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Sabaf

Management Reports May 20, 2019

4440_10-k_2019-05-20_68286ac2-a356-4786-900b-0c7212f4163f.pdf

Management Reports

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Expanding the range

Operating in a world market means satisfying diverse customers by listening to their many needs and requirements. With a broad and growing product range, Sabaf competes and achieves remarkable results in every country.

Business and Financial situation of the Group
109
The acquisition of Okida Elektronik112
Risk Factors112
Research and development114
Consolidated disclosure of non-financial information114
Personnel114
Environment114
Corporate governance
114
Internal control system on financial reporting114
Model 231114
Personal data protection
115
Derivative financial instruments115
Atypical or unusual transactions
115
Secondary offices115
Management and coordination115
Intra-group transaction and related-party transactions
115
Significant events after year-end and business outlook
115
Business and financial situation of Sabaf S.p.A
115
Reconciliation between parent company
and consolidated shareholders' equity and net profit for the period117
Use of the longer time limit for calling the shareholders' meeting 117
(€/000) 2018 % 2017 % 2018-2017
CHANGE
CHANGE %
Sales revenue 150,642 100% 150,223 100% 419 +0.3%
EBITDA 29,959 19.9% 30,955 20.6% (996) -3.2%
EBIT 16,409 10.9% 18,117 12.1% (1,708) -9.4%
Pre-tax profit 20,960 13.9% 17,804 11.9% 3,156 +17.7%
Profit attributable to the Group 15,614 10.4% 14,835 9.9% 779 +5.3%
Basic earnings per share (€) 1.413 1.323 0.090 +6.8%
Diluted earnings per share (€) 1.413 1.323 0.090 +6.8%

BUSINESS AND FINANCIAL SITUATION OF THE GROUP

In 2018, the Sabaf Group reported a sales revenue of € 150.6 million, an increase of 0.3% versus the figure of € 150.2 million in 2017 (-2.4% taking into consideration the same scope of consolidation). Profitability continued to be excellent, albeit slightly down: 2018 EBITDA amounted to € 30 million, equivalent to 19.9% of turnover, compared to € 31 million (20.6% of turnover) in 2017, EBIT reached € 16.4 million, equivalent to 10.9% of turnover, compared to € 18.1 million (12.1%) in 2017. Net profit of 2018, equal to € 15.6 million (10.4% of sales), is 5.3% higher than the € 14.8 million of 2017.

The subdivision of sales revenues by product line is shown in the table below:

(€/000) 2018 % 2017 % CHANGE %
Brass valves 4,327 2.9% 5,991 4.0% -27.8%
Light alloy valves 37,615 25.0% 39,351 26.2% -4.4%
Thermostats 6,521 4.3% 7,376 4.9% -11.6%
Standard burners 39,368 26.1% 41,070 27.3% -4.1%
Special burners 27,585 18.3% 27,184 18.1% +1.5%
Accessories and other revenues 15,422 10.3% 15,267 10.2% +1.0%
Total household gas parts 130,838 86.9% 136,239 90.7% -4.0%
Professional gas parts 5,331 3.5% 5,079 3.4% +5.0%
Hinges 10,436 6.9% 8,905 5.9% +17.2%
Electronic components 4,037 2.7% 0 0.0%
Total 150,642 100% 150,223 100% +0.3%

Product innovation continues to support sales of special and professional burners, while more mature products (brass valves and thermostats) show a marked decline. Sales of hinges increased significantly, supported by the positive trend of the North American market and the launch of new supply contracts. Following the acquisition of Okida Elektronik, from September 2018 the Group is also active in the production and sale of electronic components.

(€/000) 2018 % 2017 % CHANGE % Italy 31,579 21.0% 36,523 24.3% -13.5% Western Europe 12,337 8.2% 11,678 7.8% +5.6% Eastern Europe 46,301 30.7% 42,824 28.5% +8.1% Middle East and Africa 12,303 8.2% 13,009 8.6% -5.4% Asia and Oceania 7,590 5.0% 10,516 7.0% -27.8% South America 25,461 16.9% 22,938 15.3% +11.0% North America and Mexico 15,071 10.0% 12,735 8.5% +18.3% Total 150,642 100% 150,223 100% +0.3%

The geographical breakdown of revenues is shown below:

The sales analysis by geographical area shows an uneven trend in the various markets in which the Group operates. The best results were achieved on the American continent: sales in North America were sustained by the good performance of consumption; in South America, strong growth rates were recorded in the Andean countries, which more than offset the effects of the crisis in Argentina and a still stagnant demand in Brazil. Satisfactory growth rates were recorded in European markets, thanks to the consolidation of relationships with major customers and the contribution made by the acquisition in Turkey of Okida; only in Italy sales are down due to the sharp reduction in the production of domestic appliances. North Africa and the Middle East have shown signs of weakness, while the Group's presence on Asian markets is not yet sufficiently consolidated.

Average sales prices in 2018 were 0.2% lower compared to 2017.

The effective average purchase prices of the main raw materials (aluminium alloys, steel and brass) were on average higher than in 2017, with a negative impact of 0.7% of sales. Consumption (purchases plus change in inventories) as a percentage of sales was 38.4% in 2018, compared with 38.2% in 2017.

The impact of labour cost on sales decreased from 23.5% to 23.1%, by benefiting from greater automation of production.

The ratio of net financial expenses to turnover remained low, equal to 0.6% of turnover. During the year, the Group recorded in the income statement positive exchange differences of € 5.4 million, due to fluctuations in exchange rates with the Turkish lira and the U.S. dollar.

The tax rate in 2018 was 24.6% (16.2% in 2017, when the Group recorded the "Patent Box" benefit for the three-year period 2015 to 2017). The main tax benefits enjoyed by the Group are shown in Note 31 to the consolidated financial statements.

The Group's statement of financial position, reclassified based on financial criteria, is illustrated below:

(€/000) 31.12.2018 31.12.2017
Non-current assets 119,527 93,802
Short-term assets 1 92,111 79,314
Short-term liabilities 2 (32,381) (28,561)
Working capital 3 59,730 50,753
Short-term financial assets - 67
Provisions for risks and charges,
Post-employment benefits, deferred taxes
(6,387) (4,034)
Net invested capital 172,870 140,588
Short-term net financial position (9,180) (5,830)
Medium/long-term net financial position (44,344) (19,703)
Net financial debt (53,524) (25,533)
Shareholders' equity 119,346 115,055

Sum of Inventories, Trade receivables, Tax receivables and Other current receivables

Sum of Trade payables, Tax payables and Other liabilities

Difference between short-term assets and short-term liabilities

110

Cash flows for the financial year are summarised in the table below:

(€/000) 2018 2017
Opening liquidity 11,533 12,143
Operating cash flow 25,814 22,779
Cash flow from investments (11,467) (13,944)
Free cash flow 14,347 8,835
Cash flow from financing activities 21,579 (6,516)
Okida acquisition (24,077) -
Foreign exchange differences due to translation (9,956) (2,929)
Cash flow for the period 1,893 (610)
Closing liquidity 13,426 11,533

Net financial debt and liquidity shown in the tables above are defined in compliance with the net financial position detailed in Note 22 of the consolidated financial statements, as required by CONSOB memorandum of 28 July 2006.

At 31 December 2018, working capital stood at € 59.7 million compared with € 50.8 million at the end of the 2017: its impact on pro-forma turnover (i.e. considered the contribution of Okida for the entire financial year 2018) was 38% (33.8% in 2017).

The Group's financial debt is mainly medium to long-term, the most widely used form of financing is unsecured loans repayable in 5 years.

In 2018, the Group invested € 24.1 million to acquire 100% of the Turkish company Okida Elektronik; the purposes of this transaction are closely examined in the next paragraph of this report.

The Sabaf Group also carried out organic investments of € 11.5 million: the main investments in the financial year were aimed at the further automation of production of light alloy valves and interconnection of production plants with management systems (Industry 4.0). Other investments were made in the production of presses for new burners. Investments in maintenance and replacement, so that production equipment is kept constantly up to date and efficient, are systematic.

During the financial year, the Group paid out dividends of € 6.1 million and purchased treasury shares for € 2.4 million; the net financial debt was € 53.5 million, versus € 25.5 million in 31 December 2017.

Shareholders' equity totalled € 119.3 million at 31 December 2018; the ratio between the net financial debt and the shareholders' equity was 0.45 versus 0.22 in 2017.

Economic and financial indicators

2018 2017
ROCE (return on capital employed) 9.5% 12.9%
Dividends per share (€) 0.55 4 0.55
Net debt/EBITDA 1.79 0.82
Net debt/equity ratio 45% 22%
Market capitalisation (31/12)/equity ratio 1.44 2.00
Change in turnover +0.2% +14.7%

Please refer to the introductory part of the Annual Report for a detailed examination of other key performance indicators.

THE ACQUISITION OF OKIDA ELEKTRONIK

In September 2018, the Group acquired 100% of Okida Elektronik, a leader in Turkey in the design, manufacture and sale of electronic control boards, controls, timers, display units and power units for ovens, hoods, vacuum cleaners, refrigerators and freezers. The acquisition of Okida represents the first step towards the implementation of the 2018-2022 Business Plan, in line with the strategy of expanding the range of products in components for household appliances and the acquisition of e-skills.

Okida was consolidated as from 4 September 2018, contributing € 4 million to 2018 consolidated turnover. The company ended the entire 2018 financial year with sales of € 11.1 million.

RISK FACTORS

The results of the risk identification and assessment process carried out in 2018 showed that the Sabaf Group is exposed to certain risk factors, which can be traced back to the macro-categories described below.

Risks of external context

Risks deriving from the external context in which Sabaf operates, which could have a negative impact on the economic and financial sustainability of the business in the medium/long-term. The most significant risks in this category are related to general economic conditions, trend in demand and product competition, in addition to the risks related to Sabaf's presence in Turkey and, more generally, to instability in the emerging countries in which the Group operates.

Strategic risks

Strategic risks that could negatively impact Sabaf's short to medium term performance, including, for example: the loss of business opportunities in the Chinese market, risks related to the growth through acquisitions and the protection of product exclusivity.

Legal and compliance risks

Risks related to Sabaf's contractual liabilities and compliance with the regulations applicable to the Group, including: Legislative Decree 231/2001, Law 262/2005, HSE regulations, regulations applicable to listed companies, tax regulations, labour regulations, international trade regulations and intellectual property regulations.

Operational risks

Risks of suffering losses due to inadequate or malfunctioning processes, human resources and information systems. This category includes financial risks (e.g. losses deriving from the volatility of the price of raw materials used by the Group in its production processes, from fluctuations in exchange rates or from the management of trade receivables), risks related to production processes (e.g. product liability), organisational risks (e.g. loss of key staff and expertise and the difficulty of replacing them, resistance to change by the organisation), risks related to purchases (e.g. relations with suppliers

and contractors) and Information Technology risks.

The main risks are described in detail below as well as the relevant risk management actions that are currently being implemented.

Performance of the sector

The Group's financial position, results and cash flows are affected by several factors related to the performance of the sector, including:

  • General macro-economic performance: the household appliance market is affected by macro-economic factors such as: gross domestic product, consumer and business confidence, interest rate trend, the cost of raw materials, the unemployment rate and the ease of access to credit.
  • Concentration of the end markets: as a result of mergers and acquisitions, customers have acquired bargaining power.
  • Stagnation of demand in mature markets (i.e. Europe) in favour of growth in emerging Countries, characterised by different sales conditions and a more unstable macro-economic environment.
  • Increasing competition, which in some cases imposes aggressive pricing policies.

To cope with this situation, the Group aims to retain and reinforce its leadership position wherever possible through:

  • development of new products characterised by superior performance compared with market standards, and tailored to the needs of the customer;
  • diversification of commercial investments in growing and emerging markets with local commercial and productive investments;
  • the maintenance of high quality and safety standards, which make it possible to differentiate the product through the use of resources and implementation of production processes that are not easily sustainable by competitors;
  • strengthening of business relations with the main players in the sector;
  • adoption of a diversification strategy and entry into new segments / business sectors.

Instability of Emerging countries in which the Group operates

Turkey represents the main production hub of household appliances at the European level; over the years, local industry attracted heavy foreign investments and favoured the growth of important manufacturers. In this context, the Sabaf Group created a production plant in Turkey in 2012 that realises today 10% of total production. In 2018, the Group also acquired 100% of Okida Elektronik, a leader in Turkey in the design, manufacture and sale of electronic control boards for household appliances.

With the acquisition of Okida, Turkey represents approximately 15% of the Group's production and more than 25% of its total sales. The social and political tensions in Turkey over the last few years had no effect on the activities of the Sabaf Group, which continued normally. In consideration of the strategic importance of this Country, the management assessed the risks that could arise from any difficulties/impossibilities of operating in Turkey and envisaged actions to mitigate this risk.

More generally, the Group is exposed to risks related to (political, economic, tax, regulatory) instability in some emerging countries where it produces or sells. Any embargoes or major political or economic instability, or changes in the regulatory and/or local law systems, or new tariffs or taxes imposed could negatively affect a portion of Group turnover and the related profitability.

Sabaf has taken the following measures to mitigate the above risk factors:

  • diversifying investments at international level, setting different strategic priorities that, in addition to business opportunities, also consider the different associated risk profiles;
  • monitoring of the economic and social performance of the target countries, also through a local network of agents and collaborators;
  • timely assessment of (potential) impacts of any business interruption on the markets of Emerging countries;
  • adoption of contractual sales conditions that protect the Group (e.g.: advance payments and payments through letters of credit from major banks).

Product competition

The Sabaf Group's business model focuses on the production of gas cooking components (valves and burners); therefore, there is the risk of not correctly assessing the threats and opportunities deriving from the competition of alternative products (alternative solutions to gas cooking, such as induction), with the consequence of not adequately making use of any market opportunities and/or suffering from negative impacts on margins and turnover.

In recent years, the Group has launched a number of projects aimed at analysing the opportunities and threats related to competition of products other than gas cooking, including:

  • analysing the possibilities for expansion in the induction hob market, with a focus on technical and commercial feasibility analyses;
  • development of new gas cooking components able to satisfy the needs that lead some consumers (especially Western consumers) to prefer induction (aesthetic factors, practicality and ease of cleaning, technological integration with electronic components);
  • evaluation of M&A operations, also in sectors adjacent to the traditional Sabaf sector.

Loss of business opportunities in the Chinese market

With a production of over 20 million hobs per year, China is one of the world's most important markets. After many years of commercial presence only, in 2015 Sabaf started the on-site production of a special burner for the Chinese market. However, there is a risk that Sabaf's investments in the opening of its Chinese headquarters and the start of production will not generate - at least in the short/medium term - an adequate economic return.

To support the development of the Group's Chinese subsidiary and ensure the economic return on the investments made, Sabaf is carrying out the following actions:

  • developing a strategic/operational plan suitable for using growth opportunities offered by the local market;
  • continuing to develop product lines in accordance with the needs of the Chinese market and in compliance with local regulations;
  • adopting and maintaining a quality-price mix in line with the expectations of potential local customers.

Growth through acquisitions

The strategic plan developed by the Group's management includes the possibility of growth through acquisitions, also in related sectors. This strategic choice involves specific risk profiles for Sabaf, due to:

  • incorrect assessment of the target companies / incorrect assessment of risks and opportunities for a possible acquisition;
  • delays or difficulties in integration.

The Group adopted solutions and instruments to mitigate the above risks, such as:

  • definition of guidelines / requirements necessary for the identification of target companies;
  • creation of an internal work team, dedicated to the identification and evaluation of potential targets;
  • development of guidelines, processes and tools to support the assessment of M&As and subsequent integration activities.

Protection of product exclusivity

Sabaf's business model based the protection of product exclusivity mainly on design capacity and the internal production of special machines used in manufacturing processes, thanks to its unique know-how that competitors would find difficult to replicate.

There is a risk that some Group products, although patented, will be copied by competitors. Exposure to this risk increased as a result of the opening up of trade in countries where it is difficult to enforce industrial patent rights.

Sabaf developed and maintained a structured model to manage innovation and protect intellectual property. Moreover, the Group periodically monitors the patent strategies adopted/to be adopted based on the assessments of cost/opportunity.

Financial risks

The Sabaf Group is exposed to a series of financial risks, due to:

  • Commodity price volatility: Sabaf uses metals and alloys in its production processes, the prices of which are generally negotiated semi-annually or annually; as a result, Group companies may not be able to immediately pass on to customers changes in the prices of commodities that occur during the year, which has an impact on profitability.
  • Exchange rate fluctuation: the Group carries out transactions primarily in euro; however, transactions also take place in other currencies, such as the U.S. dollar, the Brazilian real, the Turkish lira and the Chinese renminbi. in particular, since turnover in US dollars accounted for about 16% of consolidated turnover, the possible depreciation against the euro and the real could lead to a loss in competitiveness on the markets in which sales are made in that currency (mainly South and North America).
  • Trade receivable: the high concentration of turnover on a small number of customers generates a concentration of the respective trade receivables, with a resulting increase in the negative impact on economic and financial results in the event of insolvency of any one of them. In particular, given the structural difficulties of the household appliance sector in mature markets, it is possible that situations of financial difficulty and insolvency among customers could arise.

For more information on financial risks and the related management methods, see Note 35 of the consolidated financial statements as regards disclosure for the purposes of IFRS 7.

RESEARCH AND DEVELOPMENT

The most important research and development projects carried out in 2018 were as follows:

Gas parts

  • various models of customised burners are being developed mainly for North America;
  • innovative technical solutions that make it easier for users to clean burners are being tested;
  • a project is underway to create a multiposition valve.

Hinges

  • a damping unit fitted in the oven was developed to provide a soft close effect using just one damping unit for the kitchen;
  • damping unit fitted in the oven was developed that allows to have both a soft close and a soft open effect;
  • a horizontal axis hinge was developed for covers used in the semi-professional sector;
  • a hidden cam hinge for oven doors with a damping unit fitted in the oven was developed.

Electronic components

  • an advanced IOT electronic control system for hoods was developed;
  • a platform for electronic control with touch interface was created for up-market refrigerators and freezers;
  • an innovative electronic control platform for electric ovens is being developed.

The improvement in production processes continued throughout the Group, accompanied by the development and internal production of machinery, tools and presses.

Development costs to the tune of € 340,000 were capitalised, as all the conditions set by international accounting standards were met; in other cases, they were charged to the income statement.

CONSOLIDATED DISCLOSURE OF NON-FINANCIAL INFORMATION

Starting from 2017, the Sabaf Group publishes the consolidated disclosure of non-financial information required by Legislative Decree no. 254/2016 in a report separate from this Management Report. The consolidated disclosure of non-financial information provides all the information needed to ensure understanding of the Group's activities, performance, results and impact, with particular reference to environmental, social and personnel aspects, respect for human rights and the fight against active and passive corruption, which are relevant considering the Group's activities and characteristics.

The consolidated disclosure of non-financial information is included in the same file in which the management report, the consolidated financial statements, the separate financial statements of the parent company Sabaf S.p.A. and the remuneration report are published.

It should be noted that since 2005, the Sabaf Group has drawn up an Annual Report on its economic, social and environmental sustainability performance.

PERSONNEL

In 2018, the Sabaf Group suffered no on-the-job deaths or serious accidents that led to serious or very serious injuries to staff for which the Group was definitively held responsible, nor was it held responsible for occupational illnesses of employees or former employees or causes of mobbing.

For all other information, please refer to the Consolidated disclosure of non-financial information.

ENVIRONMENT

In 2018 there was no:

  • damage caused to the environment for which the Group was held definitively responsible;
  • definitive fines or penalties imposed on the Group for environmental crimes or damage.

For all other information, please refer to the Consolidated disclosure of non-financial information.

CORPORATE GOVERNANCE

For a complete description of the corporate governance system of the Sabaf Group, see the report on corporate governance and on the ownership structure, available in the Investor Relations section of the company website.

INTERNAL CONTROL SYSTEM ON FINANCIAL REPORTING

The internal control system on financial reporting is described in detail in the report on corporate governance and on ownership structure.

With reference to the "conditions for listing shares of parent companies set up and regulated by the law of states not belonging to the European Union" pursuant to articles 36 and 39 of the Market Regulations, the Company and its subsidiaries have administrative and accounting systems that can provide the public with the accounting situations prepared for drafting the consolidated report of the companies that fall within the scope of this regulation and can regularly supply management and the auditors of the Parent Company with the data necessary for drafting the consolidated financial statements. The Sabaf Group has also set up an effective information flow to the independent auditor as well as continuous information on the composition of the corporate bodies of the subsidiaries, together with information on the offices held, and requires the systematic and centralised gathering as well as regular updates of the formal documents relating to the articles of association and granting of powers to corporate bodies. The conditions exist as required by article 36, letters a), b) and c) of the Market Regulations issued by CONSOB. During the year, the Group acquired Okida Elektronik, a company based in Turkey, and is fully integrating its financial reporting system.

MODEL 231

The Organisation, Management and Control Model, adopted pursuant to Legislative Decree 231/2001, is described in the report on company governance and on the ownership structure, which should be reviewed for reference.

114

PERSONAL DATA PROTECTION

During 2018, Sabaf S.p.A. updated its personal data management and protection system, adopting an Organisational Model consistent with the provisions of European Regulation 2016/679 (General Data Protection Regulation - GDPR). Specific projects are being implemented for all Group companies for which the GDPR is applicable.

DERIVATIVE FINANCIAL INSTRUMENTS

For the comments on this item, please see Note 35 of the consolidated financial statements.

ATYPICAL OR UNUSUAL TRANSACTIONS

Sabaf Group companies did not execute any unusual or atypical transactions in 2018.

SECONDARY OFFICES

Neither Sabaf S.p.A. nor its subsidiaries have secondary operating offices.

MANAGEMENT AND COORDINATION

Sabaf S.p.A. is not subject to management and coordination by other companies. Sabaf S.p.A. exercises management and coordination activities over its Italian subsidiaries, Faringosi Hinges s.r.l., Sabaf Immobiliare s.r.l. and A.R.C. s.r.l.

INTRA-GROUP TRANSACTIONS AND RELATED-PARTY TRANSACTIONS

The relationships between the Group companies, including those with the parent company, are regulated under market conditions, as well as the relationships with related parties, defined in accordance with the accounting standard IAS 24. The details of the intra-group transactions and other related-party transactions are given in Note 36 of the consolidated financial statements and in Note 37 of the separate financial statements of Sabaf S.p.A.

SIGNIFICANT EVENTS AFTER YEAR-END AND BUSINESS OUTLOOK

The start of 2019 shows signs of a slowdown in demand in some of the main markets in which the Group operates, including Turkey.

For 2019 the Group estimates that it will be able to achieve sales ranging from € 160 to € 165 million and a gross operating profit (EBITDA %) of more than 20%.

These forecasts assume a macroeconomic scenario not affected by unpredictable events. If the economic situation were to change significantly, actual figures might diverge from forecasts.

BUSINESS AND FINANCIAL SITUATION OF SABAF S.P.A.

(€/000) 2018 2017 CHANGE % CHANGE
Sales revenue 110,065 115,687 (5,622) -4.9%
EBITDA 13,644 17,477 (3,833) -21.9%
EBIT 5,543 8,050 (2,507) -31.1%
Pre-tax profit (EBT) 9,227 9,072 155 +1.7%
Net Profit 8,040 8,001 39 +0.5%

The reclassification based on financial criteria is illustrated below:

(€/000) 31.12.2018 31.12.2017
Non-current assets 5 96,495 89,361
Non-current financial assets 5,367 1,848
Short-term assets 6 64,927 58,875
Short-term liabilities 7 (25,626) (23,643)
Working capital 8 39,301 35,232
Provisions for risks and charges, Post-employment benefits,
deferred taxes
(3,278) (2,637)
Net invested capital 138,885 123,804
Short-term net financial position (12,056) (15,239)
Medium/long-term net financial position (33,789) (16,478)
Net financial position (45,845) (31,717)
Shareholders' equity 92,040 92,087

5 Excluding Financial assets

6 Sum of Inventories, Trade receivables, Tax receivables and Other current receivables

Sum of Trade payables, Tax payables and Other liabilities

8 Difference between short-term assets and short-term liabilities

Cash flows for the financial year are summarised in the table below:

(€/000) 2018 2017
Operating cash flow 2,697 1,797
Cash flow from investments 8,796 12,554
Free cash flow (15,219) (9,319)
Free cash flow (6,423) 3,235
Cash flow from financing activities 5,685 (2,335)
Cash flow for the period (738) 900
Closing liquidity 1,959 2,697

Net financial debt and the net short-term financial position shown in the tables above are defined in compliance with the net financial position detailed in Note 22 of the separate financial statements, as required by the CONSOB memorandum of 28 July 2006.

The 2018 financial year ended with a decrease in turnover of 4.9% compared with 2017. The sales analysis by product category shows a marked decrease in more mature products (brass valves and thermostats), while more innovative product families (light alloy valves and special burners) show an improved performance. The decrease in sales had a negative impact on gross operating profitability: EBITDA was € 13.6 million, or 12.4% of turnover (€ 17.5 million in 2017, or 15.1%).

EBIT of 2018 was € 5.5 million, or 5% of turnover (€ 8.1 million in 2017, or 7%).

The impact of the labour costs on sales increased from 24.8% to 25.8%. Net finance expense as a percentage of turnover was minimal, at 0.8%, given the low level of financial debt and the low interest rates.

During 2018, the Company received dividends of € 3 million from the subsidiary Sabaf Immobiliare and € 1.3 million from the new investee Okida Elektronik.

The actual tax burden related to 2018 was 12.9% (11.8% in 2017). Net profit was € 8 million euro, or 7.3% of turnover (substantially unchanged from 2017, when it represented 6.9% of turnover).

In 2018, Sabaf S.p.A. invested over € 8 million in plant and equipment. The main investments in the financial year were aimed at increasing the production capacity of special burners, at the further automation of production of light alloy valves and interconnecting production plants with management systems (Industry 4.0). Other investments were made in the production of presses for new burners. Investments in maintenance and replacement, so that production equipment is kept constantly up to date and efficient, are systematic.

At 31 December 2018, working capital stood at € 39.3 million compared with € 35.2 million at the end of the previous year: its percentage impact on turnover stood at 35.7% from 30.5% at the end of 2017.

The net financial debt was € 45.8 million, compared with € 31.7 million on 31 December 2017.

At the end of the year, the shareholders' equity amounted to € 92 million, compared with € 92.1 million in 2017. The net financial debt/shareholders' equity ratio was 49.8%, 34% at the end of 2017.

RECONCILIATION BETWEEN PARENT COMPANY AND CONSOLIDATED SHAREHOLDERS' EQUITY AND NET PROFIT FOR THE PERIOD

Pursuant to the CONSOB memorandum of 28 July 2006, a reconciliation statement of the result of the 2018 financial year and Group shareholders' equity at 31 December 2018 with the same values of the parent company Sabaf S.p.A. is given below:

31.12.2018 31.12.2017
Description Profit for the
year
Shareholders'
equity
Profit for the
year
Shareholders'
equity
Profit and shareholders' equity of parent company Sabaf S.p.A. 8,040 92,039 8,001 92,087
Equity and consolidated company results 9 15,324 113,123 7,971 74,144
Elimination of the carrying value of consolidated equity investments 640 (83,622) 682 (48,596)
Put option on A.R.C. minorities 55 (1,818) (241) (1,763)
Intercompany eliminations (8,005) (427) (1,497) (817)
Other adjustments (256) 51 0 0
Minority interests (184) (1,644) (81) (1,460)
Profit and shareholders' equity attributable to the Group 15,614 117,702 14,835 113,595

USE OF THE LONGER TIME LIMIT FOR CALLING THE SHAREHOLDERS' MEETING

Pursuant to the second paragraph of Article 2364 of the Italian Civil Code, in consideration of the need to consolidate the financial statements of Group companies and to prepare all supporting documentation, the directors intend to use the longer time limits granted to companies required to prepare the consolidated financial statements for calling the ordinary shareholders' meeting to approve the 2018 financial statements. The Shareholders' Meeting will be convened on a single date for 7 May 2019.

Proposal for approval of the separate financial statements and proposed dividend

While thanking employees, the Board of Statutory Auditors, the independent auditors, and the Supervisory Authorities for their effective collaboration, we ask the shareholders to approve the financial statements for the year ended 31 December 2018, with the proposal to allocate the profit for the year of € 8,040,215 in the following manner:

  • a dividend of € 0.55 per share to be paid to shareholders as from 29 May 2019 (ex-date 27 May 2019 and record date 28 May 2019). With regard to treasury shares, we invite you to allocate an amount corresponding to the dividend on the shares held in portfolio on the ex-date to the Extraordinary Reserve;
  • the remainder to the Extraordinary Reserve.

Ospitaletto, 26 March 2019

The Board of Directors

9 Figures adjusted to allocate the consolidation difference to the equity of the acquired companies

Continuity and specialisation

We do not know the future, but we are preparing to face it by improving skills and increasing knowledge and experience daily. Knowledge allows us to continue production with an ever-increasing specialisation.

Consolidated financial statements at 31 December 2018

Group structure and corporate bodies 121
Consolidated statement of financial position122
Consolidated income statement123
Consolidated statement of comprehensive income124
Statement of changes in consolidated shareholders' equity
124
Consolidated cash flow statement125
Explanatory Notes
126
Certification of the Consolidated Financial Statements 155
Independent auditor's report on the Consolidated
Financial Statements at 31 December 2018156

Group structure and Corporate bodies

Group structure

Parent company: SABAF S.p.A.

Subsidiaries and equity interest owned by the Group

Companies consolidated on a line-by-line basis

Faringosi Hinges s.r.l. 100%
Sabaf do Brasil Ltda. 100%
Sabaf Beyaz Esya Parcalari Sanayi
Ve Ticaret Limited Sirteki (Sabaf Turkey)
100%
Sabaf Appliance Components
Trading (Kunshan) Co., Ltd. (in liquidation)
100%
Sabaf Appliance Components (Kunshan) Co., Ltd. 100%
Sabaf Immobiliare s.r.l. 100%
A.R.C. s.r.l. 70%
Okida Elektronik Sanayi ve Tickaret A.S 100%
Non-consolidated companies
Sabaf US Corp.
Handan ARC Burners Co., Ltd.
100%
35.5%

Board of Directors

Director Alessandro Potestà
Director* Carlo Scarpa
Director* Daniela Toscani
Stefania Triva

* independent directors

Board of Statutory Auditors Independent Auditor

Consolidated statement of financial position

(€/000) NOTES 31.12.2018 31.12.2017
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 1 70,765 73,069
Investment property 2 4,403 5,697
Intangible assets 3 39,054 9,283
Equity investments 4 380 281
Non-current financial assets 10 120 180
Non-current receivables 5 188 196
Deferred tax assets 21 4,617 5,096
TOTAL NON-CURRENT ASSETS 119,527 93,802
CURRENT ASSETS
Inventories 6 39,179 32,929
Trade receivables 7 46,932 42,263
Tax receivables 8 4,466 3,065
Other current receivables 9 1,534 1,057
Current financial assets 10 3,511 67
Cash and cash equivalents 11 13,426 11,533
TOTAL CURRENT ASSETS 109,048 90,914
ASSETS HELD FOR SALE 0 0
TOTAL ASSETS 228,575 184,716
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital 12 11,533 11,533
Retained earnings, Other reserves 90,555 87,227
Profit for the year 15,614 14,835
Total equity interest of the Group 117,702 113,595
Minority interests 1,644 1,460
TOTAL SHAREHOLDERS' EQUITY 119,346 115,055
NON-CURRENT LIABILITIES
Loans 14 42,406 17,760
Other financial liabilities 15 1,938 1,943
Post-employment benefit and retirement
reserves
16 2,632 2,845
Provisions for risks and charges 17 725 385
Deferred tax liabilities 21 3,030 804
Total non-current liabilities 50,731 23,737
CURRENT LIABILITIES
Loans 14 18,435 17,288
Other financial liabilities 15 7,682 75
Trade payables 18 21,215 19,975
Tax payables 19 3,566 1,095
Other payables 20 7,600 7,491
TOTAL CURRENT LIABILITIES 58,498 45,924
LIABILITIES HELD FOR SALE 0 0
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
228,575 184,716

122

Consolidated income statement

(€/000) NOTES 2018 2017
INCOME STATEMENT COMPONENTS
OPERATING REVENUE AND INCOME
Revenue 23 150,642 150,223
Other income 24 3,369 3,361
Total operating revenue and income 154,011 153,584
OPERATING COSTS
Materials 25 (62,447) (59,794)
Change in inventories 4,603 2,380
Services 26 (31,297) (30,227)
Payroll costs 27 (34,840) (35,328)
Other operating costs 28 (1,670) (1,134)
Costs for capitalised in-house work 1,599 1,474
TOTAL OPERATING COSTS (124,052) (122,629)
OPERATING PROFIT BEFORE DEPRECIATION
AND AMORTISATION, CAPITAL GAINS/
LOSSES, AND WRITE-DOWNS/WRITE-BACKS
OF NON-CURRENT ASSETS
29,959 30,955
Depreciations and amortisation 1, 2, 3 (12,728) (12,826)
Capital gains on disposals of non-current assets 28 (12)
Value adjustments of non-current assets 2 (850) 0
EBIT 16,409 18,117
Financial income 373 214
Financial expenses 29 (1,206) (804)
Exchange rate gains and losses 30 5,384 274
Profits and losses from equity investments 0 3
PROFIT BEFORE TAXES 20,960 17,804
Income tax 31 (5,162) (2,888)
PROFIT FOR THE YEAR 15,798 14,916
of which:
Minority interests 184 81
PROFIT ATTRIBUTABLE TO THE GROUP 15,614 14,835
EARNINGS PER SHARE (EPS) 32
Base 1.413 euro 1.323 euro
Diluted 1.413 euro 1.323 euro

Consolidated statement of comprehensive income

(€/000) 2018 2017
PROFIT FOR THE YEAR 15,798 14,916
Total profits/losses that will not be subsequently
reclassified under profit (loss) for the year
Actuarial post-employment benefit reserve evaluation 32 82
Tax effect (8) (20)
24 62
Total profits/losses that will be subsequently
reclassified under profit (loss) for the year
Forex differences due to translation of financial statements
in foreign currencies
(3,940) (4,806)
TOTAL OTHER PROFITS/(LOSSES) NET OF TAXES FOR THE YEAR (3,916) (4,744)
TOTAL PROFIT 11,882 10,172
of which:
Minority interests 184 81
TOTAL PROFIT ATTRIBUTABLE TO THE GROUP 11,698 10,091

Statement of changes in consolidated shareholders' equity

(€/000) Share
capital
Share
premium
reserve
Legal
reserve
Treasury
shares
Translation
reserve
Post-employment
benefit discoun
ting reserve
Other
reserves
Profit for
the year
Total Group
shareholders'
equity
Minority
interests
Total
sharehol
ders' equity
At 31 December 2016* 11,533 10,002 2,307 (2,399) (7,388) (612) 88,561 8,994 110,998 1,379 112,377
Allocation of 2016 profit
- dividends paid out (5,384) (5,384) (5,384)
- carried forward 3,610 (3,610) 0 0
Purchase of treasury shares (2,110) (2,110) (2,110)
Total profit
at 31 December 2017
(4,806) 62 14,835 10,091 81 10,172
At 31 December 2017 11,533 10,002 2,307 (4,509) (12,194) (550) 92,171 14,835 113,595 1,460 115,055
Allocation of 2017 profit
- 2017 Dividends paid out (6,071) (6,071) (6,071)
- Carried forward 8,764 (8,764) 0 0
Purchase of treasury shares (2,359) (2,359) (2,359)
Stock grant plan 321 321 321
Other changes 518 518 518
Total profit
at 31 December 2018
(3,940) 24 15,614 11,698 184 11,882
At 31 December 2018 11,533 10,002 2,307 (6,868) (16,134) (526) 101,774 15,614 117,702 1,644 119,346

* figures recalculated pursuant to IFRS 3, in order to retrospectively take into account the effects resulting from the fair value measurement of A.R.C's assets and liabilities, at the acquisition date previously considered provisional.

Consolidated cash flow statement

(€/000) 2018 2017
Cash and cash equivalents at beginning of year 11,533 12,143
Profit for the year 15,798 14,916
Adjustments for:
- Depreciation and amortisation 12,728 12,826
- Write-downs of non-current assets 850 -
- Realised gains/losses (28) 12
- Valuation of the stock grant plan 321 -
- Net financial income and expenses 833 590
- Income tax 5,162 2,888
Change in post-employment benefit reserve (241) (189)
Change in risk provisions 340 (49)
Change in trade receivables (3,003) (5,421)
Change in inventories (4,374) (1,445)
Change in trade payables 556 998
Change in net working capital (6,821) (5,868)
Change in other receivables and payables, deferred tax 2,537 1,029
Payment of taxes (4,860) (3,058)
Payment of financial expenses (1,178) (532)
Collection of financial income 373 214
Cash flow from operations 25,814 22,779
Investments in non-current assets
- intangible (589) (860)
- tangible (11,348) (13,604)
- financial (99) 0
Disposal of non-current assets 569 520
Cash flow absorbed by investments (11,467) (13,944)
Repayment of loans (19,579) (16,526)
Raising of loans 52,972 17,751
Short-term financial assets (3,384) (247)
Purchase of treasury shares (2,359) (2,110)
Payment of dividends (6,071) (5,384)
Cash flow absorbed by financing activities 21,579 (6,516)
Acquisition of Okida Elektronik (24,077) 0
Foreign exchange differences due to translation (9,956) (2,929)
Net financial flows for the year 1,893 (610)
Cash and cash equivalents at end of year (Note 10) 13,426 11,533
Current financial debt 22,606 17,363
Non-current financial debt 44,344 19,703
Net financial debt (Note 22) 53,524 25,533

Explanatory Notes

Accounting standards

STATEMENT OF COMPLIANCE AND BASIS OF PRESENTATION

The consolidated financial statements of the Sabaf Group for the financial year 2018 have been prepared in compliance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Union. Reference to IFRS also includes all current International Accounting Standards (IAS). The financial statements have been prepared in euro, the current currency in the economies in which the Group mainly operates, rounding amounts to the nearest thousand, and are compared with consolidated financial statements for the previous year, prepared according to the same standards. They consist of the statement of financial position, the income statement, the statement of changes in shareholders' equity, the cash flow statement and these explanatory notes. The financial statements have been prepared on a historical cost basis except for some revaluations of property, plant and equipment undertaken in previous years, and are considered a going concern. The Group assessed that it is a going concern (as defined by paragraphs 25 and 26 of IAS 1), also due to the strong competitive position, high profitability and solidity of the financial structure.

FINANCIAL STATEMENTS

The Group has adopted the following formats:

  • current and non-current assets and current and non-current liabilities are stated separately in the statement of the financial position;
  • an income statement that expresses costs using a classification based on the nature of each item;
  • a comprehensive income statement that expresses revenue and expense items not recognised in profit (loss) for the year as required or permitted by IFRS;
  • a cash flow statement that presents financial flows originating from operating activity, using the indirect method.

Use of these formats permits the most meaningful representation of the Group's operating results, financial position and cash flows.

SCOPE OF CONSOLIDATION

The scope of consolidation at 31 December 2018 comprises the parent company Sabaf S.p.A. and the following companies controlled by Sabaf S.p.A.:

  • Faringosi Hinges s.r.l.
  • Sabaf Immobiliare s.r.l.
  • Sabaf do Brasil Ltda.
  • Sabaf Beyaz Esya Parcalari Sanayi Ve Ticaret Limited Sirteki (Sabaf Turkey)
  • Sabaf Appliance Components Trading (Kunshan) Co., Ltd.
  • Sabaf Appliance Components (Kunshan) Co., Ltd.
  • A.R.C. s.r.l.
  • Okida Elektronik Sanayi ve Tickaret A.S

The only change in the scope of consolidation compared to 31 December 2017 is related to Okida Elektronik, of which the Group acquired control on 4 September 2018.

Sabaf U.S. is not consolidated since it is irrelevant for the purposes of the consolidation.

Handan A.R.C. Ltd, Chinese company in which the Group holds a 35.5% share, was measured at cost in that at 31 December 2018 operations are still in their embryonic stages, and therefore the company is considered irrelevant for consolidation purposes.

The companies in which Sabaf S.p.A. simultaneously possess the following three elements are considered subsidiaries: (a) power over the company; (b) exposure or rights to variable returns resulting from involvement therein; (c) ability to affect the size of these returns by exercising power. If these subsidiaries exercise a significant influence, they are consolidated as from the date in which control begins until the date in which control ends so as to provide a correct representation of the Group's operating results, financial position and cash flows.

CONSOLIDATION CRITERIA

The data used for consolidation have been taken from the income statements and statements of financial position prepared by the directors of the individual subsidiary companies. These figures have been appropriately amended and restated, when necessary, to align them with international accounting standards and with uniform group-wide classification criteria.

The criteria applied for consolidation are as follows:

  • a) Assets and liabilities, income and costs in the financial statements consolidated on a 100% line-by-line basis are incorporated into the Group financial statements, regardless of the entity of the equity interest concerned. In addition, the carrying value of equity interests is eliminated against the shareholders' equity relating to investee companies.
  • b) Positive differences arising from elimination of equity investments against the carrying value of shareholders' equity at the date of first-time consolidation are attributed to the higher values of assets and liabilities when possible and, for the remainder, to goodwill. In accordance with the provisions of IFRS 3, the Group has changed the accounting treatment of goodwill on a prospective basis as from the transition date. Therefore, since 1 January 2004, the Group has not amortised goodwill and instead subjects it to impairment testing.
  • c) Payable/receivable and cost/revenue items between consolidated companies and profits/losses arising from intercompany transactions are eliminated.
  • d) The portion of shareholders' equity and net profit for the period pertaining to minority shareholders is posted in specific items of the balance sheet and income statement.

INFORMATION RELATED TO IFRS 3

Starting from these financial statements, Okida Elektronik, company active in the design and production of electronic components for household appliances, of which the Group acquired 100% control on 4 September 2018, was consolidated 1 . The Report on Operations describes the purpose of the transaction and the expected synergies.In these consolidated financial statements, the temporary evaluation of Okida in accordance with IFRS 3 revised, namely recognising the fair value of assets, liabilities and contingent liabilities at the acquisition date, was carried out. The final evaluation will be carried out within 12 months from the acquisition date. The effects of this operation are shown in the following table 2 :

Original values at
04.09.2018
Purchase Price Allocation Fair value of assets
and liabilities acquired
ASSETS
Property, plant, and equipment 146 146
Intangible assets 409 8,638 9,047
- Customer Relationship 6,805
- Know How 891
- Brand 942
Inventories 1,876 1,876
Trade receivables 1,666 1,666
Other receivables 236 236
Cash and cash equivalents 4,680 4,680
Total assets 9,013 17,651
LIABILITIES
Provisions for risks and charges 0 (269) (269)
Deferred tax liabilities 0 (1,753) (1,753)
Trade payables (684) (684)
Other payables (814) (814)
Total liabilities (1,498) (3,520)
Fair value of net assets acquired (a) 7,515 14,131
Total cost of acquisition (b) 28,757
Goodwill deriving from acquisition (b-a) 14,626
Acquired cash and cash equivalents (c) 4,680
Total cash outlay (b-c) 24,077

The acquisition price was determined based on an Enterprise Value of 4x EBITDA 2017 plus 1.05x EBITDA 2018, adjusted for the net financial position at the date of the transaction and for the difference between working capital at the date of the transaction and average working capital. The parties agreed that the payment of part of the price will be postponed and in any case payable by the first quarter of 2019. At 31 December 2018, Other financial liabilities included a residual liability of € 7.622 million owed to former Okida shareholders, which represents the residual portion of the price payable to sellers (Note 15). The acquisition was entirely financed by bank loans with a duration of 72 months.

As shown in the table, the Purchase Price Allocation, carried out with the support of independent experts, led to the identification and measurement of the fair values of the following acquired intangible assets:

  • Customer Relationship: fair value of € 6.805 million determined using the "Multi-period Excess Earnings" method, taking the following parameters as reference:
  • revenue relating to customers with whom there is a strong technical and commercial relationship
  • profitability in line with the historical average
  • economic useful life of 15 years
  • discount rate of 10.85%
  • growth rate g of 2% from 2019 to 2021 and of 2.5% for the following years

2Values originally expressed in Turkish lira and converted in this table at the Euro/Turkish lira exchange rate on the acquisition date (7.7188). In the consolidated balance sheet as at 31 December 2018, the values, including goodwill, are converted at the year-end exchange rate (6.0588)

1Financial data at 31 December 2018 and economic results for the period for which the Group held control (4 September - 31 September 2018) were consolidated

  • Know How, fair value of € 0.891 million determined using the "Relief from Royalty" method, taking the following parameters as reference:
  • total revenue at the valuation date
  • royalty rate equal to 3%
  • economic useful life of 7 years
  • discount rate of 10.3%
  • growth rate g of 2% from 2019 to 2021 and of 2.5% for the following years
  • Brand, fair value of € 0.942 million determined using the "Relief from Royalty" method, taking the following parameters as reference:
  • total revenue at the valuation date
  • royalty rate equal to 2%
  • economic useful life of 15 years
  • discount rate of 10.3%
  • growth rate g of 2% from 2019 to 2021 and of 2.5% for the following years

The related tax effect was recognised on the fair value of the intangible assets identified above (recognition of deferred taxes of € 1.753 million).

The Purchase Price Allocation also led to the recognition of provisions for risks and charges totalling € 0.269 million (Note 17).

In the period for which the Group held control (4 September 2018 - 31 December 2018), Okida achieved sales revenue of € 4.024 million and a net profit of € 0.371 million.

In order to assess the extent of the change in the scope of consolidation in the consolidated statement of financial position at 31 December 2018, the following table summarises the balance sheet balances at the same date of Okida Elektronik, including the effects of the Purchase Price Allocation described above.

31.12.2018
ASSETS
Property, plant and equipment 189
Intangible assets 29,901
Inventories 2,609
Trade receivables 3,399
Tax receivables 676
Other receivables 244
Cash and cash equivalents 1,214
Total assets 38,232
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity 32,649
Provisions for risks and charges 273
Deferred tax liabilities 2,174
Trade payables 1,570
Tax payables 1,380
Other payables 186
Total liabilities 38,232

CONVERSION INTO EURO OF FOREIGN-CURRENCY INCOME STATEMENTS AND STATEMENTS OF FINANCIAL POSITION

Separate financial statements of each company belonging to the Group are prepared in the currency of the country in which that company operates (functional currency). For the purposes of the consolidated financial statements, the financial statement of each foreign entity is expressed in euro, which is the Group's functional currency and the reporting currency for the consolidated financial statements.

Balance sheet items in accounts expressed in currencies other than euro are converted by applying current end-of-year exchange rates. Income statement items are converted at average exchange rates for the year.

Foreign exchange differences arising from the comparison between opening shareholders' equity converted at current exchange rates and at historical exchange rates, together with the difference between the net result expressed at average and current exchange rates, are allocated to "Other Reserves" in shareholders' equity.

The exchange rates used for conversion into euro of the financial statements of the foreign subsidiaries, prepared in local currency, are shown in the following table:

Description of currency EXCHANGE RATE IN
EFFECT AT 31.12.18
AVERAGE EXCHANGE
RATE 2018
EXCHANGE RATE IN
EFFECT AT 31.12.17
AVERAGE EXCHANGE
RATE 2017
Brazilian real 4.4440 4.3085 3.9729 3.6048
Turkish lira 6.0588 5.7145 4.5464 4.1207
Chinese renminbi 7.8751 7.8038 7.8044 7.6289

RECONCILIATION BETWEEN PARENT COMPANY AND CONSOLIDATED SHAREHOLDERS' EQUITY AND NET PROFIT FOR THE YEAR

31.12.2018 31.12.2017
Description Profit for the year Shareholders'
equity
Profit for the year Shareholders'
equity
Profit and shareholders' equity
of parent company Sabaf S.p.A.
8,040 92,039 8,001 92,087
Equity and consolidated company results3 15,324 113,123 7,971 74,144
Elimination of consolidated equity investments' carrying value 640 (83,622) 682 (48,596)
Put option on A.R.C. minorities 55 (1,818) (241) (1,763)
Intercompany eliminations (8,005) (427) (1,497) (817)
Other adjustments (256) 51 0 0
Minority interests (184) (1,644) (81) (1,460)
Profit and shareholders' equity attributable to the Group 15,614 117,702 14,835 113,595

3Figures adjusted to allocate the consolidation difference to the equity of the acquired companies

SEGMENT REPORTING

The Group's Operating segments in accordance with IFRS 8 - Operating Segment are identified in the business segments that generate revenue and costs, whose results are periodically reassessed by top management in order to assess performance and decisions regarding resource allocation. The Group operating segments are the following:

• gas parts (household and professional)

  • hinges
  • electronic components for household appliances.

ACCOUNTING POLICIES

The accounting standards and policies applied for the preparation of the consolidated financial statements at 31 December 2018, unchanged versus the previous year, with the exception of the new accounting standards adopted as from 1 January 2018 (IFRS 9 and IFRS 15), are shown below:

Property, plant and equipment

These are recorded at purchase or manufacturing cost. The cost includes directly chargeable ancillary costs. These costs also include revaluations undertaken in the past based on monetary revaluation rules or pursuant to company mergers. Depreciation is calculated according to rates deemed appropriate to spread the carrying value of tangible assets over their useful working life. Estimated useful working life in years, unchanged compared to previous financial years, is as follows:

Buildings 33
Light constructions 10
General plant 10
Specific plant and machinery 6 – 10
Equipment 4 – 10
Furniture 8
Electronic equipment 5
Vehicles and other transport means 4 – 5

Ordinary maintenance costs are expensed in the year in which they are incurred; costs that increase the asset value or useful working life are capitalised and depreciated according to the residual possibility of utilisation of the assets to which they refer.

Land is not depreciated.

Leased assets

Assets acquired via finance lease contracts are accounted for using the financial method and are reported with assets at their purchase value, less depreciation. Depreciation of such assets is reflected in the consolidated annual financial statements applying the same policy followed for Company-owned property, plant and equipment. Set against recognition of such assets, the amounts payable to the financial lessor are posted among shortand medium-/long-term payables. In addition, financial charges pertaining to the period are charged to the income statement.

Goodwill

Goodwill is the difference between the purchase price and fair value of investee companies' identifiable assets and liabilities on the date of acquisition.

As regards acquisitions completed prior to the date of IFRS adoption, the Sabaf Group has used the option provided by IFRS 1 to refrain from applying IFRS 3 – concerning business combinations – to acquisitions that took place prior to the transition date. Consequently, goodwill arising in relation to past acquisitions has not been recalculated and has been posted in accordance with Italian GAAPs, net of amortisation reported up to 31 December 2003 and any losses caused by a permanent value impairment.

After the transition date, goodwill – as an intangible asset with an indefinite useful life – is not amortised but subjected annually to impairment testing to check for value loss, or more frequently if there are signs that the asset may have suffered impairment (impairment test).

Other intangible assets

As established by IAS 38, other intangible assets acquired or internally produced are recognised as assets when it is probable that use of the asset will generate future economic benefits and when asset cost can be measured reliably. If it is considered that these future economic benefits will not be generated, the development costs are written down in the year in which this is ascertained.

Such assets are measured at purchase or production cost and - if the assets concerned have a finite useful life - are amortised on a straight-line basis over their estimated useful life. Estimated useful working life, in years, is as follows:

Customer relationship 15
Brand 15
Know-how 7
Development costs 10
Software 3 - 5

Impairment

At each end of reporting period, the Group reviews the carrying value of its tangible and intangible assets to determine whether there are signs of impairment losses of these assets. If there is any such indication, the recoverable amount of said assets is estimated so as to determine the total of the write-down. If it is not possible to estimate recoverable amount individually, the Group estimates the recoverable amount of the cash generating unit (CGU) to which the asset belongs.

In particular, the recoverable amount of the cash generating units (which generally coincide with the legal entity to which the capitalised assets refer) is verified by determining the value of use. The recoverable amount is the higher of the net selling price and value of use. In measuring the value of use, future cash flows net of taxes, estimated based on past experience, are discounted to their present value using a pre-tax rate that reflects fair market valuations of the present cost of money and specific asset risk. The main assumptions used for calculating the value of use concern the discount rate, growth rate, expected changes in selling prices and cost trends during the period used for the calculation. The growth rates adopted are based on future market expectations in the relevant sector. Changes in the sales prices are based on past experience and on the expected future changes in the market. The Group prepares operating cash flow forecasts based on the most recent budgets approved by the Board of Directors of the consolidated companies, draws up the forecasts for the coming years and determines the terminal value (current value of perpetual income), which expresses the medium and long term operating flows in the specific sector.

If the recoverable amount of an asset (or CGU) is estimated to be lower than its carrying value, the asset's carrying value is reduced to the lower recoverable amount, recognising impairment in the income statement.

When there is no longer any reason for a write-down to be maintained, the carrying value of the asset (or of the cash-generating unit) - with the exception of goodwill - is increased to the new value resulting from the estimate of its recoverable amount, but not beyond the net carrying value that the asset would have had if it had not been written down for impairment. Reversal of impairment loss is recognised in the income statement.

Investment property

As allowed by IAS 40, non-operating buildings and constructions are assessed at cost net of depreciation and losses due to cumulative impairment. The depreciation criterion applied is the asset's estimated useful life, which is considered to be 33 years.

If the recoverable amount of the investment property – determined based on the market value of the properties – is estimated to be lower than its carrying value, the asset's carrying value is reduced to the lower recoverable amount, recognising impairment in the income statement.

When there is no longer any reason for a write-down to be maintained, the carrying value of the asset (or CGU) is increased to the new value stemming from the estimate of its recoverable amount – but not beyond the net carrying value that the asset would have had if it had not been written down for impairment. Reversal of impairment loss is recognised in the income statement.

Equity investments and non-current receivables

Equity investments not classified as held for sale are stated in the accounts at cost, reduced for impairment. The original value is written back in subsequent years if the reasons for write-down cease to exist.

Non-current receivables are stated at their presumed realisable value.

Inventories

Inventories are measured at the lower of purchase or production cost – determined using the weighted average cost method – and the corresponding fair value represented by the replacement cost for purchased materials and by the presumed realisable value for finished and semi-processed products

– calculated taking into account any manufacturing costs and direct selling costs yet to be incurred. Inventory cost includes accessory costs and the portion of direct and indirect manufacturing costs that can reasonably be assigned to inventory items. Inventories subject to obsolescence and low turnover are written down in relation to their possibility of use or realisation. Inventory write-downs are eliminated in subsequent years if the reasons for such write-downs cease to exist.

Trade receivables and other financial assets

Initial recognition

Upon initial recognition, financial assets are classified, as the case may be, on

the basis of subsequent measurement methods, i.e. at amortised cost, at fair value recognised in other comprehensive income (OCI) and at fair value recognised in the income statement.

The classification of financial assets at initial recognition depends on the characteristics of the contractual cash flows of the financial assets and on the business model that the Group uses to manage them.

Trade receivables that do not contain a significant financing component are valued at the transaction price determined in accordance with IFRS 15. See the "Revenue from Contracts with Customers" paragraph.

Other financial assets are recorded at fair value plus, in the case of a financial asset not at fair value recognised in the income statement, transaction costs. For a financial asset to be classified and measured at amortised cost or at fair value recognised in OCI, it must generate cash flows that depend solely on the principal and interest on the amount of principal to be repaid (known as 'solely payments of principal and interest (SPPI)'). This measurement is referred to as the SPPI test and is carried out at the instrument level.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below.

Financial assets at amortised cost (debt instruments)

This category is the most important for the Group. The Group measures the financial assets at amortised cost if both of the following requirements are met:

  • the financial asset is held as part of a business model whose objective is to hold financial assets for the purpose of collecting contractual cash flows and
  • the contractual terms of the financial asset envisage, at certain dates, cash flows represented solely by payments of principal and interest on the amount of principal to be repaid

Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in the income statement when the asset is derecognised, modified or revalued.

Financial assets at amortised cost of the Group include trade receivables.

Financial assets at fair value through profit or loss

This category includes all assets held for trading, assets designated at initial recognition as financial assets measured at fair value with changes recognised in the income statement, or financial assets that must be measured at fair value. Assets held for trading are all those assets acquired for sale or repurchase in the short term. Derivatives, separated or otherwise, are classified as financial instruments held for trading, unless they are designated as effective hedging instruments. Financial assets with cash flows that are not represented solely by principal and interest payments are classified and measured at fair value through profit or loss, regardless of the business model. Financial instruments at fair value with changes recognised in the income statement are recognised in the statement of financial position at fair value and net changes in fair value are recognised in the income statement. This category includes derivative instruments.

The Group does not hold financial assets at fair value through profit or loss with reclassification of cumulative gains and losses or financial assets at fair value through profit or loss without reversal of cumulative gains and losses upon derecognition.

Derecognition

A financial asset (or, if applicable, part of a financial asset or part of a group of similar financial assets) is firstly written off (e.g. removed from the statement of financial position of the Group) when:

• the rights to receive cash flows from the asset are extinguished, or

• the Group transferred to a third party the right to receive financial flows from the asset or has taken on the contractual obligation to pay them fully and without delay and (a) transferred substantially all the risks and benefits of the ownership of the financial asset or (b) did not substantially transfer or retain all the risks and benefits of the asset, but transferred their control. If the Group has transferred the rights to receive financial flows from an asset or has signed an agreement on the basis of which it retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the financial flows to one or more beneficiaries (pass-through), it considers whether or to what extent it has retained the risks and benefits concerning the ownership. If it has not substantially transferred or retained all the risks and benefits or has not lost control over it, the asset continued to be recognised in the financial statements of the Group to the extent of its residual involvement in the asset itself. In this case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured in such a way as to reflect the rights and obligations that pertain to the Group. When the residual involvement of the entity is a guarantee in the transferred asset, the involvement is measured based on the amount of the asset or the maximum amount of the consideration received that the entity could be obliged to pay, whichever lower.

Provisions for risks and charges

Provisions for risks and charges are provisioned to cover losses and debts, the existence of which is certain or probable, but whose amount or date of occurrence cannot be determined at the end of the year. Provisions are stated in the statement of financial position only when a legal or implicit obligation exists that determines the use of resources with an impact on profit and loss to meet that obligation and the amount can be reliably estimated. If the effect is significant, the provisions are calculated by updating future financial flows estimated at a rate including taxes such as to reflect current market valuations of the current value of the cash and specific risks associated with the liability.

Post-employment benefit reserve

The post-employment benefit reserve (TFR) is provisioned to cover the entire liability accruing vis-à-vis employees in compliance with current legislation and with national and supplementary company collective labour contracts. This liability is subject to revaluation via application of indices fixed by current regulations. Up to 31 December 2006, post-employment benefits were considered defined-benefit plans and accounted for in compliance with IAS 19, using the projected unit-credit method. The regulations of this fund were amended by Italian Law no. 296 of 27 December 2006 and subsequent Decrees and Regulations issued during the first months of 2007. In the light of these changes, and, in particular, for companies with at least 50 employees, post-employment benefits must now be considered a defined-benefit plan only for the portions accruing before 1 January 2007 (and not yet paid as at the end of the reporting period). Conversely, portions accruing after that date are treated as defined-contribution plans. Actuarial gains or losses are recorded immediately under "Other total profits/(losses)".

Trade payables and other financial liabilities

Initial recognition

All financial liabilities are initially recognised at fair value, in addition to directly attributable transaction costs in case of mortgages, loans and payables. The Company's financial liabilities include trade payables and other payables, mortgages and loans, including current account overdrafts and derivative financial instruments.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below.

Financial liabilities at fair value recognised in the income statement

Financial liabilities at fair value with changes recognised in the income statement include liabilities held for trading and financial liabilities initially recognised at fair value, with changes recognised in the income statement. Liabilities held for trading are those liabilities acquired in order to discharge or transfer them in the short term. This category also includes derivative financial instruments subscribed by the Company and not designated as hedging instruments in a hedging relationship pursuant to IFRS 9. Embedded derivatives, separated from the main contract, are classified as financial instruments held for trading, unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement. Financial liabilities are designated at fair value with changes recognised in the income statement from the date of initial recognition, only if the criteria of IFRS 9 are met.

Loans and payables

This is the most important category for the Company and includes interest-bearing payables and loans. After initial statement, loans are valued using the amortised cost approach, applying the effective interest rate method. Gains and losses are recognised in the income statement when the liability is discharged, as well as through the amortisation process. Amortised cost is calculated by recognising the discount or premium on the acquisition and the fees or costs that are an integral part of the effective interest rate. Amortisation at the effective interest rate is included in financial expenses in the income statement.

Derecognition

A financial liability is derecognised when the obligation underlying the liability is discharged, cancelled or fulfilled. If an existing financial liability is replaced by another from the same lender, at substantially different conditions, or if the conditions of an existing liability are substantially changed, this replacement or change is treated as a derecognition of the original liability accompanied by the recognition of a new liability, with any differences between the carrying values recognised in the income statement.

Policy for conversion of foreign currency items

Receivables and payables originally expressed in foreign currencies are converted into euro at the exchange rates in force on the date of the transactions originating them. Forex differences realised upon collection of receivables and payment of payables in foreign currency are posted in the income statement. Income and costs relating to foreign-currency transactions are converted at the rate in force on the transaction date.

At year-end, assets and liabilities expressed in foreign currencies, with the ex-

ception of non-current items, are posted at the spot exchange rate in force at the end of the reporting period and related foreign exchange gains and losses are posted in the income statement. If conversion generates a net gain, this value constitutes a non-distributable reserve until it is effectively realised.

Derivative instruments and hedge accounting

The Group's business is exposed to financial risks relating to changes in exchange rates, commodity prices and interest rates. The company uses derivative instruments (mainly forward contracts on currencies and commodity options) to hedge risks stemming from changes in foreign currencies relating to irrevocable commitments or to planned future transactions.

Derivatives are initially recognised at cost and are then adjusted to fair value on subsequent closing dates.

Changes in the fair value of derivatives designated and recognised as effective for hedging future cash flows relating to the Group's contractual commitments and planned transactions are recognised directly in shareholders' equity, while the ineffective portion is immediately posted in the income statement. If the contractual commitments or planned transactions materialise in the recognition of assets or liabilities, when such assets or liabilities are recognised, the gains or losses on the derivative that were directly recognised in equity are factored back into the initial valuation of the cost of acquisition or carrying value of the asset or liability. For cash flow hedges that do not lead to recognition of assets or liabilities, the amounts that were directly recognised in equity are included in the income statement in the same period when the contractual commitment or planned transaction hedged impacts profit and loss – for example, when a planned sale actually takes place.

For effective hedges of exposure to changes in fair value, the item hedged is adjusted for the changes in fair value attributable to the risk hedged and recognised in the income statement. Gains and losses stemming from the derivative's valuation are also posted in the income statement.

Changes in the fair value of derivatives not designated as hedging instruments are recognised in the income statement in the period when they occur.

Hedge accounting is discontinued when the hedging instrument expires, is sold or is exercised, or when it no longer qualifies as a hedge. At this time, the cumulative gains or losses of the hedging instrument recognised in equity are kept in the latter until the planned transaction actually takes place. If the transaction hedged is not expected to take place, cumulative gains or losses recognised directly in equity are transferred to the year's income statement.

Embedded derivatives included in other financial instruments or contracts are treated as separate derivatives when their risks and characteristics are not strictly related to those of their host contracts and the latter are not measured at fair value with posting of related gains and losses in the income statement.

Revenue from contracts with customers

The Group is engaged in the supply of components for household appliances (mainly gas components, such as valves and burners, hinges and electronic components).

Revenue from contracts with customers is recognised when control of the goods is transferred to the customer for an amount that reflects the consideration that the Group expects to receive in exchange for the goods. The control of the goods passes to the customer according to the terms of return defined with the customer. The usual extended payment terms range from 30 to 120 days from shipment; the Group believes that the price does not include significant financing components.

The guarantees provided for in the contracts with customers are of a general nature and not extended and are accounted for in accordance with IAS 37.

Financial income

Finance income includes interest receivable on funds invested and income from financial instruments, when not offset as part of hedging transactions. Interest income is recorded in the income statement at the time of vesting, taking effective output into consideration.

Financial expenses

Financial expenses include interest payable on financial debt calculated using the effective interest method and bank expenses. All the other financial expenses are recognised as costs for the year in which they are incurred.

Income taxes for the year

Income taxes include all taxes calculated on the Group's taxable income. Income taxes are directly recognised in the income statement, with the exception of those concerning items directly debited or credited to shareholders' equity, in which case the tax effect is recognised directly in shareholders' equity. Other taxes not relating to income, such as property taxes, are included among operating expenses. Deferred taxes are provisioned in accordance with the global liability provisioning method. They are calculated on all temporary differences emerging between the taxable base of an asset and liability and its book value in the consolidated financial statements, with the exception of goodwill that is not tax-deductible and of differences stemming from investments in subsidiaries for which cancellation is not envisaged in the foreseeable future. Deferred tax assets on unused tax losses and tax credits carried forward are recognised to the extent that it is probable that future taxable income will be available against which they can be recovered. Current and deferred tax assets and liabilities are offset when income taxes are levied by the same tax authority and when there is a legal right to settle on a net basis. Deferred tax assets and liabilities are measured using the tax rates that are expected to be applicable, according to the respective regulations of the countries where the Group operates, in the years when temporary differences will be realised or settled.

Dividends

Dividends are posted on an accrual basis when the right to receive them materialises, i.e. when shareholders approve dividend distribution.

Treasury shares

Treasury shares are booked as a reduction of shareholders' equity. The carrying value of treasury shares and revenues from any subsequent sales are recognised in the form of changes in shareholders' equity.

Equity-settled transactions

Some Group employees receive part of the remuneration in the form of sharebased payments, therefore employees provide services in exchange for shares ("equity-settled transactions"). The cost of equity-settled transactions is determined by the fair value at the date on which the assignment is made using an appropriate measurement method, as explained in more detail in Note 37.

This cost, together with the corresponding increase in shareholders' equity, is recorded under personnel costs (Note 27) over the period in which the conditions relating to the achievement of objectives and/or the provision of the service are met. The cumulative costs recognised for such transactions at the end of each reporting period up to the vesting date are commensurate with the expiry of the vesting period and the best estimate of the number of equity instruments that will actually vest.

Service or performance conditions are not taken into account when defining the fair value of the plan at the assignment date. However, the probability of these conditions being met is taken into account when defining the best estimate of the number of equity instruments that will vest. Market conditions are reflected in the fair value at the assignment date. Any other condition related to the plan that does not involve a service obligation is not considered to be a vesting condition. Non-vesting conditions are reflected in the fair value of the plan and result in the immediate recognition of the cost of the plan, unless there are also service or performance conditions.

No cost is recognised for rights that do not vest in that the performance and/ or service conditions are not met. When the rights include a market condition or a non-vesting condition, these are treated as if they had vested regardless of whether the market conditions or other non-vesting conditions to which they are subject are met or not, it being understood that all other performance and/ or service conditions must be met.

If the conditions of the plan are changed, the minimum cost to be recognised is the fair value at the assignment date in the absence of the change in the plan itself, on the assumption that the original conditions of the plan are met. Moreover, a cost is recognised for each change that results in an increase in total fair value of the payment plan, or that is in any case favourable for employees; this cost is measured with reference to the date of change. When a plan is cancelled, any remaining element of the plan's fair value is immediately expensed to the income statement.

Earnings per share

Basic EPS is calculated by dividing the profit or loss attributable to the direct parent company's shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is calculated by dividing the profit or loss attributable to the direct parent company's shareholders by the weighted average number of shares outstanding, adjusted to take into account the effects of all potential ordinary shares with a dilutive effect.

Use of estimates

Preparation of the financial statements and notes in accordance with IFRS requires management to make estimates and assumptions that affect the carrying values of assets and liabilities and the disclosures on contingent assets and liabilities as of the end of the reporting period. Actual results might differ from these estimates. Estimates are used to measure tangible and intangible assets subject to impairment testing, as described earlier, as well as to measure provisions for bad debts, for inventory obsolescence, depreciation and amortisation, asset write-downs, employee benefits, taxes, and other provisions. Specifically:

Recoverable amount of tangible and intangible assets

The procedure for determining impairment of tangible and intangible assets described in "Impairment" implies – in estimating the value of use – the use of the Business Plans of investees, which are based on a series of assumptions relating to future events and actions of the investees' management bodies, which may not necessarily come about. In estimating market value, however, assumptions are made on the expected trend in trading between third parties based on historical trends, which may not actually be repeated.

Provisions for bad debts

Receivables are adjusted by the related bad debt provision to take into account their recoverable amount. To determine the size of the write-downs, management must make subjective assessments based on the documentation and information available regarding, among other things, the customer's solvency, as well as experience and historical payment trends.

Provisions for inventory obsolescence

Inventories subject to obsolescence and slow turnover are systematically valued, and written down if their recoverable amount is less than their carrying value. Write-downs are calculated based on management assumptions and estimates, resulting from experience and historical results.

Employee benefits

The current value of liabilities for employee benefits depends on a series of factors determined using actuarial techniques based on certain assumptions. Assumptions concern the discount rate, estimates of future salary increases, and mortality and resignation rates. Any change in the above-mentioned assumptions might have significant effects on liabilities for pension benefits.

Share-based payments

Estimating the fair value of share-based payments requires the determination of the most appropriate valuation model, which depends on the terms and conditions under which these instruments are granted. This also requires the identification of data to feed into the valuation model, including assumptions about the exercise period of the options, volatility and dividend yield. The Group uses a binomial model for the initial measurement of the fair value of share-based payments with employees.

Income tax

The Group is subject to different bodies of tax legislation on income. Determining liabilities for Group taxes requires the use of management valuations in relation to transactions whose tax implications are not certain at the end of the reporting period. Furthermore, the valuation of deferred taxes is based on income expectations for future years; the valuation of expected income depends on factors that might change over time and have a significant effect on the valuation of deferred tax assets.

Other provisions and reserves

When estimating the risk of potential liabilities from disputes, the Directors rely on communications regarding the status of recovery procedures and disputes from the lawyers who represent the Group in litigation. These estimates are determined taking into account the gradual development of the disputes, considering existing exemptions.

Estimates and assumptions are regularly reviewed and the effects of each change immediately reflected in the income statement.

New accounting standards

Accounting standards, amendments and interpretations applicable from 1 January 2018

Standard IFRS 9 – FINANCIAL INSTRUMENTS. In July 2014, the IAS issued its final IFRS 9 replacing IAS 39 and all previous versions of IFRS 9. The standard was approved by the European Union in November 2016 and is effective for financial years beginning on or after 1 January 2018. IFRS 9 brings together all aspects relating to the recognition of financial instruments: Classification and Measurement, Impairment and Hedge Accounting. The adoption of IFRS 9 did not have a significant impact on the Group's financial statements and did not entail the need to record adjustments to the consolidated statement of financial position at the date of initial application of the standard.

Classification and measurement

The Group did not have a significant impact on its financial statements as a result of the application of the classification and measurement requirements envisaged by IFRS 9. Loans, like trade receivables, are held for collection at the contractual due dates and are expected to generate cash flows represented solely by collections of principal and interest.

Impairment

The Group has not recorded any adjustments to the consolidated statement of financial position at the date of initial application of the standard. In particular, with reference to trade receivables, the Group considered its policy of bad debt provision consistent with the Standard.

Hedge accounting

The Group does not use hedge accounting for hedging instruments.

Standard IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS. In May 2014, the IAS issued IFRS 15, a new revenue recognition standard that replaces IAS 18 and IAS 11 and was supplemented with further clarifications and guidance in 2016. The standard is applicable to the preparation of the financial statements for the financial years starting from 1 January 2018 and introduced a new five-stage model that applies to contracts with customers. IFRS 15 requires the recognition of revenue for an amount that reflects the consideration to which the entity believes it is entitled in exchange for the

transfer of goods or services to the customer.

The application of the new standard and the relative interpretations has not had significant effects on the Group's consolidated financial statements, either from the point of view of classification or of determining quantities. In particular, the application of IFRS 15 had no impact on contracts with customers, in which the sale of Sabaf products is the only obligation ("at a point in time"), since revenues are recognised at the time when control of the activity is transferred to the customer, according to the terms of return defined with the customer. The guarantees provided for in the contracts are of a general nature and not extended and, consequently, the Group believes that they will continue to be accounted for in accordance with IAS 37. Finally, with regard to the income from participating in the production of presses and equipment, in line with previous years, the Group will continue to allocate these revenues over the useful life of the projects, which is generally 10 years.

Document "ANNUAL IMPROVEMENTS TO IFRSS: 2014-2016 CYCLE". The

provisions issued concern IFRS 1 First-Time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters, IAS 28 Investments in Associates and Joint Ventures – Measuring investees at fair value through profit or loss: an investment-by-investment choice or a consistent policy choice, IFRS 12 Disclosure of Interests in Other Entities – Clarification of the scope of the Standard. The provisions were approved by the European Union in February 2018 and are applicable in the preparation of the financial statements for financial years beginning on or after 1 January 2018, with reference to the amendments to IAS 28 and IFRS 1, as from 1 January 2017, with reference to the amendments to IFRS 12. The adoption of the provisions by the Group did not entail any changes in accounting policies or retrospective adjustments.

IFRIC 22 Interpretation "FOREIGN CURRENCY TRANSACTIONS AND ADVANCE CONSIDERATION". The interpretation was endorsed by the European Union in March 2018 and is applicable from 1 January 2018. The interpretation aims to provide guidelines for foreign currency transactions if advances or non-cash payments are recognised in the financial statements, prior to the recognition of the related asset, cost or revenue. This document provides guidance on how an entity should determine the date of a transaction, and consequently, the spot exchange rate to be used when foreign currency transactions occur in which the payment is made or received in advance. The adoption of the interpretation by the Group did not entail any changes in accounting policies or retrospective adjustments.

Amendment to IAS 40 "TRANSFERS OF INVESTMENT PROPERTY". These amendments clarify the transfers of a property to, or from, investment property. In particular, an entity must reclassify a property among, or from, investment property only when there is evidence that there was a change in the intended use of the property. This change must refer to a specific event that happened and must not be limited to a change of intention by the Management of an entity. The interpretation was endorsed by the European Union in March 2018 and is applicable from 1 January 2018 The adoption of the amendments by the Group did not entail any changes in accounting policies or retrospective adjustments.

Amendment to IFRS 2 "CLASSIFICATION AND MEASUREMENT OF SHARE-BASED PAYMENT TRANSACTIONS", which contains some clarification on the recording of the effects of vesting conditions in the presence of cash-settled share-based payments, on the classification of share-based payments with net settlement characteristics and on the recording of amendments under the terms and conditions of a share-based payment that change their classification from cash-settled to equity-settled. The interpretation was endorsed by the European Union in February 2018 and is applicable from 1 January 2018. The adoption of the amendments by the Group did not entail any changes in accounting policies or retrospective adjustments.

IFRS and IFRIC accounting standard, amendments approved by the European Union, not yet universally applicable and not adopted early by the Group at 31 December 2018

Standard IFRS 16 "LEASES" (published on 13 January 2016), which will replace standard IAS 17 – Leases, as well as interpretations IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases— Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The new standard provides a new definition of lease and introduces a criterion based on the control (right of use) of an asset in order to distinguish the leasing contracts from the service contracts, identifying the discriminatory ones: the identification of the asset, the right of replacement of the same, the right to obtain substantially all of the economic benefits deriving from the use of the asset and the right to direct the use of the asset underlying the contract. The standard establishes a single model of recognition and measurement of the lease agreements for the lessee which requires the recognition of the asset to be leased (operating lease or otherwise) in assets offset by a financial debt, while also providing the opportunity not to recognise as leases the agreements whose subject matter are "low-value assets" and leases with a contract duration equal to or less than 12 months. By contrast, the Standard does not include significant changes for the lessors. The standard applies beginning on 1 January 2019 but early application is permitted, only for Companies that already applied IFRS 15 - Revenue from Contracts with Customers.

On the basis of the analyses carried out, the directors expect that the application of IFRS 16 may have a minor impact on the amounts and on the related disclosures in the Group's consolidated financial statements. However, it is not possible to provide a reasonable estimate of the effects until the Group has completed a detailed analysis of the related contracts.

Amendment to IFRS 9 "PREPAYMENT FEATURES WITH NEGATIVE COM-

PENSATION". This document specifies the instruments that envisage early repayment that could comply with the "SPPI" test even if the "reasonable additional compensation" to be paid in the event of early repayment is a "negative compensation" for the lender. The interpretation was endorsed by the European Union in March 2018 and is applicable from 1 January 2019 (early application is also permitted). The directors do not expect a significant effect on the Group's consolidated financial statements through the adoption of these changes.

IFRS accounting standards, amendments and interpretations not yet approved by the European Union

On the reference date of these consolidated financial statements the competent bodies of the European Union have not yet concluded the approval process necessary for the adoption of the amendments and principles described below.

On 7 June 2017, IASB published the clarification document IFRIC 23 – UN-CERTAINTY OVER INCOME TAX TREATMENTS. The document deals with uncertainties about the tax treatment of income taxes. The document requires that uncertainties in determining deferred tax assets and liabilities be reflected in the financial statements only when it is probable that the entity will pay or recover the amount in question. Moreover, the document does not contain any new disclosure requirement but emphasises that an entity will have to determine whether it will be necessary to disclose information on management considerations and on the uncertainty relating to tax accounting in accordance with IAS 1. The new interpretation applies from 1 January 2019, but early application is permitted.

Amendment to IAS 28 "LONG-TERM INTERESTS IN ASSOCIATES AND JOINT VENTURES" (published on 12 October 2017). This document clarifies the need to apply IFRS 9, including the requirements of impairment, to other long-term interests in associate companies and joint ventures that are not accounted for under the equity method. The amendment applies from 1 January 2019, but early application is permitted. The directors do not expect a significant effect on the Group's consolidated financial statements through the adoption of these changes.

Document "ANNUAL IMPROVEMENTS TO IFRSS 2015-2017 CYCLE", published on 12 December 2017 (including IFRS 3 Business Combinations and IFRS 11 Joint Arrangements – Remeasurement of previously held interest in a joint operation, IAS 12 Income Taxes – Income tax consequences of payments on financial instruments classified as equity, IAS 23 Borrowing costs Disclosure of Interests in Other Entities – Borrowing costs eligible for capitalisation) which implements changes to some standards as part of the annual process of improving them. The amendments apply from 1 January 2019 but early application is permitted. The directors do not expect a significant effect on the Group's consolidated financial statements through the adoption of these changes.

Amendment to IAS 19 "PLAN AMENDMENT, CURTAILMENT OR SETTLE-MENT". The amendments clarify how pension costs are determined when a change occurs in a defined benefit plan. The amendments will be effective for the preparation of the financial statements for financial years beginning on or after 1 January 2019, unless they are postponed subsequent to their approval by the European Union.

Standard IFRS 17 "INSURANCE CONTRACTS". A new accounting standard for the recognition of insurance contracts that will replace IFRS 4. The new standard will be effective for the preparation of the financial statements for financial years beginning on or after 1 January 2021, unless they are postponed subsequent to their approval by the European Union.

Comments on significant balance sheet items

1. PROPERTY, PLANT AND EQUIPMENT

PROPERTY PLANT
AND EQUIPMENT
OTHER ASSETS ASSETS UNDER
CONSTRUCTION
TOTAL
COST
At 31 December 2016 51,268 185,148 40,303 1,770 278,489
Increases 1,589 7,050 2,487 2,782 13,908
Disposals - (1,002) (538) - (1,540)
Reclassifications 118 587 192 (1,201) (304)
Forex differences (914) (1,900) (626) (29) (3,469)
At 31 December 2017 52,061 189,883 41,818 3,322 287,084
Increases 309 6,120 1,703 3,250 11,382
Disposals - (1,644) (125) - (1,769)
Change in the scope of consolidation - 189 - - 189
Reclassifications 5 1,647 84 (1,770) (34)
Forex differences (868) (1,840) (563) (114) (3,385)
At 31 December 2018 51,507 194,355 42,917 4,688 293,467
ACCUMULATED DEPRECIATIONS
At 31 December 2016 16,976 152,756 35,312 - 205,044
Depreciations for the year 1,459 8,047 2,260 - 11,766
Eliminations for disposals - (800) (479) - (1,279)
Reclassifications 5 41 30 - 76
Forex differences (156) (1,002) (434) - (1,592)
At 31 December 2017 18,284 159,042 36,689 - 214,015
Depreciations for the year 1,466 7,781 2,125 - 11,372
Eliminations for disposals - (1,178) (92) - (1,270)
Reclassifications 4 40 28 - 72
Forex differences (151) (956) (380) - (1,487)
At 31 December 2018 19,603 164,729 38,370 - 222,702
NET CARRYING VALUE
At 31 December 2018 31,904 29,626 4,547 4,688 70,765
At 31 December 2017 33,777 30,841 5,129 3,322 73,069

The breakdown of the net carrying value of Property was as follows:

31.12.2018 31.12.2017 Change
Land 6,699 6,877 (178)
Industrial buildings 25,205 26,900 (1,695)
Total 31,904 33,777 (1,873)

The net carrying value of industrial property includes an amount of € 2,040,000 (€ 2,125,000 at 31 December 2017) relating to industrial buildings held under finance leases.

The main investments in the financial year were aimed at increasing the production capacity of special burners, completing the automation of production of light alloy valves and interconnecting production plants with management systems (Industry 4.0). Other investments were made in the production of presses for new burners. Investments in maintenance and replacement, so that production equipment is kept constantly up to date and efficient, are systematic.

Decreases mainly relate to the disposal of machinery no longer in use. Assets under construction include machinery under construction and advance payments to suppliers of capital equipment.

At 31 December 2018, the Group found no endogenous or exogenous indicators of impairment of its property, plant and equipment. As a result, the value of property, plant and equipment was not submitted to impairment testing.

2. INVESTMENT PROPERTY

COST
At 31 December 2016 13,136
Increases -
Disposals (199)
At 31 December 2017 12,937
Increases -
Disposals (19)
At 31 December 2018 12,918

At 31 December 2016 6,866 Depreciations for the year 436 Eliminations for disposals (62) At 31 December 2017 7,240 Depreciations for the year 427 Write-downs for the year 850 Eliminations for disposals (2) At 31 December 2018 8,515

Net carrying value
At 31 December 2018 4,403
At 31 December 2017 5,697

This item includes non-operating buildings owned by the Group: these are mainly properties for residential use, held for rental or sale.

At 31 December 2018, the Group recorded a write-down of € 850,000, corresponding to the residual carrying value of a property acquired in 2013 and for which a revocation action was initiated during the year by the bankruptcy of the selling company. At 31 December 2018, the Group found no other endogenous or exogenous indicators of impairment of its investment property. As a result, the value of investment property was not submitted to impairment testing.

3. INTANGIBLE ASSETS

Depreciations and write-downs

GOODWILL PATENTS
AND SOFTWARE
DEVELOPMENT
COSTS
OTHER INTANGIBLE
ASSETS
TOTAL
Cost
At 31 December 2016 10,778 6,467 4,955 791 22,991
Increases - 420 496 23 939
Reclassifications - - (79) - (79)
Decreases - (14) - (13) (27)
Forex differences - (14) - (8) (22)
At 31 December 2017 10,778 6,859 5,372 793 23,802
Increases - 227 340 22 589
Reclassifications - - - - -
Decreases - - (59) (19) (78)
Change in the scope of consolidation 18,632 84 - 11,458 30,174
Forex differences - (18) - - (18)
At 31 December 2018 29,410 7,152 5,653 12,254 54,469
AMORTISATION/WRITE-DOWNS
At 31 December 2016 4,563 6,005 2,699 647 13,914
Amortisation for the year - 272 342 22 636
Decreases - (14) - - (14)
Forex differences - (9) - (8) (17)
At 31 December 2017 4,563 6,254 3,041 661 14,519
Amortisation for the year - 261 367 288 916
Decreases - - - (12) (12)
NET CARRYING VALUE
At 31 December 2018 24,847 645 2,245 11,318 39,054
At 31 December 2017 6,215 605 2,331 132 9,283

Forex differences - (8) - - (8) At 31 December 2018 4,563 6,507 3,408 937 15,415

Goodwill

Goodwill recognised at 31 December 2018 is allocated:

  • to the "Hinges" (CGU) cash generating units of € 4.445 million;
  • to the "Professional burners" CGU of € 1.770 million;
  • to the "Electronic components" CGU of € 18.632 million.

The Group verifies the ability to recover goodwill at least once a year or more frequently if there are indications of impairment. Recoverable amount is determined through value of use, by discounting expected cash flows.

Goodwill allocated to the Hinges CGU

In 2018, the Hinges CGU achieved very positive and better results - in terms of sales and profitability - both compared to the previous year and compared to the budget. The 2019-2023 forward plan envisages a further increase in sales and the maintenance of high levels of profitability. At 31 December 2018, the Group tested - with the support of independent experts - the carrying value of its CGU Hinges for impairment, determining its recoverable amount, considered to be equivalent to its usable value, by discounting expected future cash flow in the forward plan drafted by the management. Cash flows for the period from 2019 to 2023 were augmented by the so-called terminal value, which expresses the operating flows that the CGU is expected to generate from the sixth year to infinity and determined based on the perpetual income. The value of use was calculated based on a discount rate (WACC) of 10.45% (9.18% in the impairment test carried out while preparing the consolidated financial statements at 31 December 2017) and a growth rate (g) of 1.50%, unchanged from the 2017 impairment test.

The recoverable amount calculated on the basis of the above-mentioned assumptions and valuation techniques is € 12.645 million, compared with a carrying value of the assets allocated to the Hinges unit of € 7.379 million; consequently, the value recorded for goodwill at 31 December 2018 was deemed recoverable.

Sensitivity analysis

The table below shows the changes in recoverable amount depending on changes in the WACC discount rate and growth factor g:

(€/000) GROWTH RATE
DISCOUNT RATE 1.00% 1.25% 1.50% 1.75% 2.00%
9.45% 13,689 14,022 14,376 14,754 15,156
9.95% 12,859 13,150 13,459 13,786 14,134
10.45% 12,118 12,374 12,645 12,931 13,233
10.95% 11,453 11,679 11,918 12,169 12,435
11.45% 10,852 11,054 11,265 11,488 11,722

Goodwill allocated to the Professional burners CGU

At 31 December 2018, the Group tested - with the support of independent experts - the carrying value of its Professional burners CGU for impairment, determining its recoverable amount, considered to be equivalent to its usable value, by discounting expected future cash flow in the forward plan drafted at the beginning of 2019. Cash flows for the period from 2019 to 2023 were augmented by the so-called terminal value, which expresses the operating flows that the CGU is expected to generate from the sixth year to infinity and determined based on the perpetual income. The value of use was calculated based on a discount rate (WACC) of 7.73% (6.90% in the impairment test carried out while preparing the consolidated financial statements at 31 December 2017) and a growth rate (g) of 1.50%, unchanged from the 2017 impairment test.

The recoverable amount calculated on the basis of the above-mentioned assumptions and valuation techniques is € 10.482 million, compared with a carrying value of the assets allocated to the Professional burners unit of € 4.247 million (including minority interests); consequently, the value recorded for goodwill at 31 December 2018 was deemed recoverable.

Sensitivity analysis

The table below shows the changes in recoverable amount depending on changes in the WACC discount rate and growth factor g:

(€/000) GROWTH RATE
DISCOUNT RATE 1.00% 1.25% 1.50% 1.75% 2.00%
6.73% 11,637 12,082 12,569 13,106 13,699
7.23% 10,666 11,034 11,434 11,871 12,349
7.73% 9,839 10,148 10,482 10,843 11,236
8.23% 9,128 9,390 9,671 9,974 10,302
8.73% 8,510 8,734 8,974 9,231 9,507

Goodwill allocated to the Electronic components CGU

At 31 December 2018, the Group tested - with the support of independent experts - the carrying value of its Electronic components CGU for impairment, determining its recoverable amount, considered to be equivalent to its value of use, by discounting expected future cash flow estimated on the basis of the 2019 budget and projections for the following three years. Cash flows for the period from 2019 to 2022 were augmented by the so-called terminal value, which expresses the operating flows that the CGU is expected to generate from the fifth year to infinity and determined based on the perpetual income. The value of use was calculated based on a discount rate (WACC) of 11.05% and a growth rate (g) of 2.50%, in line with the expected growth of the sector in the Turkish market.

The recoverable amount calculated on the basis of the above-mentioned assumptions and valuation techniques is € 38.452 million, compared with a carrying value of the assets allocated to the Electronic components unit of € 31.434 million; consequently, the value recorded for goodwill at 31 December 2018 was deemed recoverable.

Sensitivity analysis

The table below shows the changes in recoverable amount depending on changes in the WACC discount rate and growth factor g:

(€/000) GROWTH RATE
DISCOUNT RATE 1.50% 2.00% 2.50% 3.00%
10% 38,985 41,094 43,484 46,215
10.5% 36,856 38,716 40,811 43,185
11% 34,949 40,811 38,452 40,531
11.5% 33,233 43,185 36,352 38,188

Patents and software

Software investments include the application development of the Group management system (SAP) and the implementation of specific IT solutions to meet the requirements of the tax regulations of the countries in which the Group operates.

Development costs

The main investments in the year relate to the development of new products, including special burners and personalised burners for some customers (research and development activities carried out during the year are set out in the Report on Operations).

Other intangible assets

The other intangible assets recorded in these consolidated financial statements mainly derive from the Purchase Price Allocation carried out following the acquisition of Okida Elektronik and described in the previous paragraph "Information related to IFRS 3".

The net carrying value of intangible assets is broken down as follows:

31.12.2018 31.12.2017 CHANGE
Customer Relationship
electronic components
8,477 - 8,477
Electronic components
- Brand
1,174 - 1,174
Electronic components
- Know-how
1,081 - 1,081
Other 586 132 454
Total 11,318 132 11,186

At 31 December 2018, the recoverability of the amount of other intangible assets allocated to the Electronic Components CGU was verified as part of the impairment test of the related goodwill described in the previous paragraph.

4. EQUITY INVESTMENTS

31.12.2017 CAPITAL INCREASES DISPOSALS 31.12.2018
Sabaf US 139 - - 139
ARC Handan Burners Co. 101 100 - 201
Other equity investments 40 - - 40
Total 280 100 0 380

The subsidiary Sabaf U.S. operates as a commercial base for North America. The carrying value of the investment is deemed recoverable taking into consideration expected developments on the North American market.

Handan ARC Burners Co. is a Chinese joint venture with the aim to produce and market in China burners for professional cooking. During the year, the Group, through ARC s.r.l., which holds the equity investment in the joint venture, subscribed and paid up capital of € 100,000 and increased its stake from 50% to 51% (therefore, the Group's share is now 35.5%). Handan ARC Burners is still in the start-up phase.

5. NON-CURRENT RECEIVABLES

31.12.2018 31.12.2017 CHANGE
Tax receivables 145 153 (8)
Guarantee deposits 43 43 -
Total 188 196 (8)

Tax receivables relate to indirect taxes expected to be recovered after 31 December 2018.

6. INVENTORIES

31.12.2018 31.12.2017 CHANGE
Raw Materials 14,680 11,459 3,221
Semi-processed goods 11,727 11,180 547
Finished products 15,576 13,448 2,128
Provision for inventory write-downs (2,804) (3,158) 354
Total 39,179 32,929 6,250

The value of final inventories at 31 December 2018 increased compared to the end of the previous year due to the change in the scope of consolidation and to the higher value of finished products held in consignment stock by some customers. The provision for write-downs is mainly allocated for hedging the obsolescence risk. At the end of the financial year, the appropriation is adjusted based on specific analyses carried out on slow-moving and non-moving products.

7. TRADE RECEIVABLES

31.12.2018 31.12.2017 CHANGE
Total trade receivables 48,061 43,002 5,059
Bad debt provision (1,129) (739) (390)
Net total 46,932 42,263 4,669

Trade receivables at 31 December 2018 were higher than at the end of 2017 following the change in the scope of consolidation. Moreover, some customer payments of approximately € 4 million, which were due by the end of the year, were received in the early months of 2019. With the exception of this circumstance, there were no significant changes in the payment terms agreed with customers. The amount of trade receivables recognised in the financial statements includes approximately € 26.1 million in insured receivables (€ 28.2 million at 31 December 2017).

31.12.2018 31.12.2017 CHANGE
Current receivables (not past due) 38,980 38,282 698
Outstanding up to 30 days 3,972 2,802 1,170
Outstanding from 30 to 60 days 1,019 868 151
Outstanding from 60 to 90 days 3,062 594 2,468
Outstanding for more than 90 days 1,028 456 572
Total 48,061 43,002 5,059

The bad deb provision was adjusted to the better estimate of the credit risk at the end of the reporting period. Changes during the year were as follows:

31.12.2017 PROVISIONS UTILISATION EXCHANGE RATE
DIFFERENCES
31.12.2018
Bad debt provision 739 415 (23) (3) 1,129

8. TAX RECEIVABLES

31.12.2018 31.12.2017 CHANGE
For income tax 3,435 1,998 1,437
For VAT and other sales taxes 851 682 169
Other tax credits 180 385 (205)
Total 4,466 3,065 1,401

The income tax receivables derives for € 1,153,000 from the full deductibility of IRAP from IRES relating to the expenses incurred for employees for the 2006-2011 period (Italian Legislative Decree 201/2011), for which an application for a refund was presented and, for the residual part, to the payments on account on 2018 income, for the part exceeding the tax to be paid.

Other tax credits mainly refer to receivables in respect of indirect Brazilian and Turkish taxes.

9. OTHER CURRENT RECEIVABLES

31.12.2018 31.12.2017 CHANGE
Credits to be received from suppliers 385 360 25
Advances to suppliers 411 155 256
Other 738 542 196
Total 1,534 1,057 477

Credits to be received from suppliers mainly refer to bonuses paid to the Group for the attainment of purchasing objectives. Other current receivables include accrued income and prepaid expenses.

10. FINANCIAL ASSETS

31.12.2018 31.12.2017
Current Non-current Current Non-current
Escrow bank accounts 3,510 120 60 180
Derivative instruments on interest rates - - 7 -
Currency derivatives 1 - - -
Total 3,511 120 67 180

At 31 December 2018, the following were taken out:

  • a term deposit of € 3.45 million, due on 31 March 2019, for a bank guarantee issued in favour of the sellers of the Okida Elektronik equity investment for the portion of the price for which payment is deferred until March 2019.

  • a term deposit of € 0.18 million, due on 30 June 2021, for the portion of the price not yet paid to the sellers of the ARC equity investment (Note 15).

11. CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which amounted to € 13,426,000 at 31 December 2018 (€ 11,533,000 at 31 December 2017) consisted of bank current account balances of approximately € 7.1 million and sight deposits of approximately € 6.3 million.

12. SHARE CAPITAL

The parent company's share capital consists of 11,533,450 shares with a par value of € 1.00 each. The share capital paid in and subscribed did not change during the year. At 31 December 2018, the structure of the share capital is shown in the table below.

NO. OF SHARES % OF SHARE CAPITAL RIGHTS
AND OBLIGATIONS
Ordinary shares 11,133,450 96.532% --
Ordinary shares with increased vote 400,000 3.468% Two voting rights per share
TOTAL 11,533,450 100%

With the exception of the right to increased vote, there are no rights, privileges or restrictions on the shares of the Parent Company. The availability of the Parent Company's reserves is indicated in the separate financial statements of Sabaf S.p.A.

13. TREASURY SHARES AND OTHER RESERVES

During the financial year Sabaf S.p.A. acquired 132,737 treasury shares at an average unit price of € 17.77; there have been no sales.

At 31 December 2018, the parent company Sabaf S.p.A. held 514,506 treasury shares, equal to 4.46% of share capital (381,769 treasury shares at 31 December 2017), reported in the financial statements as an adjustment to shareholders' equity at a unit value of € 13.35 (the market value at year-end was € 14.88). There were 11,018,944 outstanding shares at 31 December 2018 (11,151,681 at 31 December 2017).

Items "Retained earnings, other reserves" of € 90,236,000 included, at 31 December 2018, the stock grant reserve of € 321,000, which included the measurement at 31 December 2018 of fair value of rights assigned to receive shares of the Parent Company. For details of the Stock Grant Plan, refer to Note 37.

14. LOANS

31.12.2018 31.12.2017
Current Non-current Current Non-current
Property leasing 153 1,309 149 1,462
Unsecured loans 10,741 41,097 5,982 16,298
Short-term bank loans 5,247 - 9,477 -
Advances on bank receipts or invoices 1,942 - 1,678 -
Interest payable 44 - 2 -
Derivative instruments on interest rates 308 - - -
Total 18,435 42,406 17,288 17,760

During the year, the Group took out new unsecured loans for a total of € 37 million to finance the investments made, with particular reference to the acquisition of Okida. All loans are signed with an original maturity ranging from 5 to 6 years and are repayable in instalments.

Some of the outstanding unsecured loans have covenants, defined with reference to the consolidated financial statements at the end of the reporting period, as specified below:

  • commitment to maintain a ratio of net financial position to shareholders' equity of less than 1 (residual amount of the loans at 31 December 2018 equal to € 31 million)
  • commitment to maintain a ratio of net financial position to EBITDA of less than 2 (residual amount of the loans at 31 December 2018 equal to € 7 million) or less than 2.5 (residual amount of the loans at 31 December 2018 equal to € 24 million)

15. OTHER FINANCIAL LIABILITIES

widely observed at 31 December 2018.

All bank loans are denominated in euro, with the exception of a short-term loan of USD 2 million.

To manage interest rate risk, unsecured loans are either fixed-rate or hedged by IRS. These consolidated financial statements include the negative fair value of the IRSs hedging rate risks of unsecured loans pending, for residual notional amounts of approximately € 34.9 million and expiry until 31 December 2024. Financial expenses were recognised in the income statement with a balancing entry.

Note 35 provides information on financial risks, pursuant to IFRS 7.

31.12.2018 31.12.2017
Current Non-current Current Non-current
Payables to former Okida shareholders 7,622 -
Option on A.R.C. minorities - 1,818 - 1,763
Payables to A.R.C. shareholders 60 120 60 180
Derivative instruments on interest rates - - 15 -
Total 7,682 1,938 75 1,943

As part of the acquisition of 100% of Okida Elektronik, the parties agreed that the payment of part of the price would be subject to adjustment (depending, inter alia, on Okida's 2018 EBITDA) and postponed compared to the effective date of the transaction (4 September 2018). The payables to Okida shareholders at 31 December 2018 in these consolidated financial statements represent the residual portion of the price to be paid to the sellers.

In June 2016, as part of the acquisition of 70% of A.R.C. S.r.l., Sabaf signed with Loris Gasparini (current minority shareholder by 30% of A.R.C.) an agreement that aimed to regulate Gasparini's right to leave A.R.C. and the interest of Sabaf to acquire 100% of the shares after expiry of the term of five years from the signing of the purchase agreement of 24 June 2016, by signing specific option agreements. Therefore, the agreement envisaged specific option rights to purchase (by Sabaf) and sell (by Gasparini) exercisable as from 24 June 2021, the remaining shares of 30% of A.R.C., with strike prices contractually defined on the basis of final income parameters from A.R.C. at 31 December 2020.

Pursuant to the provisions of IAS 32, the assignment of an option to sell (put option) in the terms described above required the recording of a liability corresponding to the estimated redemption value, expected at the time of any exercise of the option: to this end, a financial liability of € 1.763 million was recognised in the consolidated financial statements at 31 December 2017. At 31 December 2018, the Group revalued the outlay estimate, based on the expected results of A.R.C. at 31 December 2020 in accordance with the business plan of the subsidiary prepared at the beginning of 2019. Th recalculation of the fair value, in compliance with IAS 39, led to an increase of € 55,000 in the liability; financial expenses were recognised as a balancing entry (Note 29).

The payable to the A.R.C. shareholders of € 180,000 at 31 December 2018 is related to the part of the price still to be paid to the sellers, which was deposited on an non-interest-bearing escrow account and will be released in favour of the sellers at constant rates in 3 years, in accordance with contractual agreements and guarantees issued by the sellers.

16. POST-EMPLOYMENT BENEFIT AND RETIREMENT RESERVES

POST-EMPLOYMENT
BENEFIT RESERVE
RETIREMENT RESERVE TOTAL
At 31 December 2017 2,720 125 2,845
Provisions 154 - 154
Financial expenses 27 - 27
Payments made (226) (125) (351)
Tax effect (32) - (32)
Forex differences (11) - (11)
At 31 December 2018 2,632 0 2,632

Following the revision of IAS 19 - Employee benefits, from 1 January 2013 all actuarial gains or losses are recorded immediately in the comprehensive income statement ("Other comprehensive income") under the item "Actuarial income and losses".

Post-employment benefits are calculated as follows:

FINANCIAL ASSUMPTIONS
31.12.2018 31.12.2017
Discount rate 1.30% 1.15%
Inflation 1.70% 1.80%
DEMOGRAPHIC THEORY
31.12.2018 31.12.2017
Mortality rate ISTAT 2016 M/F ISTAT 2016 M/F
Disability rate INPS 1998 M/F INPS 1998 M/F
Staff turnover 3% - 6% 3% - 6%
Advance pay-outs 5% - 7% per year 5% - 7% per year
Retirement age pursuant to legislation
in force on
31 December 2018
pursuant to legislation
in force on
31 December 2017

17. PROVISIONS FOR RISKS AND CHARGES

31.12.2017 Provisions Utilisation Change in the
scope
of consolidation
Exchange
rate
differences
31.12.2018
Reserve for agents' indemnities 210 28 (21) - - 217
Product guarantee fund 60 57 (57) - - 60
Reserve for legal risks 115 70 (3) - (7) 175
Other provisions for risks and charges - - - 273 - 273
Total 385 155 (81) 273 (7) 725

The reserve for agents' indemnities covers amounts payable to agents if the Group terminates the agency relationship.

The product guarantee fund covers the risk of returns or charges by customers for products already sold. The fund was adjusted at the end of the year, on the basis of analyses conducted and past experience.

The reserve for legal risks, set aside for moderate disputes, was adjusted to reflect the outstanding disputes.

18. TRADE PAYABLES

31.12.2018 31.12.2017 CHANGE
Total 21,215 19,975 1,240

The increase in trade payables is related to the change in the scope of consolidation. Average payment terms did not change versus the previous year. At 31 December 2018, there were no overdue payables of a significant amount and the Group did not receive any injunctions for overdue payables.

Other provisions for risks and charges, recognised as part of the purchase price allocation following the acquisition of Okida Elektronik, reflect the fair value of the potential liabilities of the acquired entity (tax risks).

The provisions booked to the provisions for risks, which represent the estimate of future payments made based on historical experience, have not been discounted because the effect is considered negligible.

19. TAX PAYABLES

31.12.2018 31.12.2017 CHANGE
For income tax 2,672 240 2,432
Withholding taxes 680 656 24
Other tax payables 214 199 15
Total 3,566 1,095 2,471

The income tax payables refer to the taxes for the year, for the portion exceeding the advances paid.

20. OTHER CURRENT PAYABLES

31.12.2018 31.12.2017 CHANGE
To employees 4,383 4,552 (169)
To social security institutions 2,148 2,304 (156)
To agents 312 195 117
Advances from customers 250 94 156
Other current payables 507 346 161
Total 7,600 7,491 109

At the beginning of 2019, payables due to employees and social security institutions were paid in accordance with the scheduled expiry dates.

21. DEFERRED TAX ASSETS AND LIABILITIES

31.12.2018 31.12.2017
Deferred tax assets 4,617 5,096
Deferred tax liabilities (3,030) (804)
Net position 1,587 4,293

The table below analyses the nature of the temporary differences that determine the recognition of deferred tax liabilities and assets and their changes during the year and the previous year.

Non-current
tangible and
intangible assets
Provisions
and value
adjustments
Fair value
of derivative
instruments
Good
will
Tax
incentives
Actuarial post-em
ployment benefit
reserve evaluation
Other
temporary
differences
Total
At 31 December 2017 (120) 1,150 3 1,771 629 189 671 4,293
To the income statement 78 34 53 - (141) - (333) (309)
To shareholders' equity (1,753) - - - - (7) - (1,760)
Forex differences (421) (20) - - (149) - (47) (637)
At 31 December 2018 (2,216) 1,164 56 1,771 339 182 291 1,587

As described in the paragraph "Information related to IFRS 3", these consolidated financial statements include deferred taxes on the fair value measurement of intangible assets recognised as a result of the Purchase Price Allocation of Okida Elektronik.

Deferred tax assets relating to goodwill, equal to € 1,771,000, refer to the exemption of the value of the equity investment in Faringosi Hinges s.r.l. made in 2011 pursuant to Italian law Decree 98/2011.

Deferred tax assets relating to tax incentives are commensurate to investments made in Turkey.

22. NET FINANCIAL POSITION

As required by the CONSOB memorandum of 28 July 2006, we disclose that the Group's net financial position is as follows:

31.12.2018 31.12.2017 CHANGE
Cash (Note 11)
A.
19 14 5
B.
(Note 11)
Positive balances of unrestricted bank accounts 7,067 11,009 (3,942)
Other cash equivalents
C.
6,340 510 5,830
D. Liquidity (A+B+C) 13,426 11,533 1,893
E. Current financial receivables 3,511 0 3,511
Current bank payables (Note 14)
F.
7,233 11,157 (3,924)
G. Current portion of non-current debt (Note 14) 10,741 6,131 4,610
H. Other current financial payables (Note 15) 8,143 75 8,068
I. Current financial debt (F+G+H) 26,117 17,363 8,754
J. Net current financial debt (I-D-E) 9,180 5,830 3,350
K. Non-current bank payables (Note 14) 41,097 16,298 24,799
L. Other non-current financial payables (Note 14) 3,247 3,405 (158)
M. Non-current financial debt (K+L) 44,344 19,703 24,641
Net financial debt (J+M)
N.
53,524 25,533 27,991

The consolidated cash flow statement, which shows the changes in cash and cash equivalents (letter D. of this statement), describes in detail the cash flows that led to the change in the net financial position.

144

Comments on key income statement items

23. REVENUE

In 2018, sales revenues totalled € 150,642,000, up by € 419,000 (+0.3%) compared with 2017. Taking into consideration the same scope of consolidation, revenue decreased by 2.4%.

Revenue by geographical area
2018 % 2017 % % CHANGE
Italy 31,579 21.0% 36,523 24.3% -13.5%
Western Europe 12,337 8.2% 11,678 7.8% +5.6%
Eastern Europe 46,301 30.7% 42,824 28.5% +8.1%
Middle East and Africa 12,303 8.2% 13,009 8.6% -5.4%
Asia and Oceania 7,590 5.0% 10,516 7.0% -27.8%
South America 25,461 16.9% 22,938 15.3% +11.0%
North America and Mexico 15,071 10.0% 12,735 8.5% +18.3%
Total 150,642 100% 150,223 100% +0.3%

The sales analysis by geographical area shows an uneven trend in the various markets in which the Group operates. The best results were achieved on the American continent: sales in North America were sustained by the good performance of consumption; in South America, strong growth rates were recorded in the Andean countries, which more than offset the effects of the crisis in Argentina and a still stagnant demand in Brazil. Satisfactory growth rates were recorded in European markets, thanks to the consolidation of relationships with major customers and the contribution made by the acquisition in Turkey of Okida; only in Italy sales are down due to the sharp reduction in the production of domestic appliances. North Africa and the Middle East have shown signs of weakness, while the Group's presence on Asian markets is not yet sufficiently consolidated.

Revenue by product family

2018 % 2017 % % CHANGE
Brass valves 4,327 2.9% 5,991 4.0% -27.8%
Light alloy valves 37,615 25.0% 39,351 26.2% -4.4%
Thermostats 6,521 4.3% 7,376 4.9% -11.6%
Standard burners 39,368 26.1% 41,070 27.3% -4.1%
Special burners 27,585 18.3% 27,184 18.1% +1.5%
Accessories 15,422 10.3% 15,267 10.2% +1.0%
Household gas parts 130,838 86.9% 136,239 90.7% -4.0%
Professional gas parts 5,331 3.5% 5,079 3.4% +5.0%
Hinges 10,436 6.9% 8,905 5.9% +17.2%
Electronic components 4,037 2.7% - -
Total 150,642 100% 150,223 100% +0.3%

Product innovation continues to support sales of special and professional burners, while more mature products (brass valves and thermostats) show a marked decline. Sales of hinges increased significantly, supported by the positive trend of the North American market and the launch of new supply contracts. Following the acquisition of Okida Elektronik, from September 2018 the Group is also active in the production and sale of electronic components.

Average sales prices in 2018 were on average 0.2% lower compared with 2017.

2018 2017 CHANGE
Sale of trimmings 2,507 2,261 246
Contingent income 88 311 (223)
Rental income 88 89 (1)
Use of provisions for risks
and charges
71 36 35
Other income 615 664 (49)
Total 3,369 3,361 8

24. OTHER INCOME

Total 34,840 35,328 (488) The increase in income from the sale of trimmings is related to the increase in the price of raw materials.

25. MATERIALS

2018 2017 CHANGE
Commodities and
outsourced components
56,347 54,179 2,168
Consumables 6,100 5,615 485
Total 62,447 59,794 2,653

In 2018, the effective purchase prices of the main raw materials (aluminium alloys, steel and brass) were on average higher than in 2017, with a negative impact of 0.7% of sales. Consumption (purchases plus change in inventories) as a percentage of sales was 38.4% in 2018, compared with 38.2% in 2017.

26. COSTS FOR SERVICES

2018 2017 CHANGE
Outsourced
processing
10,017 9,779 238
Natural gas and
power
4,561 4,485 76
Maintenance 4,468 4,474 (6)
Transport 2,340 2,221 119
Advisory services 2,326 2,106 220
Travel expenses and
allowances
780 715 65
Commissions 736 637 99
Directors' fees 685 1,084 (399)
Insurance 545 537 8
Canteen 393 394 (1)
Other costs 4,446 3,795 651
Total 31,297 30,227 1,070

The main outsourced processing carried out by the Group's Italian companies include aluminium die-casting, hot moulding of brass and steel blanking, as well as some mechanical processing and assembly.

Costs for advisory services related to technical (€ 770,000), sales (€ 440,000) and legal, administrative and general (€ 1,116,000) services. Other costs included expenses for the registration of patents, waste disposal, cleaning, leasing third-party assets and other minor charges.

27. PAYROLL COSTS

2018 2017 CHANGE
Salaries and wages 23,141 23,987 (846)
Social Security costs 7,429 7,585 (156)
Temporary agency
workers
2,121 1,910 211
Post-employment
benefit reserve and
other costs
1,828 1,846 (18)
Stock grant plan 321 - 321

The average Group headcount in 2018 was 798 employees compared to 760 in 2017. The average number of temporary staff was 61 in 2018 (60 in 2017). In 2018, the Group made negligible use of the temporary unemployment fund. The item "Stock Grant Plan" included the measurement at 31 December 2018 of the fair value of rights to the assignment of shares of the Parent Company attributed to Group employees. For details of the Stock Grant Plan, refer to Note 37.

28. OTHER OPERATING COSTS

2018 2017 CHANGE
Non-income taxes 506 539 (33)
Other operating
expenses
371 331 40
Contingent liabilities 217 145 72
Losses and
write-downs of trade
receivables
421 93 328
Provisions for risks 127 11 116
Other provisions 28 15 13
Total 1,670 1,134 536

Non-income taxes chiefly relate to property tax.

Provisions refer to the allocations to the reserves described in Note 17.

29. FINANCIAL EXPENSES

2018 2017 CHANGE
Interest paid to banks 829 270 559
Interest paid on finance
lease contracts
17 19 (2)
Banking expenses 287 240 47
Adjustment to the
fair value of the ARC
option (Note 15)
55 241 (186)
Other financial
expense
18 34 (16)
Total 1,206 804 402

The increase in financial expenses to banks reflects the higher average net debt for the year. Interest paid to banks includes IRS spreads payable that hedge interest rate risks (Note 35).

30. EXCHANGE RATE GAINS AND LOSSES 31. INCOME TAXES

In 2018, the Group reported net foreign exchange gains of € 5,384,000, versus net gains of € 274,000 in 2017. The main portion of 2018 foreign exchange gains, recorded by Sabaf Turkey, is related to financial payables taken out in euros and reflects the revaluation of the Turkish lira against the euro from the date on which the financial payables were taken out to the end of the reporting period.

2018 2017 CHANGE
Current taxes 5,039 3,836 1,203
Deferred tax liabilities 103 (452) 555
Taxes related to
previous financial years
21 (496) 517
Total 5,163 2,888 2,275

The current income taxes include the IRES of € 2,049,000, the IRAP of € 549,000 and foreign income taxes of € 2,441,000 (€ 2,448,000, € 545,000 and € 843,000 respectively in 2017).

Reconciliation between the tax burden booked in the financial statements and the theoretical tax burden calculated according to the statutory tax rates currently in force in Italy is shown in the following table:

2018 2017
Theoretical income tax 5,030 4,272
Permanent tax differences 937 172
Taxes related to previous financial years 18 91
Tax effect from different foreign tax rates (25) 5
Effect of non-recoverable tax losses 154 172
"Patent box" tax benefit (323) (1,151)
"Super ammortamento" tax benefit (449) (179)
Tax incentives for investments in Turkey (710) (950)
Other differences 22 10
Income taxes booked in the accounts, excluding IRAP
and withholding taxes (current and deferred)
4,654 2,442
IRAP (current and deferred) 509 446
Total 5,163 2,888

Theoretical taxes were calculated applying the current corporate income tax (IRES) rate, i.e. 24%, to the pre-tax result. IRAP is not taken into account for the purpose of reconciliation because, as it is a tax with a different assessment basis from pre-tax profit, it would generate distorting effects.

Permanent tax differences mainly relate to non-deductible provisions and value adjustments.

In these consolidated financial statements, the Group recognised:

  • the tax benefit related to the Patent Box for 2018 of € 375,000 (€ 323,000 for IRES and € 52,000 for IRAP). Following the prior agreement signed with the Revenue Agency, in 2017 the benefit for the three-year period from 2015 to 2017, for a total of € 1,324,000 was recognised;

  • the tax benefits relating to "Superammortamento" (Super amortisation) and "Iperammortamento" (Hyper amortisation), related to the investments made in Italy, amounting to € 449,000 (€ 179,000 in 2017);

  • the tax benefits deriving from the investments made in Italy amounting to € 710,000 (€ 950,000 in 2017).

No significant tax disputes were pending at 31 December 2018.

32. EARNINGS PER SHARE

Basic and diluted EPS are calculated based on the following data:

EARNINGS 2018 2017
(€/000) (€/000)
Profit for the year 15,614 14,835
Number of shares 2018 2017
Weighted average number of ordinary shares for determining basic
earnings per share
11,051,570 11,208,062
Dilutive effect from potential ordinary shares - -
Weighted average number of ordinary shares for determining diluted
earnings per share
11,051,570 11,208,062
Earnings per share (€) 2018 2017
Basic earnings per share 1.413 1.323
Diluted earnings per share 1.413 1.323

Basic earnings per share are calculated on the average number of outstanding shares minus treasury shares, equal to 481,880 in 2018 (325,388 in 2017). Diluted earnings per share are calculated taking into account any shares approved but not yet subscribed, of which there were none in 2018 and 2017.

33. DIVIDENDS

On 31 May 2018, shareholders were paid an ordinary dividend of € 0.55 per share (total dividends of € 6,071,000).

The Directors have recommended payment of an unchanged dividend of € 0.55 per share this year. This dividend is subject to approval of shareholders in the annual Shareholders' Meeting and was not included under liabilities in these financial statements.

The dividend proposed is scheduled for payment on 29 May 2019 (ex-date 27 May and record date 28 May).

34. INFORMATION BY BUSINESS SEGMENT

Below is the information by business segment for 2018 and 2017.

2018 FY
Gas parts
(household and professional)
Hinges Electronic components Total
Sales 136,211 10,407 4,024 150,642
Ebit 13,540 1,315 1,554 16,409
2017 FY
Gas parts
(household and professional)
Hinges Electronic components Total
Sales 141,280 8,943 - 150,223
Ebit 16,974 1,143 - 18,117

35. INFORMATION ON FINANCIAL RISK

Categories of financial instruments

In accordance with IFRS 7, a breakdown of the financial instruments is shown below, among the categories set forth in IAS 39.

31.12.2018 31.12.2017
Financial assets
Amortised cost
Cash and cash equivalents 13,426 11,533
Escrow bank deposits 3,630 240
Trade receivables and other receivables 48,654 43,516
Income statement fair value
Derivative to hedge cash flows 1 7
Financial liabilities
Amortised cost
Loans 60,533 35,048
Other financial liabilities 7,802 240
Trade payables 21,215 19,975
Income statement fair value
ARC put option (Note 15) 1,818 1,763
Derivative to hedge cash flows 308 15

The Group is exposed to financial risks related to its operations, mainly:

  • credit risk, with special reference to normal trade relations with customers;
  • market risk, relating to the volatility of prices of commodities, foreign exchange and interest rates;
  • liquidity risk, which can be expressed by the inability to find financial resources necessary to ensure Group operations.

It is part of the Sabaf Group's policies to hedge exposure to changes in prices and in fluctuations in exchange and interest rates via derivative financial instruments. Hedging is done using forward contracts, options or combinations of these instruments. Generally speaking, the maximum duration covered by such hedging does not exceed 18 months. The Group does not enter into speculative transactions. When the derivatives used for hedging purposes meet the necessary requisites, hedge accounting rules are followed.

Credit risk management

Trade receivables involve producers of domestic appliances, multinational groups and smaller manufacturers in a few or single markets. The Group assesses the creditworthiness of all its customers at the start of supply and systemically at least on an annual basis. After this assessment, each customer is assigned a credit limit.

A credit insurance policy is in place, which guarantees cover for approximately 55% of trade receivables.

Credit risk relating to customers operating in emerging economies is generally attenuated by the expectation of revenue through letters of credit.

Forex risk management

The key currencies other than the euro to which the Group is exposed are the US dollar, the Brazilian real and the Turkish lira, in relation to sales made in dollars (chiefly on some Asian and American markets) and the production units in Brazil and Turkey. Sales in US dollars represented 16% of total turnover in 2017, while purchases in dollars represented 4% of total turnover. During the year, operations in dollars were partially hedged through forward sales contracts; at 31 December 2018, the Group had in place forward sales contracts for a total of USD 1 million, maturing on 31 December 2019.

Sensitivity analysis

With reference to financial assets and liabilities in US dollars at 31 December 2018, a hypothetical and immediate revaluation of 10% of the euro against the dollar would have led to a loss of € 634,000.

Interest rate risk management

Owing to the current trend in interest rates, the Group favours fixed-rate indebtedness: medium to long-term loans originated at a variable rate are converted to a fixed rate by entering into interest rate swaps (IRS) when the loan is opened. At 31 December 2018, IRS totalling € 34.9 million were in place, mirrored in mortgages with the same residual debt, through which the Group transformed the floating rate of the mortgages into fixed rate. The derivative contracts were not designated as a cash flow hedge and were therefore recognised using the "income statement fair value" method.

Sensitivity analysis

Considering the IRS in place, at the end of 2018 almost all of the Group's financial debt was at a fixed rate. Therefore, at 31 December 2018 no sensitivity analysis was carried out in that the exposure to interest rate risk, linked to a hypothetical increase (decrease) in interest rates, is not significant.

Commodity price risk management

A significant portion of the Group's purchase costs is represented by aluminium, steel and brass. Sale prices of products are generally renegotiated annually; as a result, the Group is unable to pass on to customers any changes in the prices of commodities during the year. The Group protects itself from the risk of changes in the price of aluminium, steel and brass with supply contracts signed with suppliers for delivery up to twelve months in advance or, alternatively, with derivative financial instruments. In 2018 and 2017, the Group did not use financial derivatives on commodities. To stabilise the rising costs of commodities, Sabaf preferred to execute transactions on the physical market, fixing prices with suppliers for immediate and deferred delivery.

Liquidity risk management

The Group operates with a debt ratio considered physiological (net financial debt / shareholders' equity at 31 December 2018 of 45%, net financial debt / EBITDA of 1.79) and has unused short-term lines of credit. To minimise the risk of liquidity, the Administration and Finance Department:

  • maintains a correct balance of net financial debt, financing investments with capital and with medium to long-term debt.
  • verifies systematically that the short-term accrued cash flows (amounts received from customers and other income) are expected to accommodate the deferred cash flows (short-term financial debt, payments to suppliers and other outgoings);
  • regularly assesses expected financial needs in order to promptly take any corrective measures.
AT 31 DECEMBER 2018 Carrying value Contractual
financial flows
Within
3 months
From 3 months
to 1 year
From 1 to 5
years
More than 5
years
Short-term bank loans 7,233 8,063 8,063 0 - -
Unsecured loans 51,838 53,219 1,947 9,256 39,603 2,413
Finance leases 1,462 1,630 47 142 754 687
Payables to ARC shareholders 180 180 - 60 120 -
Payables to former Okida shareholders 7,622 7,622 7,622 - - -
ARC option 1,818 1,818 - - 1,818 -
Total financial payables 70,153 72,532 17,679 9,458 42,295 3,100
Trade payables 21,215 21,215 20,412 803 - -
Total 91,368 93,747 38,091 10,261 42,295 3,100
AT 31 DECEMBER 2017 Carrying value Contractual
financial flows
Within
3 months
From 3 months
to 1 year
From 1 to 5
years
More than 5
years
Short-term bank loans 11,157 11,157 11,157 0 - -
Unsecured loans 22,280 22,676 1,537 4,612 16,527 -
Finance leases 1,611 1,818 47 141 754 876
Payables to ARC shareholders 240 240 - 60 180 -
ARC option 1,763 1,763 - - 1,763 -
Total financial payables 37,051 37,654 12,741 4,813 19,224 876
Trade payables 19,975 19,975 19,021 954 - -
Total 57,026 57,629 31,762 5,767 19,224 876

An analysis by expiration date of financial payables at 31 December 2018 and 31 December 2017 is shown below:

The various due dates are based on the period between the end of the reporting period and the contractual expiration date of the commitments, the values indicated in the table correspond to non-discounted cash flows. Cash flows include the shares of principal and interest; for floating rate liabilities, the shares of interest are determined based on the value of the reference parameter at the end of the reporting period and increased by the spread set forth in each contract.

Hierarchical levels of fair value assessment

  • Level 1 quotations found on an active market for assets or liabilities subject to assessment;
  • The revised IFRS 7 requires that financial instruments reported in the statement of financial position at fair value be classified based on a hierarchy that reflects the significance of the input used in determining the fair value. IFRS 7 makes a distinction between the following levels:
  • Level 2 input other than prices listed in the previous point, which can be observed directly (prices) or indirectly (derived from prices) on the market;
  • Level 3 input based on observable market data

The following table shows the financial assets and liabilities valued at fair value at 31 December 2018, by hierarchical level of fair value assessment.

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
Other financial assets (currency derivatives) - 1 - 1
Total assets - 1 - 1
Other financial liabilities (interest rate derivatives) - 308 - 308
Other financial liabilities (ARC put option) - - 1,818 1,818
Total liabilities - 308 1,818 2,126

36. RELATED-PARTY TRANSACTIONS

Transactions between consolidated companies were eliminated from the consolidated financial statements and are not reported in these notes. The table below illustrates the impact of all transactions between the Group and other related parties on the balance sheet and income statement.

Impact of related-party transactions on balance sheet items

TOTAL 2018 GIUSEPPE
SALERI S.A.P.A.
NON-CONSOLIDATED
SUBSIDIARIES
OTHER
RELATED PARTIES
TOTAL
RELATED PARTIES
IMPACT ON
THE TOTAL
Trade receivables 46,932 12 88 - 100 0.21%
Tax receivables 4,466 1,158 - - 1,158 25.93%
Trade payables 21,215 - - 5 5 0.02%
TOTAL 2017 GIUSEPPE NON-CONSOLIDATED OTHER TOTAL IMPACT ON
SALERI S.A.P.A. SUBSIDIARIES RELATED PARTIES RELATED PARTIES THE TOTAL
Trade receivables 42,263 - 299 - 299 0.71%
Tax receivables 3,065 1,158 - - 1,158 37.78%
Trade payables 19,976 - - 2 2 0.01%
TOTAL 2018 GIUSEPPE
SALERI S.A.P.A.
NON-CONSOLIDATED
SUBSIDIARIES
OTHER
RELATED PARTIES
TOTAL
RELATED PARTIES
IMPACT ON
THE TOTAL
Other income 3,369 40 - - 40 1.19%
Services (31,297) - (263) (22) (285) 0.91%

Impact of related-party transactions on income statement items

TOTAL 2017 GIUSEPPE SALERI S.A.P.A. NON-CONSOLIDATED SUBSIDIARIES OTHER RELATED PARTIES TOTAL RELATED PARTIES IMPACT ON THE TOTAL Other income 3,361 10 - - 10 0.30% Services (30,227) - (167) (20) (187) 0.62%

Transactions with the shareholder, Giuseppe Saleri S.a.p.A., comprise:

• administration services provided by Sabaf S.p.A. to Giuseppe Saleri S.a.p.A.;

• transactions as part of the domestic tax consolidation scheme until 2016, which generated the receivables shown in the tables and for which liquidation by the tax authorities is pending.

Transactions are regulated by specific contracts regulated at arm's length conditions.

Transactions with non-consolidated subsidiaries were solely of a commercial nature.

Fees to directors, statutory auditors and executives with strategic responsibilities

Please see the 2018 Report on Remuneration for this information.

37. SHARE-BASED PAYMENTS

In order to adopt a medium and long-term incentive instrument for directors and employees of the Sabaf Group, on the proposal of the Remuneration and Nomination Committee, the Board of Directors of Sabaf S.p.A. prepared a specific free allocation plan of shares (the "Plan") with the characteristics described below.

The Plan was approved by the Shareholders' Meeting on 8 May 2018 and the related Regulations by the Board of Directors on 15 May 2018.

Purpose of the plan

The Plan aims to promote and pursue the involvement of the beneficiaries whose activities are considered relevant for the implementation of the contents and the achievement of the objectives set out in the Business Plan, foster loyalty development and motivation of managers, by increasing their entrepreneurial approach as well as align the interests of management with those of the Company's shareholders more closely, with a view to encouraging the achievement of significant results in the economic and asset growth of the Company.

Beneficiaries of the plan

The Plan is intended for persons who hold or will hold key positions in the Company and/or its Subsidiaries, with reference to the implementation of the contents and the achievement of the objectives of the 2018-2020 Business Plan. The Beneficiaries are divided into two groups:

  • Cluster 1: Beneficiaries already identified in the Plan or who will be identified by the Board of Directors by 30 June 2018 on the Shareholders' Meeting authority.
  • Cluster 2: Beneficiaries who will be identified by the Board of Directors from 1 July 2018 to 30 June 2019 on the Shareholders' Meeting authority.

On 15 May 2018, the Board of Directors identified the Beneficiaries of Cluster 1 of the Plan to whom a total of 185,600 rights have been assigned.

Subject-matter of the plan

The subject-matter of the Plan is the free allocation to the Beneficiaries of a maximum of 370,000 Rights, each of which entitles them to receive free of charge, under the terms and conditions provided for by the Regulations of the Plan, 1 Sabaf S.p.A. Share.

The free allocation of Sabaf S.p.A. shares is conditional, among other things, on the achievement, in whole or in part, with progressiveness, of the business objectives related to the ROI, EBITDA and TSR indicators.

Deadline of the Plan

The Plan expires on 31 December 2022 (or on a different subsequent date set by the Board of Directors).

Fair Value measurement methods

Considering the allocation mechanism described above, it was necessary to measure at fair value the rights assigned to receive shares of the Parent Company. In line with the date of assignment of the rights and terms of the plan, the grant date was set at 15 May 2018.

The main assumptions made at the beginning of the vesting period are illustrated below:

2018 2019 2020 2018-2020
Share price at the start of the vesting period 19.48 19.48 19.48 19.48
Risk free rate -0.2846% -0.1641% -0.0497% -0.0497%
Expected volatility 31% 29% 27% 29%
Dividend yield 2.30% 2.30% 2.30% 2.30%
Strike Price 19.48 19.48 19.48 19.48
Total value on ROI 6.83
Rights on ROI 33.40% Fair Value 2.28
FAIR VALUE MEASUREMENT METHODS - RIGHTS RELATING TO OBJECTIVES MEASURED IN EBITDA
2018 2019 2020 2018-2020
Share price at the start of the vesting period 19.48 19.48 19.48 19.48
Risk free rate -0.2846% -0.1641% -0.0497% -0.0497%
Expected volatility 31% 29% 27% 29%
Dividend yield 2.30% 2.30% 2.30% 2.30%
Strike Price 19.48 19.48 19.48 19.48
Total value on EBITDA 8.97
Rights on EBITDA 33.30% Fair Value
2.99
FAIR VALUE MEASUREMENT METHODS - RIGHTS RELATING TO OBJECTIVES MEASURED IN TSR
2018 2019 2020
Share price at the start of the vesting period 19.48 19.48 19.48
Risk free rate -0.2846% -0.1641% -0.0497%
Expected volatility 31% 29% 27%
Dividend yield 0.00% 0.00% 0.00%
Strike Price 22.61 25.32 28.34
Total value on TSR 6.00
Rights on TSR 33.30% Fair Value 2.00
Fair Value per share at initial date of the vesting period 7.27

The accounting impacts of the Plan on these consolidated financial statements are illustrated in Note 13 and Note 27.

38. CAPITAL MANAGEMENT

For the purposes of managing the Group's capital, it has been defined that this includes the issued share capital, the share premium reserve and all other capital reserves attributable to the shareholders of the Parent Company. The main objective of capital management is to maximise the value for shareholders. In order to maintain or correct its financial structure, the Group may intervene in dividends paid to shareholders, purchase its own shares, redeem capital to shareholders or issue new shares. The Group controls equity using a gearing ratio consisting of the ratio of net financial debt (as defined in Note 22) to shareholders' equity. The Group's policy is to keep this ratio below 1.

In order to achieve this objective, the management of the Group's capital aims, among other things, to ensure that the covenants, linked to loans, which define the capital structure requirements, are complied with. Violations of covenants would allow banks to demand immediate repayment of loans (Note 14). During the current financial year, there were no breaches of the covenants linked to interest-bearing loans.

In the years ended 31 December 2018 and 2017, no changes were made to the objectives, policies and procedures for capital management.

39. SIGNIFICANT NON-RECURRING EVENTS AND TRANSACTIONS

The effects of the acquisition of Okida Elektronik are described in detail in the paragraph - "Information related to IFRS 3". Pursuant to CONSOB memorandum of 28 July 2006, the following section describes and analyses on significant non-recurring events, the consequences of which are reflected in the economic, equity and financial results for the year:

SHAREHOLDERS' EQUITY
ATTRIBUTABLE TO THE GROUP
PROFIT ATTRIBUTABLE
TO THE GROUP
NET FINANCIAL
DEBT
CASH
FLOWS
Financial statement values (A) 117,702 15,614 53,524 1,893
Write-down of investment
property (Note 2)
(850) (850) - -
Financial statement
notional value (A+B)
118,552 16,464 53,524 1,893

40. ATYPICAL AND/OR UNUSUAL TRANSACTIONS

Pursuant to CONSOB memorandum of 28 July 2006, the Group declares that no atypical and/or unusual transactions as defined by the CONSOB memorandum were executed during 2018.

41. COMMITMENTS

Guarantees issued

The Sabaf Group has issued sureties to guarantee consumer and mortgage loans granted by banks to Group employees for a total of € 4,734,000 (€ 5,145,000 at 31 December 2017).

42. SCOPE OF CONSOLIDATION AND SIGNIFICANT EQUITY INVESTMENTS

COMPANIES CONSOLIDATED USING THE FULL LINE-BY-LINE CONSOLIDATION METHOD
COMPANY NAME REGISTERED
OFFICES
SHARE CAPITAL SHAREHOLDERS OWNERSHIP %
Faringosi Hinges s.r.l. Ospitaletto (BS) € 90,000 Sabaf S.p.A. 100%
Sabaf Immobiliare s.r.l. Ospitaletto (BS) € 25,000 Sabaf S.p.A. 100%
Sabaf do Brasil Ltda Jundiaì (SP, Brazil) BRL 24,000,000 Sabaf S.p.A. 100%
Sabaf Beyaz Esya Parcalari Sanayi Ve Ticaret
Limited Sirteki
Manisa (Turkey) TRY 28,000,000 Sabaf S.p.A. 100%
Sabaf Appliance Components Trading Ltd. Kunshan (China) € 200,000 Sabaf S.p.A. 100%
Sabaf Appliance Components Ltd. Kunshan (China) € 4,400,000 Sabaf S.p.A. 100%
A.R.C. s.r.l. Campodarsego (PD)
- Italy
€ 45,000 Sabaf S.p.A. 70%
Sabaf S.p.A. 30%
Okida Elektronik Sanayi ve Tickaret A.S Istanbul (Turkey) TRY 5,000,000 Sabaf Beyaz Esya
Parcalari Sanayi Ve
Ticaret Limited Sirteki
70%
NON-CONSOLIDATED COMPANIES VALUED AT COST
REGISTERED
SHARE CAPITAL
SHAREHOLDERS
OWNERSHIP %
HOLDING %
COMPANY NAME
OFFICES
Sabaf US Corp. Plainfield (USA) USD 100,000 Sabaf S.p.A. 100% 100%
Handan ARC Burners Co., Ltd. Handan (Cina) RMB 3,000,000 A.R.C. s.r.l. 51% 35.5%

43. GENERAL INFORMATION ON THE PARENT COMPANY

Registered and administrative office Via dei Carpini, 1 25035 - Ospitaletto (Brescia)
Contacts Tel: +39 030 - 6843001
Fax: +39 030 - 6848249
E-mail: [email protected]
Website: www.sabaf.it
Tax information R.E.A. Brescia 347512
Tax Code 03244470179
VAT number 01786910982

APPENDIX

Information as required by Article 149-duodecies of the CONSOB Issuers' Regulation

The following table, prepared pursuant to Article 149-duodecies of the CONSOB Issuers' Regulation, shows fees relating to 2018 for auditing and for services other than auditing provided by the Independent Auditor and its network.

(€/000) PARTY PROVIDING
THE SERVICE
RECIPIENT FEES PERTAINING TO THE 2018
FINANCIAL YEAR
EY S.p.A. Parent company 20
Audit EY S.p.A. Italian subsidiaries 10
EY network Foreing subsidiaries 52
Other services EY S.p.A. Parent company 16 4
Total 98

CERTIFICATION OF THE CONSOLIDATED FINANCIAL STATEMENTS in accordance with Article 154 bis of Italian Legislative Decree 58/98

Pietro Iotti, the Chief Executive Officer, and Gianluca Beschi, the Financial Reporting Officer of Sabaf S.p.A., have taken into account the requirements of Article 154-bis, paragraphs 3 and 4, of Legislative Decree 58 of 24 February 1998 and can certify:

  • the adequacy, in relation to the business characteristics and
  • the actual application

of the administrative and accounting procedures for the formation of the consolidated financial statements during the 2018 financial year.

They also certify that:

  • the Consolidated financial statements:
  • were prepared in accordance with the international accounting policies recognised in the European Community in accordance with EC regulation 1606/2002 of the European Parliament and Council of 19 July 2002 and with the measures issued in implementation of Article 9 of Italian Legislative Decree 38/2005;
  • are consistent with accounting books and records;
  • provide a true and fair view of the operating results, financial position and cash flows of the issuer and of the companies included in the consolidation;
  • the report on operations contains a reliable analysis of the performance and results of operations and the situation of the issuer and the companies included in the scope of consolidation, along with a description of the key risks and uncertainties to which they are exposed.

Ospitaletto, 26 March 2019

Chief Executive Officer Pietro Iotti

The Financial Reporting Officer Gianluca Beschi

Overcoming limits

Moving from your comfort zone always offers a combination of fear and curiosity, but it is an effective drive towards innovation and progress. At Sabaf, we do not limit ourselves when we develop innovative ideas, products and skills.

Separate financial statements at 31 December 2018

Corporate bodies165
Statement of financial position166
Income statement167
Comprehensive income statement168
Statement of changes in shareholders' equity
168
Cash flow Statement169
Explanatory notes170
Certification of Separate financial statements
199
Independent auditor's report
on the Separate financial Statements at 31 December 2018
200
Report of the Board of Statutory Auditors
to the Shareholders' Meeting of SABAF S.p.A206

Corporate bodies

Board of Directors

* Independent directors

Board of Statutory Auditors Independent Auditor

Statement of financial position

(in €) NOTES 31.12.2018 31.12.2017
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 1 30,497,881 31,610,510
Investment property 2 1,261,716 1,453,564
Intangible assets 3 3,094,293 3,370,260
Equity investments 4 58,150,073 49,451,811
Non-current financial assets 5 5,366,725 1,847,639
- of which from related parties 36 5,246,725 1,667,639
Non-current receivables 19,871 19,871
Deferred tax assets 21 3,471,716 3,455,483
TOTAL NON-CURRENT ASSETS 101,862,275 91,209,138
CURRENT ASSETS
Inventories 6 26,627,854 24,768,927
Trade receivables 7 35,157,543 31,154,012
- of which from related parties 36 6,080,706 1,208,883
Tax receivables 8 2,377,224 2,229,708
- of which from related parties 36 1,083,666 1,083,666
Other current receivables 9 764,471 721,529
Current financial assets 10 5,110,000 1,067,429
- of which from related parties 36 1,600,000 1,000,000
Cash and cash equivalents 11 1,958,805 2,696,664
TOTAL CURRENT ASSETS 71,995,897 62,638,269
ASSETS HELD FOR SALE 0 0
TOTAL ASSETS 173,858,172 153,847,407
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital 12 11,533,450 11,533,450
Retained earnings, other reserves 72,464,975 72,552,367
Profit for the year 8,040,214 8,001,327
TOTAL SHAREHOLDERS' EQUITY 92,038,639 92,087,144
NON-CURRENT LIABILITIES
Loans 14 33,669,253 16,297,969
Other financial liabilities 15 120,000 180,000
Post-employment benefit and retirement reserves 16 2,083,922 2,199,523
Provisions for risks and charges 17 1,088,183 369,482
Deferred tax liabilities 21 106,646 67,983
Total non-current liabilities 37,068,004 19,114,957
CURRENT LIABILITIES
Loans 14 17,330,136 18,927,558
- of which from related parties 36 0 2,100,000
Other financial liabilities 15 1,795,310 74,849
Trade payables 18 18,944,590 16,569,390
- of which from related parties 36 3,858,114 509,631
Tax payables 19 589,828 623,013
Other payables 20 6,091,665 6,450,496
TOTAL CURRENT LIABILITIES 44,751,529 42,645,306
LIABILITIES HELD FOR SALE 0 0
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY
173,858,172 153,847,407

166

Income statement

(in €) NOTES 2018 2017
INCOME STATEMENT COMPONENTS
OPERATING REVENUE AND INCOME
Revenue 23 110,065,252 115,687,029
- of which from related parties 36 10,238,606
Other income 24 2,985,254 2,647,542
Total operating revenue and income 113,050,506 118,334,571
OPERATING COSTS
Materials 25 (45,084,626) (46,554,625)
Change in inventories 1,858,927 1,276,087
Services 26 (27,540,143) (27,603,637)
- of which by related parties 36 (3,991,378) (3,966,399)
Payroll costs 27 (28,388,299) (28,734,310)
Other operating costs 28 (1,852,013) (715,296)
Costs for capitalised in-house work 1,599,795 1,474,322
TOTAL OPERATING COSTS (99,406,359) (100,857,459)
OPERATING PROFIT BEFORE DEPRECIATION
AND AMORTISATION,
CAPITAL GAINS/LOSSES, WRITE-DOWNS/
WRITE-BACKS OF NON-CURRENT ASSETS
13,644,147 17,477,112
Depreciations and amortisation 1,2,3 (8,596,924) (8,843,617)
Capital gains/(losses) on disposals
of non-current assets
495,659 97,873
Write-downs/write-backs of non-current assets 29 0 (681,628)
- of which by related parties 36 0 (681,628)
EBIT 5,542,882 8,049,740
Financial income 122,845 88,754
Financial expenses 30 (918,213) (482,136)
Exchange rate gains and losses 31 157,102 (88,145)
Profits and losses from equity investments 32 4,322,070 1,503,354
PROFIT BEFORE TAXES 9,226,686 9,071,567
Income tax 33 (1,186,472) (1,070,240)

PROFIT FOR THE YEAR 8,040,214 8,001,327

Comprehensive income statement

(in €) 2018 2017
PROFIT FOR THE YEAR 8,040,214 8,001,327
Total profits/losses that will not be subsequently
reclassified under profit (loss) for the year
Actuarial post-employment benefit reserve evaluation 26,538 73,372
Tax effect (6,369) (17,609)
TOTAL OTHER PROFITS/(LOSSES) NET OF TAXES FOR THE YEAR 20,169 55,763
TOTAL PROFIT 8,060,383 8,057,090

Statement of changes in shareholders' equity

(€/000) Share
Capital
Share
premium
reserve
Legal
reserve
Treasury
shares
Actuarial
post-employment
benefit reserve
evaluation
Other
reserves
Profit
for the year
Total
shareholders'
equity
Balance at 31 December 2016 11,533 10,002 2,307 (2,399) (533) 68,154 2,460 91,524
2017 dividend payment (2,924) (2,460) (5,384)
Purchase of treasury shares (2,110) (2,110)
Total profit at
31 December 2017
56 8,001 8,057
Balance at 31 December 2017 11,533 10,002 2,307 (4,509) (477) 65,230 8,001 92,087
2018 dividend payment 1,930 (8,001) (6,071)
Purchase of treasury shares (2,359) (2,359)
Stock grant plan (IFRS 2) 322 322
Total profit at
31 December 2018
20 8,040 8,060
Balance at 31 December 2018 11,533 10,002 2,307 (6,868) (457) 67,482 8,040 92,039

Cash flow Statement

(€/000) 2018 FY 2017 FY
Cash and cash equivalents at beginning of year 2,697 1,797
Profit for the year 8,040 8,001
Adjustments for:
- Depreciation and amortisation 8,597 8,844
- Realised gains (496) (98)
- Write-downs of non-current assets 0 622
- Profits and losses from equity investments (4,322) (1,503)
- Valuation of the stock grant plan 321 0
- Net financial income and expenses 795 393
- Non-monetary foreign exchange differences 79 230
- Income tax 1,186 1,070
Change in post-employment benefit reserve (139) (263)
Change in risk provisions 719 47
Change in trade receivables (4,003) (3,689)
Change in inventories
(1,859) (1,276)
559
Change in trade payables 2,375
(3,487)
(4,406)
Change in net working capital
Change in other receivables and payables,
deferred taxes
(407) 830
Payment of taxes (1,319) (847)
Payment of financial expenses (895) (456)
Collection of financial income 123 89
Cash flow from operations 8,796 12,554
Investments in non-current assets
- intangible (526) (1,099)
- tangible (7,836) (8,670)
- financial (8,698) -
Disposal of non-current assets 1,841 449
Cash flow absorbed by investments (15,219) (9,319)
Repayment of loans (14,166) (10,607)
Raising of loans 31,600 14,273
Change in financial assets (7,641) (7)
Sale of treasury shares (2,359) (2,110)
Payment of dividends (6,071) (5,384)
Collection of dividends
Cash flow absorbed by financing activities
4,322
5,685
1,500
(2,335)
Total cash flows (738) 900
Cash and cash equivalents at end of year (Note 11) 1,959 2,697
Net current financial debt 12,056 15,239
Non-current financial debt 33,789 16,478
Net financial debt (Note 22) 45,845 31,717

Explanatory notes

Accounting standards

STATEMENT OF COMPLIANCE AND BASIS OF PRESENTATION

The separate financial statements of Sabaf S.p.A. for the financial year 2018 have been prepared in compliance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and adopted by the European Union. Reference to IFRS also includes all current International Accounting Standards (IAS).

The separate financial statements are drawn up in euro, which is the currency in the economy in which the Company operates. The income statement, the comprehensive income statement and the statement of financial position schedules are prepared in euro, while the cash flow statement, the statement of changes in shareholders' equity and the values reported in the explanatory notes are in thousands of euro.

The financial statements have been prepared on a historical cost basis except for some revaluations of property, plant and equipment undertaken in previous years, and are considered a going concern. The Company assessed that it is a going concern (as defined by paragraphs 25 and 26 of IAS 1), also due to the strong competitive position, high profitability and solidity of the financial structure.

Sabaf S.p.A., as the Parent Company, also prepared the consolidated financial statements of the Sabaf Group at 31 December 2018.

FINANCIAL STATEMENTS

The Company adopted the following formats:

  • current and non-current assets and current and non-current liabilities are stated separately in the statement of the financial position;
  • an income statement that expresses costs using a classification based on the nature of each item;
  • a comprehensive income statement that expresses revenue and expense items not recognised in profit for the year as required or permitted by IFRS;
  • a cash flow statement that presents financial flows originating from operating activity, using the indirect method.

Use of these formats permits the most meaningful representation of the Company's capital, business and financial status.

ACCOUNTING POLICIES

The accounting standards and policies applied for the preparation of the separate financial statements at 31 December 2018, unchanged versus the previous year, with the exception of the new accounting standards adopted as from 1 January 2018 (IFRS 9 and IFRS 15), are shown below:

Property, plant and equipment

These are recorded at purchase or manufacturing cost. The cost includes directly chargeable ancillary costs. These costs also include revaluations undertaken in the past based on monetary revaluation rules or pursuant to company mergers.

Depreciation is calculated according to rates deemed appropriate to spread the carrying value of tangible assets over their useful working life. Estimated useful working life in years, unchanged compared to previous financial years, is as follows:

Buildings 33
Light constructions 10
General plant 10
Specific plant and machinery 6 – 10
Equipment 4
Furniture 8
Electronic equipment 5
Vehicles and other transport means 5

Ordinary maintenance costs are expensed in the year in which they are incurred; costs that increase the asset value or useful working life are capitalised and depreciated according to the residual possibility of utilisation of the assets to which they refer.

Land is not depreciated.

Investment property

Investment property is valued at cost, including revaluations undertaken in the past based on monetary revaluation rules or pursuant to company mergers. The depreciation is calculated based on the estimated useful life, considered to be 33 years.

If the recoverable amount of the investment property – determined based on the market value of the properties – is estimated to be lower than its carrying value, the asset's carrying value is reduced to the lower recoverable amount, recognising impairment in the income statement.

When there is no longer any reason for a write-down to be maintained, the carrying value of the asset (or cash generating unit) is increased to the new value stemming from the estimate of its recoverable amount – but not beyond the net carrying value that the asset would have had if it had not been written down for impairment. Reversal of impairment loss is recognised in the income statement.

Intangible assets

As established by IAS 38, intangible assets acquired or internally produced are recognised as assets when it is probable that use of the asset will generate future economic benefits and when asset cost can be measured reliably.

If it is considered that these future economic benefits will not be generated, the development costs are written down in the year in which this is ascertained.

Such assets are measured at purchase or production cost and - if the assets concerned have a finite useful life - are amortised on a straight-line basis over their estimated useful life.

The useful life of projects for which development costs are capitalised is estimated to be 10 years.

The SAP management system is amortised over five years.

Equity investments

Equity investments not classified as held for sale are booked at cost, reduced for impairment.

Impairment

At each end of the reporting period, Sabaf S.p.A. reviews the carrying value of its property, plant and equipment, intangible assets and equity investments to determine whether there are signs of impairment of these assets. If there is any such indication, the recoverable amount of said assets is estimated so as to determine the total of the write-down. If it is not possible to estimate the recoverable amount individually, the Company estimates the recoverable amount of the cash generating unit (CGU) to which the asset belongs. In particular, the recoverable amount of the cash generating units (which generally coincide with the legal entity to which the capitalised assets refer) is verified by determining the value of use. The recoverable amount is the higher of the net selling price and value of use. In measuring the value of use, future cash flows net of taxes, estimated based on past experience, are discounted to their present value using a pre-tax rate that reflects current market valuations of the present cost of money and specific asset risk. The main assumptions used for calculating the value of use concern the discount rate, growth rate, expected changes in selling prices and cost trends during the period used for the calculation. The growth rates adopted are based on future market expectations in the relevant sector. Changes in the sales prices are based on past experience and on the expected future changes in the market. The Company prepares operating cash flow forecasts based on the most recent budgets approved by the Boards of Directors of the investees, draws up fouryear forecasts and determines the terminal value (current value of perpetual income), which expresses the medium and long term operating flows in the specific sector.

Furthermore, the Company checks the recoverable amount of its investees at least once a year when the separate financial statements are prepared.

If the recoverable amount of an asset (or CGU) is estimated to be lower than its carrying value, the asset's carrying value is reduced to the lower recoverable amount, recognising impairment in the income statement.

When there is no longer any reason for a write-down to be maintained, the carrying value of the asset (or cash generating unit) is increased to the new value stemming from the estimate of its recoverable amount – but not beyond the net carrying value that the asset would have had if it had not been written down for impairment. Reversal of impairment loss is recognised in the income statement.

Inventories

Inventories are measured at the lower of purchase or production cost – determined using the weighted average cost method – and the corresponding fair value represented by the replacement cost for purchased materials and by the presumed realisable value for finished and semi-processed products – calculated taking into account any manufacturing costs and direct selling costs yet to be incurred. Inventory cost includes accessory costs and the portion of direct and indirect manufacturing costs that can reasonably be assigned to inventory items. Inventories subject to obsolescence and low turnover are written down in relation to their possibility of use or realisation. Inventory write-downs are eliminated in subsequent years if the reasons for such write-downs cease to exist.

Trade receivables and other financial assets

Initial recognition

Upon initial recognition, financial assets are classified, as the case may be, on the basis of subsequent measurement methods, i.e. at amortised cost, at fair value recognised in other comprehensive income (OCI) and at fair value recognised in the income statement.

The classification of financial assets at initial recognition depends on the characteristics of the contractual cash flows of the financial assets and on the business model that the Company uses to manage them.

Trade receivables that do not contain a significant financing component are valued at the transaction price determined in accordance with IFRS 15. See the "Revenue from Contracts with Customers" paragraph.

Other financial assets are recorded at fair value plus, in the case of a financial asset not at fair value recognised in the income statement, transaction costs. For a financial asset to be classified and measured at amortised cost or at fair value recognised in OCI, it must generate cash flows that depend solely on the principal and interest on the amount of principal to be repaid (known as 'solely payments of principal and interest (SPPI)'). This measurement is referred to as the SPPI test and is carried out at the instrument level.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below.

Financial assets at amortised cost (debt instruments)

This category is the most important for the Company. The Company measures the financial assets at amortised cost if both of the following requirements are met:

  • the financial asset is held as part of a business model whose objective is to hold financial assets for the purpose of collecting contractual cash flows and
  • the contractual terms of the financial asset envisage, at certain dates, cash flows represented solely by payments of principal and interest on the amount of principal to be repaid

Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in the income statement when the asset is derecognised, modified or revalued.

Financial assets at amortised cost of the Group include trade receivables.

Financial assets at fair value through profit or loss

This category includes all assets held for trading, assets designated at initial recognition as financial assets measured at fair value with changes recognised in the income statement, or financial assets that must be measured at fair value. Assets held for trading are all those assets acquired for sale or repurchase in the short term. Derivatives, separated or otherwise, are classified as financial instruments held for trading, unless they are designated as effective hedging instruments. Financial assets with cash flows that are not represented solely by principal and interest payments are classified and measured at fair value through profit or loss, regardless of the business model. Financial instruments at fair value with changes recognised in the income statement are recognised in the statement of financial position at fair value and net changes in fair value are recognised in the income statement. This category includes derivative instruments.

The Company does not hold financial assets at fair value through profit or loss with reclassification of cumulative gains and losses or financial assets at fair value through profit or loss without reversal of cumulative gains and losses upon derecognition.

Cancellation

A financial asset (or, if applicable, part of a financial asset or part of a group of similar financial assets) is firstly written off (e.g. removed from the statement of financial position of the Company) when:

  • the rights to receive cash flows from the asset are extinguished, or
  • the Company transferred to a third party the right to receive financial flows from the asset or has taken on the contractual obligation to pay them fully and without delay and (a) transferred substantially all the risks and benefits of the ownership of the financial asset or (b) did not substantially transfer or retain all the risks and benefits of the asset, but transferred their control.

If the Company has transferred the rights to receive financial flows from an asset or has signed an agreement on the basis of which it retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the financial flows to one or more beneficiaries (pass-through), it considers whether or to what extent it has retained the risks and benefits concerning the ownership. If it has not substantially transferred or retained all the risks and benefits or has not lost control over it, the asset continued to be recognised in the financial statements of the Company to the extent of its residual involvement in the asset itself. In this case, the company also recognises an associated liability. The transferred asset and the associated liability are measured in such a way as to reflect the rights and obligations that pertain to the Company. When the residual involvement of the entity is a guarantee in the transferred asset, the involvement is measured based on the amount of the asset or the maximum amount of the consideration received that the entity could be obliged to pay, whichever lower.

Provisions for risks and charges

Provisions for risks and charges are provisioned to cover losses and debts, the existence of which is certain or probable, but whose amount or date of occurrence cannot be determined at the end of the year. Provisions are stated in the statement of financial position only when a legal or implicit obligation exists that determines the use of resources with an impact on profit and loss to meet that obligation and the amount can be reliably estimated. If the effect is significant, the provisions are calculated by updating future financial flows estimated at a rate including taxes such as to reflect current market valuations of the current value of the cash and specific risks associated with the liability.

Post-employment benefit reserve

The post-employment benefit reserve (TFR) is provisioned to cover the entire liability accruing vis-à-vis employees in compliance with current legislation and with national and supplementary company collective labour contracts. This liability is subject to revaluation via application of indices fixed by current regulations. Up to 31 December 2006, post-employment benefits were considered defined-benefit plans and accounted for in compliance with IAS 19, using the projected unit-credit method. The regulations of this fund were amended by Italian Law no. 296 of 27 December 2006 and subsequent Decrees and Regulations issued during the first months of 2007. In the light of these changes, and, in particular, for companies with at least 50 employees, post-employment benefits must now be considered a defined-benefit plan only for the portions accruing before 1 January 2007 (and not yet paid as at the end of the reporting period). Conversely, portions accruing after that date are treated as defined-contribution plans.

Actuarial gains or losses are recorded immediately under "Other total profits/ (losses)".

Trade payables and other financial liabilities

Initial recognition

All financial liabilities are initially recognised at fair value, in addition to directly attributable transaction costs in case of mortgages, loans and payables. The Company's financial liabilities include trade payables and other payables, mortgages and loans, including current account overdrafts and derivative financial instruments.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below.

Financial liabilities at fair value recognised in the income statement

Financial liabilities at fair value with changes recognised in the income statement include liabilities held for trading and financial liabilities initially recognised at fair value, with changes recognised in the income statement. Liabilities held for trading are those liabilities acquired in order to discharge or transfer them in the short term. This category also includes derivative financial instruments subscribed by the Company and not designated as hedging instruments in a hedging relationship pursuant to IFRS 9. Embedded derivatives, separated from the main contract, are classified as financial instruments held for trading, unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement. Financial liabilities are designated at fair value with changes recognised in the income statement from the date of initial recognition, only if the criteria of IFRS 9 are met.

Loans and payables

This is the most important category for the Company and includes interest-bearing payables and loans. After initial statement, loans are valued using the amortised cost approach, applying the effective interest rate method. Gains and losses are recognised in the income statement when the liability is discharged, as well as through the amortisation process. Amortised cost is calculated by recognising the discount or premium on the acquisition and the fees or costs that are an integral part of the effective interest rate. Amortisation at the effective interest rate is included in financial expenses in the income statement.

Cancellation

A financial liability is derecognised when the obligation underlying the liability is discharged, cancelled or fulfilled. If an existing financial liability is replaced by another from the same lender, at substantially different conditions, or if the conditions of an existing liability are substantially changed, this replacement or change is treated as a derecognition of the original liability accompanied by the recognition of a new liability, with any differences between the carrying values recognised in the income statement.

Policy for conversion of foreign currency items

Receivables and payables originally expressed in foreign currencies are converted into euro at the exchange rates in force on the date of the transactions originating them. Forex differences realised upon collection of receivables and payment of payables in foreign currency are posted in the income statement. Income and costs relating to foreign-currency transactions are converted at the rate in force on the transaction date.

At year-end, assets and liabilities expressed in foreign currencies are posted at the spot exchange rate in force at the end of the reporting period and related foreign exchange gains and losses are posted in the income statement. If conversion generates a net gain, this value constitutes a non-distributable reserve until it is effectively realised.

Derivative instruments and hedge accounting

The Company's business is exposed to financial risks relating to changes in exchange rates, commodity prices and interest rates. The Company may decide to use derivative financial instruments to hedge these risks.

Derivatives are initially recognised at cost and are then adjusted to fair value on subsequent closing dates.

Changes in the fair value of derivatives designated and recognised as effective for hedging future cash flows relating to the Company's contractual commitments and planned transactions are recognised directly in shareholders' equity, while the ineffective portion is immediately posted in the income statement. If the contractual commitments or planned transactions materialise in the recognition of assets or liabilities, when such assets or liabilities are recognised, the gains or losses on the derivative that were directly recognised in equity are factored back into the initial valuation of the cost of acquisition or carrying value of the asset or liability. For cash flow hedges that do not lead to recognition of assets or liabilities, the amounts that were directly recognised in equity are included in the income statement in the same period when the contractual commitment or planned transaction hedged impacts profit and loss – for example, when a planned sale actually takes place.

For effective hedges of exposure to changes in fair value, the item hedged is adjusted for the changes in fair value attributable to the risk hedged and recognised in the income statement. Gains and losses stemming from the derivative's valuation are also posted in the income statement.

Changes in the fair value of derivatives not designated as hedging instruments are recognised in the income statement in the period when they occur.

Hedge accounting is discontinued when the hedging instrument expires, is sold or is exercised, or when it no longer qualifies as a hedge. At this time, the cumulative gains or losses of the hedging instrument recognised in equity are kept in the latter until the planned transaction actually takes place. If the transaction hedged is not expected to take place, cumulative gains or losses recognised directly in equity are transferred to the year's income statement.

Embedded derivatives included in other financial instruments or contracts are treated as separate derivatives when their risks and characteristics are not strictly related to those of their host contracts and the latter are not measured at fair value with posting of related gains and losses in the income statement.

Revenue reporting

Revenue is reported net of return sales, discounts, allowances and bonuses, as well as of the taxes directly associated with sale of goods and rendering of services.

Sales revenue is reported when the company has transferred the significant risks and benefits associated with ownership of the goods and the amount of revenue can be reliably measured.

Revenues of a financial nature are recorded on an accrual basis.

Financial income

Finance income includes interest receivable on funds invested and income from financial instruments, when not offset as part of hedging transactions. Interest income is recorded in the income statement at the time of vesting, taking effective output into consideration.

Financial expenses

Financial expenses include interest payable on financial debt calculated using the effective interest method and bank expenses. All the other financial expenses are recognised as costs for the year in which they are incurred.

Income taxes for the year

Income taxes include all taxes calculated on the Company's taxable income. Income taxes are directly recognised in the income statement, with the exception of those concerning items directly debited or credited to shareholders' equity, in which case the tax effect is recognised directly in shareholders' equity. Other taxes not relating to income, such as property taxes, are included among operating expenses. Deferred taxes are provisioned in accordance with the global liability provisioning method. They are calculated on all temporary differences that emerge from the taxable base of an asset or liability and its book value. Current and deferred tax assets and liabilities are offset when income taxes are levied by the same tax authority and when there is a legal right to settle on a net basis. Deferred tax assets and liabilities are measured using the tax rates that are expected to be applicable in the years when temporary differences will be realised or settled.

Dividends

Dividends are posted on an accrual basis when the right to receive them materialises, i.e. when shareholders approve dividend distribution.

Treasury shares

Treasury shares are booked in a specific reserve as a reduction of shareholders' equity. The carrying value of treasury shares and revenues from any subsequent sales are recognised in the form of changes in shareholders' equity.

Equity-settled transactions

Some of the Company employees receive part of the remuneration in the form of share-based payments, therefore employees provide services in exchange for shares ("equity-settled transactions"). The cost of equity-settled transactions is determined by the fair value at the date on which the assignment is made using an appropriate measurement method, as explained in more detail in Note 42.

This cost, together with the corresponding increase in shareholders' equity, is recorded under personnel costs (Note 27) over the period in which the conditions relating to the achievement of objectives and/or the provision of the service are met. The cumulative costs recognised for such transactions at the end of each reporting period up to the vesting date are commensurate with the expiry of the vesting period and the best estimate of the number of equity instruments that will actually vest.

Service or performance conditions are not taken into account when defining the fair value of the plan at the assignment date. However, the probability of these conditions being met is taken into account when defining the best estimate of the number of equity instruments that will vest. Market conditions are reflected in the fair value at the assignment date. Any other condition related to the plan that does not involve a service obligation is not considered to be a vesting condition. Non-vesting conditions are reflected in the fair value of the plan and result in the immediate recognition of the cost of the plan, unless there are also service or performance conditions.

No cost is recognised for rights that do not vest in that the performance and/ or service conditions are not met. When the rights include a market condition or a non-vesting condition, these are treated as if they had vested regardless of whether the market conditions or other non-vesting conditions to which they are subject are met or not, it being understood that all other performance and/ or service conditions must be met.

If the conditions of the plan are changed, the minimum cost to be recognised is the fair value at the assignment date in the absence of the change in the plan itself, on the assumption that the original conditions of the plan are met. Moreover, a cost is recognised for each change that results in an increase in total fair value of the payment plan, or that is in any case favourable for employees; this cost is measured with reference to the date of change. When a plan is cancelled, any remaining element of the plan's fair value is immediately expensed to the income statement.

Use of estimates

Preparation of the separate financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the carrying values of assets and liabilities and the disclosures on contingent assets and liabilities at the end of the reporting period. Actual results might differ from these estimates. Estimates are used to measure tangible and intangible assets and investments subject to impairment testing, as described earlier, as well as to measure the ability to recover prepaid tax assets, provisions for bad debts, for inventory obsolescence, depreciation and amortisation, asset write-downs, employee benefits, taxes, other provisions and reserves. Specifically:

Recoverability of value of tangible and intangible assets and investments

The procedure for determining impairment loses of tangible and intangible assets described in "Impairment" implies – in estimating the value of use – the use of the Business Plans of investees, which are based on a series of assumptions relating to future events and actions of the investees' management bodies, which may not necessarily come about. In estimating market value, however, assumptions are made on the expected trend in trading between third parties based on historical trends, which may not actually be repeated.

Provisions for bad debts

Receivables are adjusted by the related bad debt provision to take into account their recoverable amount. To determine the size of the write-downs, management must make subjective assessments based on the documentation and information available regarding, among other things, the customer's solvency, as well as experience and historical payment trends.

Provisions for inventory obsolescence

Inventories subject to obsolescence and slow turnover are systematically valued and written down if their recoverable amount is less than their carrying value. Write-downs are calculated based on management assumptions and estimates, resulting from experience and historical results.

Employee benefits

The current value of liabilities for employee benefits depends on a series of factors determined using actuarial techniques based on certain assumptions. Assumptions concern the discount rate, estimates of future salary increases, and mortality and resignation rates. Any change in the above-mentioned assumptions might have an effect on liabilities for pension benefits.

Share-based payments

Estimating the fair value of share-based payments requires the determination of the most appropriate valuation model, which depends on the terms and conditions under which these instruments are granted. This also requires the identification of data to feed into the valuation model, including assumptions about the exercise period of the options, volatility and dividend yield. The Company uses a binomial model for the initial measurement of the fair value of share-based payments with employees.

Income tax

Determining liabilities for Company taxes requires the use of management valuations in relation to transactions whose tax implications are not certain at the end of the reporting period. Furthermore, the valuation of deferred taxes is based on income expectations for future years; the valuation of expected income depends on factors that might change over time and have a significant effect on the valuation of deferred tax assets.

Other provisions and reserves

When estimating the risk of potential liabilities from disputes, the Directors rely on communications regarding the status of recovery procedures and disputes from the lawyers who represent the Company in litigation. These estimates are determined taking into account the gradual development of the disputes, considering existing exemptions.

Estimates and assumptions are regularly reviewed and the effects of each change immediately reflected in the income statement.

New accounting standards

Accounting standards, amendments and interpretations applicable from 1 January 2018

Standard IFRS 9 – FINANCIAL INSTRUMENTS. In July 2014, the IAS issued its final IFRS 9 replacing IAS 39 and all previous versions of IFRS 9. The standard was approved by the European Union in November 2016 and is effective for financial years beginning on or after 1 January 2018. IFRS 9 brings together all aspects relating to the recognition of financial instruments: Classification and Measurement, Impairment and Hedge Accounting.

The adoption of IFRS 9 did not have a significant impact on the of the Company's financial statements and did not entail the need to record adjustments to the consolidated statement of financial position at the date of initial application of the standard.

Classification and measurement

The Company did not have a significant impact on its financial statements as a result of the application of the classification and measurement requirements envisaged by IFRS 9. Loans, like trade receivables, are held for collection at the contractual due dates and are expected to generate cash flows represented solely by collections of principal and interest.

Impairment

The Company has not recorded any adjustments to the consolidated statement of financial position at the date of initial application of the standard. In particular, with reference to trade receivables, the Company considered its policy of bad debt provision consistent with the Standard.

Hedge accounting

The Company does not use hedge accounting for hedging instruments.

Standard IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS.

In May 2014, the IAS issued IFRS 15, a new revenue recognition standard that replaces IAS 18 and IAS 11 and was supplemented with further clarifications and guidance in 2016. The standard is applicable to the preparation of the financial statements for the financial years starting from 1 January 2018 and introduced a new five-stage model that applies to contracts with customers. IFRS 15 requires the recognition of revenue for an amount that reflects the consideration to which the entity believes it is entitled in exchange for the transfer of goods or services to the customer.

The application of the new standard and the relative interpretations had no significant effects on the Company's separate financial statements, either from the point of view of classification or of determining quantities. In particular, the application of IFRS 15 had no impact on contracts with customers, in which the sale of Sabaf products is the only obligation ("at a point in time"), since revenues are recognised at the time when control of the activity is transferred to the customer, according to the terms of return defined with the customer. The guarantees provided for in the contracts are of a general nature and not extended and, consequently, the Company believes that they will continue to be accounted for in accordance with IAS 37. Finally, with regard to the income from participating in the production of presses and equipment, in line with previous years, the Company will continue to allocate these revenues over the useful life of the projects, which is generally 10 years.

Document "ANNUAL IMPROVEMENTS TO IFRSS: 2014-2016 CYCLE".

The provisions issued concern IFRS 1 First-Time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for firsttime adopters, IAS 28 Investments in Associates and Joint Ventures – Measuring investees at fair value through profit or loss: an investment-by-investment choice or a consistent policy choice, IFRS 12 Disclosure of Interests in Other Entities – Clarification of the scope of the Standard. The provisions were approved by the European Union in February 2018 and are applicable in the preparation of the financial statements for financial years beginning on or after 1 January 2018, with reference to the amendments to IAS 28 and IFRS 1, as from 1 January 2017, with reference to the amendments to IFRS 12. The adoption of the provisions by the Company did not entail any changes in accounting policies or retrospective adjustments.

IFRIC 22 Interpretation "FOREIGN CURRENCY TRANSACTIONS AND ADVANCE CONSIDERATION". The interpretation was endorsed by the European Union in March 2018 and is applicable from 1 January 2018. The interpretation aims to provide guidelines for foreign currency transactions if advances or non-cash payments are recognised in the financial statements, prior to the recognition of the related asset, cost or revenue. This document provides guidance on how an entity should determine the date of a transaction, and consequently, the spot exchange rate to be used when foreign currency transactions occur in which the payment is made or received in advance. The adoption of the interpretation by the Company did not entail any changes in accounting policies or retrospective adjustments.

Amendment to IAS 40 "TRANSFERS OF INVESTMENT PROPERTY". These amendments clarify the transfers of a property to, or from, investment property. In particular, an entity must reclassify a property among, or from, investment property only when there is evidence that there was a change in the intended use of the property. This change must refer to a specific event that happened and must not be limited to a change of intention by the Management of an entity. The interpretation was endorsed by the European Union in March 2018 and is applicable from 1 January 2018 The adoption of the amendments by the Company did not entail any changes in accounting policies or retrospective adjustments.

Amendment to IFRS 2 "CLASSIFICATION AND MEASUREMENT OF SHARE-BASED PAYMENT TRANSACTIONS", which contains some clarification on the recording of the effects of vesting conditions in the presence of cash-settled share-based payments, on the classification of share-based payments with net settlement characteristics and on the recording of amendments under the terms and conditions of a share-based payment that change their classification from cash-settled to equity-settled. The interpretation was endorsed by the European Union in February 2018 and is applicable from 1 January 2018. The adoption of the amendments by the Company did not entail any changes in accounting policies or retrospective adjustments.

IFRS and IFRIC accounting standards, amendments and interpretations approved by the European Union, not yet universally applicable and not adopted early by the Company at 31 December 2018

Standard IFRS 16 " LEASES" (published on 13 January 2016), which will replace standard IAS 17 – Leases, as well as interpretations IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases— Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The new standard provides a new definition of lease and introduces a criterion based on the control (right of use) of an asset in order to distinguish the leasing contracts from the service contracts, identifying the discriminatory ones: the identification of the asset, the right of replacement of the same, the right to obtain substantially all of the economic benefits deriving from the use of the asset and the right to direct the use of the asset underlying the contract. The standard establishes a single model of recognition and measurement of the lease agreements for the lessee which requires the recognition of the asset to be leased (operating lease or otherwise) in assets offset by a financial debt, while also providing the opportunity not to recognise as leases the agreements whose subject matter are "low-value assets" and leases with a contract duration equal to or less than 12 months. By contrast, the Standard does not include significant changes for the lessors. The standard applies beginning on 1 January 2019 but early application is permitted, only for Companies that already applied IFRS 15 - Revenue from Contracts with Customers.

The Company started an analysis to assess the impact of the application of IFRS 16 on the amounts and related disclosures in the separate financial statements. However, it is not possible to provide a reasonable estimate of the effects until the Company has completed a detailed analysis of the related contracts.

Amendment to IFRS 9 "PREPAYMENT FEATURES WITH NEGATIVE COM-

PENSATION. This document specifies the instruments that envisage early repayment that could comply with the "SPPI" test even if the "reasonable additional compensation" to be paid in the event of early repayment is a "negative compensation" for the lender. The interpretation was endorsed by the European Union in March 2018 and is applicable from 1 January 2019 (early application is also permitted). The directors do not expect a significant effect on the Company's separate financial statements through the adoption of these changes.

IFRS accounting standards, amendments and interpretations not yet approved by the European Union

On the reference date of these separate financial statements the competent bodies of the European Union have not yet concluded the approval process necessary for the adoption of the amendments and principles described below.

On 7 June 2017, IASB published the clarification document IFRIC 23 – UN-CERTAINTY OVER INCOME TAX TREATMENTS. The document deals with uncertainties about the tax treatment of income taxes. The document requires that uncertainties in determining deferred tax assets and liabilities be reflected in the financial statements only when it is probable that the entity will pay or recover the amount in question. Moreover, the document does not contain any new disclosure requirement but emphasises that an entity will have to determine whether it will be necessary to disclose information on management considerations and on the uncertainty relating to tax accounting in accordance with IAS 1. The new interpretation applies from 1 January 2019, but early application is permitted.

Amendment to IAS 28 "LONG-TERM INTERESTS IN ASSOCIATES AND JOINT VENTURES" (published on 12 October 2017)". This document clarifies the need to apply IFRS 9, including the requirements of impairment, to other long-term interests in associate companies and joint ventures that are not accounted for under the equity method. The amendment applies from 1 January 2019, but early application is permitted. The directors do not expect a significant effect on the Company's separate financial statements through the adoption of these changes.

Document "ANNUAL IMPROVEMENTS TO IFRSS 2015-2017 CYCLE", published on 12 December 2017 (including IFRS 3 Business Combinations and IFRS 11 Joint Arrangements – Remeasurement of previously held interest in a joint operation, IAS 12 Income Taxes – Income tax consequences of payments on financial instruments classified as equity, IAS 23 Borrowing costs Disclosure of Interests in Other Entities – Borrowing costs eligible for capitalisation) which implements changes to some standards as part of the annual process of improving them. The amendments apply from 1 January 2019 but early application is permitted. The directors do not expect a significant effect on the Company's separate financial statements through the adoption of these changes.

Amendment to IAS 19 "PLAN AMENDMENT, CURTAILMENT OR SETTLE-MENT". The amendments clarify how pension costs are determined when a change occurs in a defined benefit plan. The amendments will be effective for the preparation of the financial statements for financial years beginning on or after 1 January 2019, unless they are postponed subsequent to their approval by the European Union.

Standard IFRS 17 "INSURANCE CONTRACTS". A new accounting standard for the recognition of insurance contracts that will replace IFRS 4. The new standard will be effective for the preparation of the financial statements for financial years beginning on or after 1 January 2021, unless they are postponed subsequent to their approval by the European Union.

176

Comments on the main items of the statement of financial position

1. PROPERTY, PLANT AND EQUIPMENT

PROPERTY PLANT
AND EQUIPMENT
OTHER ASSETS ASSETS UNDER
CONSTRUCTION
TOTAL
COST
At 31 December 2016 6,327 158,391 31,819 1,427 197,964
Increases 56 5,347 1,770 1,785 8,958
Disposals - (721) (430) (33) (1,184)
Reclassification 18 551 59 (883) (255)
At 31 December 2017 6,401 163,568 33,218 2,296 205,483
Increases 164 4,772 960 1,940 7,836
Disposals - (3,436) (129) - (3,565)
Reclassification 5 1,552 19 (1,589) (13)
At 31 December 2018 6,570 166,456 34,068 2,647 209,741
ACCUMULATED DEPRECIATION
At 31 December 2016 2,887 135,147 28,838 - 166,872
Depreciations for the year 177 6,221 1,522 - 7,920
Eliminations for disposals - (525) (395) - (920)
At 31 December 2017 3,064 140,843 29,965 - 173,872
Depreciations for the year 180 6,049 1,433 - 7,662
Eliminations for disposals - (2,175) (116) - (2,291)
At 31 December 2018 3,244 144,717 31,282 - 179,243
NET CARRYING VALUE
At 31 December 2018 3,326 21,739 2,786 2,647 30,498
At 31 December 2017 3,337 22,725 3,253 2,296 31,611

The breakdown of the net carrying value of Property was as follows:

31.12.2018 31.12.2017 Change
Land 1,291 1,291 -
Industrial buildings 2,035 2,046 (11)
Total 3,326 3,337 (11)

The main investments in the financial year were aimed at increasing the production capacity of special burners, at the further automation of production of light alloy valves and interconnecting production plants with management systems (Industry 4.0). Other investments were made in the production of presses for new burners. Investments in maintenance and replacement, so that production equipment is kept constantly up to date and efficient, are systematic.

Decreases mainly relate to the disposal of machinery no longer in use or sold to subsidiaries.

Assets under construction include machinery under construction and advance payments to suppliers of capital equipment.

At 31 December 2018, the Company found no endogenous or exogenous indicators of impairment of its property, plant and equipment. As a result, the value of property, plant and equipment was not submitted to impairment testing.

2. INVESTMENT PROPERTY

COST
At 31 December 2016 6,675
Increases -
Disposals -
At 31 December 2017 6,675
Increases -
Disposals -
ACCUMULATED DEPRECIATIONS
At 31 December 2016 5,030
Depreciations for the year 191
At 31 December 2017 5,221
Depreciations for the year 192
At 31 December 2018 5,413
NET CARRYING VALUE
At 31 December 2018 1,262
At 31 December 2017 1,454

This item includes non-operating buildings owned by the Group. During the year, this item did not undergo any changes except for depreciations for the year.

At 31 December 2018, the Company found no endogenous or exogenous indicators of impairment of its investment property.

As a result, the value of investment property was not submitted to impairment testing.

3. INTANGIBLE ASSETS

PATENTS,
KNOW-HOW
AND SOFTWARE
DEVELOPMENT
COSTS
OTHER INTANGIBLE
ASSETS
TOTAL
COST
At 31 December 2016 6,275 4,902 2,067 13,244
Increases 243 441 161 845
Reclassifications 99 - 155 254
Decreases (14) (79) (14) (107)
At 31 December 2017 6,603 5,264 2,369 14,236
Increases 153 284 89 526
Reclassifications - - - -
Decreases - (59) - (59)
At 31 December 2018 6,756 5,489 2,458 14,703
AMORTISATION AND WRITE-DOWNS
At 31 December 2016 5,873 2,697 1,579 10,149
Amortisation 242 341 148 731
Decreases (14) - - (14)
At 31 December 2017 6,101 3,038 1,727 10,866
Amortisation 220 362 161 743
Decreases - - - -
At 31 December 2018 6,321 3,400 1,888 11,609

NET CARRYING VALUE

At 31 December 2018 435 2,089 570 3,094
At 31 December 2017 502 2,226 642 3,370

Intangible assets have a finite useful life and, as a result, are amortised throughout their life. The main investments in the year relate to the development of new products, mainly related to the expansion of the range of burners (research and development activities carried out during the financial year are set out in the Report on Operations). Software investments include the implementation of a production scheduler and the application development of the management system (SAP). Other intangible assets refer, in the main, to improvements to third-party leased assets. At 31 December 2018, the Company found no endogenous or exogenous indicators of impairment of its intangible assets. As a result, the value of property, plant and equipment was not submitted to impairment testing.

178

4. EQUITY INVESTMENTS

31.12.2018 31.12.2017 CHANGE
In subsidiaries 58,116 49,418 8,698
Other equity investments 34 34 -
Total 58,150 49,452 8,698

The change in equity investments in subsidiaries is broken down in the table below:

SABAF
IMMOBILIARE
FARINGOSI
HINGES
SABAF
DO
BRASIL
SABAF
U.S.
SABAF
APPLIANCE
COMPONENTS
(CHINA)
SABAF A.C.
TRADING
(CHINA)
SABAF
TURKEY
A.R.C.
S.R.L.
OKIDA TOTAL
HISTORICAL COST
At 31 December 2016 13,475 10,329 8,469 139 4,400 200 12,005 4,800 0 53,817
Purchase - - - - - - - - - -
At 31 December 2017 13,475 10,329 8,469 139 4,400 200 12,005 4,800 0 53,817
Purchase - - - - - - - - 8,698 8,698
At 31 December 2018 13,475 10,329 8,469 139 4,400 200 12,005 4,800 8,698 62,515
PROVISION FOR WRITE-DOWNS
At 31 December 2016 0 0 0 0 3,778 0 0 0 0 3,778
Write-downs - - - - 622 - - - - 622
At 31 December 2017 0 0 0 0 4,400 0 0 0 0 4,400
Write-downs - - - - - - - - - -
At 31 December 2018 0 0 0 0 4,400 0 0 0 0 4,400

NET CARRYING VALUE

At 31 December 2018 13,475 10,329 8,469 139 - 200 12,005 4,800 8,698 58,116
At 31 December 2017 13,475 10,329 8,469 139 - 200 12,005 4,800 0 49,418
PORTION OF SHAREHOLDERS' EQUITY (CALCULATED IN COMPLIANCE WITH IFRS)
At 31 December 2018 27,674
7,248
10,870
(28)
(697)
248
23,425
3,630
1,719
74,089
At 31 December 2017 30,061 6,248 10,409 (79) (60) 251 16,449 3,200 0 66,479
DIFFERENCE BETWEEN SHAREHOLDERS' EQUITY AND CARRYING VALUE
At 31 December 2018 14,199
(3,081)
2,401
(167)
(697)
48
11,420
(1,170)
(6,979)
15,974
At 31 December 2017 16,586 (4,081) 1,940 (218) (60) 51 4,444 (1,600) 0 17,062

Faringosi Hinges s.r.l.

In 2018, the Faringosi Hinges achieved very positive and better results - in terms of sales and profitability - both compared to the previous year and compared to the budget. The 2019-2023 forward plan, drafted at the beginning of 2019, envisages a further increase in sales. At 31 December 2018, Sabaf S.p.A. tested - with the support of independent experts - the carrying value of the equity investment for impairment, determining its recoverable amount, considered to be equivalent to its value of use plus available liquidity, by discounting expected future cash flows in the forward plan drafted by the management. Cash flows for the period from 2019 to 2023 were augmented by the so-called terminal value, which expresses the operating flows that the investee is expected to generate from the sixth year to infinity and determined based on the perpetual income. The value of use was calculated based on a discount rate (WACC) of 10.45% (9.18% in the impairment test carried out while preparing the separate financial statements at 31 December 2017) and a growth rate (g) of 1.50%, unchanged from 31 December 2017.

The recoverable amount calculated on the basis of the above-mentioned assumptions and valuation techniques is € 12.762 million, compared with a carrying value of the equity investment of € 10.329 million; consequently, the amount recorded for equity investment at 31 December 2018 was deemed recoverable.

Sensitivity analysis

The table below shows the changes in recoverable amount depending on changes in the WACC discount rate and growth factor g:

(€/000) GROWTH RATE
DISCOUNT RATE 1.00% 1.25% 1.50% 1.75% 2.00%
9.45% 13,784 14,118 14,472 14,849 15,252
9.95% 12,966 13,257 13,565 13,893 14,241
10.45% 12,236 12,492 12,762 13,048 13,351
10.95% 11,581 11,808 12,046 12,298 12,563
11.45% 10,991 11,192 10,404 11,627 11,861

Sabaf do Brasil

In 2018, Sabaf do Brasil continued to obtain positive results, which improved compared with 2017. Shareholders' equity (converted into euros at the end-of-year exchange rate) is higher than the carrying amount of the investment.

Sabaf U.S.

The subsidiary Sabaf U.S. operates as a commercial support for North America. The difference between the carrying value and the shareholders' equity of the investee is attributable to the non-durable losses taking into consideration expected development on the North American market.

Sabaf Appliance Components

Sabaf Appliance Components (Kunshan) Co., Ltd. has been producing burners for the Chinese market since 2015. Furthermore, the company has performed the function as distributor on the Chinese market of Sabaf products manufactured in Italy and Turkey. Low production volumes have enabled the company to reach the break-even point in 2018. At 31 December 2018, a provision for risks on equity investments of € 700,000 was recognised, corresponding to the negative equity value of the investee company. For further details, refer to Note 36.

Sabaf Appliance Components Trading

Sabaf Appliance Components Trading (Kunshan) Co., Ltd., was founded during 2012 in order to perform the function as distributor. During 2015, this activity was centralised at Sabaf Appliance Components; however, the company went into liquidation; the process of liquidation should end in 2019.

Sabaf Beyaz Esya Parcalari Sanayi Ve Ticaret Limited Sirteki (Sabaf Turkey)

Sabaf Turkey achieved extremely satisfactory results in 2018 as well. The shareholders' equity remains well above the carrying value of the equity investment.

A.R.C. s.r.l.

In June 2016, the Company acquired the controlling share (70%) of A.R.C. s.r.l., leading company in the production of burners for professional cooking. The transaction allowed Sabaf to enter into a new sector, contiguous with the traditional sector of components for household gas cooking appliances, and to enhance the consolidated international presence of the Sabaf Group.

At 31 December 2018, the Company tested - with the support of independent experts - the carrying value of the equity investment for impairment, determining its recoverable amount, considered to be equivalent to its value of use plus available liquidity, by discounting expected future cash flows in the forward plan drafted at the beginning of 2019. Cash flows for the period from 2019 to 2023 were augmented by the so-called terminal value, which expresses the operating flows that the investee is expected to generate from the fourth year to infinity and determined based on the perpetual income. The value of use was calculated based on a discount rate (WACC) of 7.73% (6.90% in the impairment test carried out while drafting the separate financial statements at 31 December 2017) and a growth rate (g) of 1.50%, in line with last year.

The portion pertaining to Sabaf S.p.A. of the recoverable amount calculated on the basis of the above-mentioned assumptions and valuation techniques is € 8.421 million (70% of total recoverable amount, equal to € 12.030 million), compared with a carrying value of the equity investment of € 4.8 million; consequently, the carrying value recorded for equity investment at 31 December 2018 was deemed recoverable.

Sensitivity analysis

The table below shows the changes in recoverable amount depending on changes in the WACC discount rate and growth factor g:

(€/000) GROWTH RATE
DISCOUNT RATE 1.00% 1.25% 1.50% 1.75% 2.00%
6.73% 13,170 13,615 14,103 14,640 15,233
7.23% 12,207 12,575 12,975 13,412 13,891
7.73% 11,389 11,697 12,030 12,392 12,785
8.23% 10,685 10,947 11,228 11,531 11,858
8.73% 10,073 10,298 10,538 10,795 11,071

As part of the acquisition of 70% of A.R.C. S.r.l., Sabaf S.p.A. signed with Loris Gasparini (current minority shareholder by 30% of A.R.C.) an agreement that aimed to regulate Gasparini's right to leave A.R.C. and the interest of Sabaf to acquire 100% of the shares after expiry of the term of five years from the signing of the purchase agreement of 24 June 2016, by signing specific option agreements. Therefore, the agreement envisaged specific option rights to purchase (by Sabaf) and sell (by Gasparini) exercisable as from 24 June 2021, the remaining shares of 30% of A.R.C., with strike prices contractually defined on the basis of final income parameters from A.R.C. at 31 December 2020.

The option for the purchase of the residual 30% of A.R.C. represents a derivative instrument; since the exercise price defined by contract was considered representative of the fair value of the portion that can be potentially acquired, no value was recorded in the separate financial statements ended 31 December 2018.

Okida Elektronik Sanayi Limited Sirket

In September 2018, the Company directly acquired 30% of Okida Elektronik (the remaining 70% was acquired through the subsidiary Sabaf Turkey). Okida is a leader in Turkey in the design and manufacture of electronic components for household appliances (mainly ovens and hoods); the transaction allowed Sabaf to enter into a new sector, contiguous with the traditional sector of components for household gas cooking appliances.

At 31 December 2018, the Company tested - with the support of independent experts - the carrying value of the equity investment, determining its recoverable amount, by discounting expected future cash flows estimated on the basis of the 2019 budget and projections for the following three years. Cash flows for the period from 2019 to 2022 were augmented by the so-called terminal value, which expresses the operating flows that the company is expected to generate from the fifth year to infinity and determined based on the perpetual income. The value of use was calculated based on a discount rate (WACC) of 11.05% and a growth rate (g) of 2.50%, in line with the expected growth of the sector in the Turkish market.

The portion pertaining to Sabaf S.p.A. of the recoverable amount calculated on the basis of the above-mentioned assumptions and valuation techniques is € 11.900 million (30% of total equity value, equal to € 39.665 million), compared with a carrying value of the equity investment of € 8.698 million; consequently, the carrying value recorded for equity investment at 31 December 2018 was deemed recoverable.

Sensitivity analysis

The table below shows the changes in recoverable amount depending on changes in the WACC discount rate and growth factor g:

(€/000) GROWTH RATE
DISCOUNT RATE 1.50% 2.00% 2.50% 3.00%
10% 40,200 42,307 44,697 47,430
10.5% 38,070 39,930 42,027 44,400
11% 36,163 37,817 39,665 41,747
11.5% 34,447 35,923 37,567 39,403

5. NON-CURRENT FINANCIAL ASSETS

31.12.2018 31.12.2017 CHANGE
Financial receivables from subsidiaries 5,247 1,668 3,579
Escrow bank account 120 180 (60)
Total 5,367 1,848 3,519

At 31 December 2018, financial receivables from subsidiaries consist of:

  • an interest-bearing loan of USD 2 million (€ 1.747 million at the end-of-year exchange rate), granted to the subsidiary Sabaf do Brasil with the aim of optimising the Group's exposure to foreign exchange rate risk and whose maturity at the beginning of 2019 was postponed to March 2021:
  • an interest-bearing loan of € 3.5 million to the subsidiary Sabaf Turkey, disbursed during the year as part of the coordination of the Group's financial management, with maturity in August 2021

• As part of the acquisition of 70% of A.R.C., in 2016, Sabaf S.p.A. paid to a non-interest-bearing fixed bank account the total amount of € 300,000. This amount, deducted from the consideration agreed to guarantee the commitments assumed by the sellers, is released in favour of the sellers at constant rates in 5 years (Note 15). At 31 December 2018, the portion due beyond 12 months amounted to € 120,000, whereas the portion due within 12 months amounted to € 60,000 (Note 10).

6. INVENTORIES

31.12.2018 31.12.2017 CHANGE
Commodities 9,358 8,795 563
Semi-processed goods 9,633 9,115 516
Finished products 9,231 8,789 442
Provision for inventory write-downs (1,594) (1,930) 336
Total 26,628 24,769 1,857

The provision for write-downs is allocated for hedging the obsolescence risk, quantified on the basis of specific analyses carried out at the end of the year on slow-moving and non-moving products, and refers to raw materials for

€ 435,000, semi-finished products for € 408,000 and finished products for € 751,000.

7. TRADE RECEIVABLES

Net total 35,157 31,154 4,003
Bad debt provision (1,000) (600) (400)
Total trade receivables 36,157 31,754 4,403
31.12.2018 31.12.2017 CHANGE

At 31 December 2018, trade receivables included balances totalling USD 3,526,000, booked at the EUR/USD exchange rate in effect on 31 December 2018, i.e. 1.1450. The amount of trade receivables recognised in the financial statements includes approximately € 18 million in insured receivables (€ 22 million at 31 December 2017).

Note that some customer payments of approximately € 3.5 million, which were due by the end of the year, were received at the beginning of 2019. With the exception of this circumstance, there were no significant changes in the payment terms agreed with customers.

31.12.2018 31.12.2017 CHANGE
Current receivables (not past due) 29,966 28,591 1,375
Outstanding up to 30 days 1,996 1,524 472
Outstanding from 31 to 60 days 494 754 (260)
Outstanding from 61 to 90 days 3,030 519 2,511
Outstanding for more than 90 days 671 366 305
Total 36,157 31,754 4,403

The bad deb provision was adjusted to the better estimate of the credit risk at the end of the reporting period. Changes during the year were as follows:

31.12.2017 PROVISIONS UTILISATION 31.12.2018
Bad debt provision 600 402 (2) 1,000

8. TAX RECEIVABLES

31.12.2018 31.12.2017 CHANGE
For income tax 2,002 1,644 358
For VAT 375 586 (211)
Total 2,377 2,230 147

The income tax receivables derives for € 1,084,000 from the full deductibility of IRAP from IRES relating to the expenses incurred for employees for the 2006-2011 period (Italian Legislative Decree 201/2011), for which an application for a refund was presented and, for the residual part, to the payments on account on income, for the part exceeding the tax to be paid.

9. OTHER CURRENT RECEIVABLES

31.12.2018 31.12.2017 CHANGE
Credits to be received from suppliers 374 351 23
Advances to suppliers 112 28 84
Due from INAIL 10 21 (11)
Other 268 322 (54)
Total 764 722 42

At 31 December 2018, credits to be received from suppliers included € 171,000 related to the relief due to the Company as an energy-intensive business (known as "energy-intensive bonuses") for the year 2017. "Energy-intensive bonuses" due for the year 2016 were regularly collected during 2018.

10. CURRENT FINANCIAL ASSETS

31.12.2018 31.12.2017 CHANGE
Financial receivables from subsidiaries 1,600 1,000 600
Escrow bank accounts 3,510 60 3,450
Interest rate derivatives - 7 (7)
Total 5,110 1,067 4,043

Financial receivables from subsidiaries consist of an interest-bearing loan with a duration of 12 months to Sabaf Appliance Components Co., Ltd. to support the Chinese subsidiary's working capital.

At 31 December 2018, a term deposit of € 3.45 million was taken out, due on 31 March 2019, for a bank guarantee issued in favour of the sellers of the Okida Elektronik equity investment for the portion of the price, for which payment is deferred until March 2019.

11. CASH AND CASH EQUIVALENTS

The item Cash and cash equivalents, equal to € 1,959,000 at 31 December 2018 (€ 2,697,000 at 31 December 2017) refers almost exclusively to bank current account balances.

12. SHARE CAPITAL

The Company's share capital consists of 11,533,450 shares with a par value of € 1.00 each. The share capital paid in and subscribed did not change during the year. At 31 December 2018, the structure of the share capital is shown in the table below.

NO. OF SHARES % OF SHARE
CAPITAL
RIGHTS
AND OBLIGATIONS
Ordinary shares 11,133,450 96.532% --
Ordinary shares with increased vote 400,000 3.468% Two voting rights per share
TOTAL 11,533,450 100%

With the exception of the right to increased vote, there are no rights, privileges or restrictions on the Company. The availability of reserves is indicated in a table at the end of these Explanatory Notes.

13. TREASURY SHARES AND OTHER RESERVES

During the financial year, Sabaf S.p.A. acquired 132,737 treasury shares at an average unit price of € 17.77; there have been no sales.

At 31 December 2018, the Company held 514,506 treasury shares, equal to 4.46% of share capital (381,769 treasury shares at 31 December 2017), reported in the financial statements as an adjustment to shareholders' equity at a unit value of € 13.348 (the market value at year-end was € 11.811). There were 11,018,944 outstanding shares at 31 December 2018 (11,151,681 at 31 December 2017).

Items "Retained earnings, other reserves" of € 72,465,000 included, at 31 December 2018, the stock grant reserve of € 321,000, which included the measurement at 31 December 2018 of fair value of rights assigned to receive Sabaf shares. For details of the Stock Grant Plan, refer to Note 42.

14. LOANS

31.12.2018 31.12.2017
Current Non-current Current Non-current
Unsecured loans 9,911 33,669 5,982 16,298
Short-term bank loans 7,188 - 10,846 -
Derivative instruments on interest rates 231 - - -
Sabaf Turkey loan - - 2,100 -
TOTAL 17,330 33,669 18,928 16,298

During the year, the Company took out new unsecured loans for a total of € 28.7 million to finance the investments made, with particular reference to the acquisition of Okida. All loans are signed with an original maturity of ranging from 5 to 6 years and are repayable in instalments.

Some of the outstanding unsecured loans have covenants, defined with reference to the consolidated financial statements at the end of the reporting period, as specified below:

  • commitment to maintain a ratio of net financial position to shareholders' equity of less than 1 (residual amount of the loans at 31 December 2018 equal to € 22.7 million)
  • commitment to maintain a ratio of net financial position to EBITDA of less than 2 (residual amount of the loans at 31 December 2018 equal to € 7 million) or less than 2.5 (residual amount of the loans at 31 December 2018 equal to € 15.7 million) widely complied with at 31 December 2018.

All bank loans are denominated in euro, with the exception of a short-term loan of USD 2 million.

To manage interest rate risk, unsecured loans are either fixed-rate or hedged by IRS. These separate financial statements include the negative fair value of the IRSs hedging rate risks of unsecured loans pending, for residual notional amounts of approximately € 26.6 million and expiry until 31 December 2024. Financial expenses were recognised in the income statement with a balancing entry.

Note 36 provides information on financial risks, pursuant to IFRS 7.

15. OTHER FINANCIAL LIABILITIES

31.12.2018 31.12.2017
Current Non-current Current Non-current
Payables to former Okida shareholders 1,735 -
Payables to A.R.C. shareholders 60 120 60 180
Derivative instruments on interest rates - - 15 -
TOTAL 1,795 120 75 180

As part of the acquisition of Okida Elektronik, the parties agreed that the payment of part of the price would be subject to adjustment (depending, inter alia, on Okida's 2018 EBITDA) and postponed compared to the effective date of the transaction (4 September 2018). The payables to Okida shareholders at 31 December 2018 in these financial statements represents the residual portion of the price to be paid to the sellers by the Company.

The payable to the A.R.C. shareholders of € 180,000 at 31 December 2018 is related to the part of the price still to be paid to the sellers, which was deposited on an fixed account (Note 5) and will be released in favour of the sellers at constant rates in 3 years, in accordance with contractual agreements and guarantees issued by the sellers.

16. POST-EMPLOYMENT BENEFIT RESERVE

AT 31 DECEMBER 2017 2,200
Financial expenses 24
Payments made (113)
Tax effect (27)
AT 31 DECEMBER 2018 2,084

Post-employment benefits are calculated as follows:

FINANCIAL ASSUMPTIONS
31.12.2018
31.12.2017
Discount rate 1.30% 1.15%
Inflation 1.70% 1.80%
DEMOGRAPHIC THEORY
31.12.2018
31.12.2017
Mortality rate ISTAT 2016 M/F ISTAT 2016 M/F
Disability rate INPS 1998 M/F INPS 1998 M/F
Staff turnover 6% 6%
Advance pay-outs 5% per year 5% per year
Retirement age pursuant to legislation
in force
on 31 December 2018
pursuant to legislation
in force
on 31 December 2017

17. PROVISIONS FOR RISKS AND CHARGES

31.12.2017 PROVISIONS UTILISATION 31.12.2018
Reserve for agents' indemnities 199 28 (19) 208
Product guarantee fund 60 7 (7) 60
Provision for risks on equity investments 60 640 - 700
Reserve for legal risks 50 70 - 120
Total 369 745 (26) 1,088

The reserve for agents' indemnities covers amounts payable to agents if the Company terminates the agency relationship.

The product guarantee fund covers the risk of returns or charges by customers for products already sold.

The provision for risks on equity investments was set aside to cover future outlays to restore the shareholders' equity of the Chinese subsidiary Sabaf Appliance Components, which was negative at 31 December 2018.

The reserve for legal risks is allocated for disputes of a modest size.

The provisions booked to the provisions for risks, which represent the estimate of future payments made based on historical experience, have not been discounted because the effect is considered negligible.

Following the revision of IAS 19 - Employee benefits, from 1 January 2013 all actuarial gains or losses are recorded immediately in the comprehensive income statement ("Other comprehensive income") under the item "Actuarial income and losses".

18. TRADE PAYABLES 19. TAX PAYABLES

31.12.2018 31.12.2017 CHANGE
Total 18,945 16,569 2,374

Average payment terms did not change versus the previous year. The amount of trade payables in currencies other than the euro is not significant. At 31 December 2018, there were no overdue payables of a significant amount and the Company did not receive any injunctions for overdue payables.

31.12.2018 31.12.2017 CHANGE
To inland
revenue for
IRPEF tax
deductions
590 569 21
Other tax
payables
- 54 (54)
Total 590 623 (33)

Payables for IRPEF tax deductions, relating to employment and self-employment, were duly paid at maturity.

20. OTHER CURRENT PAYABLES

31.12.2018 31.12.2017 CHANGE
To employees 3,649 3,931 (282)
To social security institutions 1,901 2,063 (162)
Advances from customers 91 64 27
To agents 235 165 70
Other current payables 216 227 (11)
Total 6,092 6,450 (358)

At the beginning of 2019, payables due to employees and social security institutions were paid in accordance with the scheduled expiry dates.

21. DEFERRED TAX ASSETS AND LIABILITIES

31.12.2018 31.12.2017
Deferred tax assets 3,472 3,455
Deferred tax liabilities (107) (68)
Net position 3,365 3,387

The table below analyses the nature of the temporary differences that determine the recognition of deferred tax liabilities and assets and their changes during the year and the previous year.

AMORTISATION
AND LEASING
PROVISIONS
AND VALUE
ADJUSTMENTS
FAIR
VALUE OF
DERIVATIVE
INSTRUMENTS
GOODWILL ACTUARIAL
POST-EMPLOYMENT
BENEFIT RESERVE
EVALUATION
OTHER
TEMPORARY
DIFFERENCES
TOTAL
At 31 December 2016 393 770 57 1,771 178 17 3,186
To the income statement (46) 149 (55) - (2) 172 218
To shareholders' equity - - - - (17) - (17)
At 31 December 2017 347 919 2 1,771 159 189 3,387
To the income statement 69 (45) 53 - - (93) (16)
To shareholders' equity - - - - (6) - (6)
At 31 December 2018 416 874 55 1,771 153 96 3,365

Deferred tax assets relating to goodwill refer to the exemption of the value of the investment in Faringosi Hinges s.r.l. made in 2011 pursuant to Italian law Decree 98/2011.

186

22. NET FINANCIAL POSITION

As required by the CONSOB memorandum of 28 July 2006, we disclose that the Company's net financial position is as follows:

31.12.2018 31.12.2017 CHANGE
A. Cash (Note 11) 6 5 1
B. Positive balances of unrestricted bank accounts
(Note 11)
1,953 2,692 (739)
C. Other cash equivalents - - -
D. Liquidity (A+B+C) 1,959 2,697 (738)
E. Current financial receivables 5,110 1,067 4,043
F. Current bank payables (Note 14) 7,419 12,946 (5,527)
G. Current portion of non-current debt (Note 14) 9,911 5,982 3,929
H. Other current financial payables (Note 15) 1,795 75 1,720
I. Current financial debt (F+G+H) 19,125 19,003 122
J. Net current financial debt (I-D-E) 12,056 15,239 (3,183)
K. Non-current bank payables (Note 14) 33,669 16,298 17,371
L. Other non-current financial payables 120 180 (60)
M. Non-current financial debt (K+L) 33,789 16,478 17,311
N. Net financial debt (J+M) 45,845 31,717 14,128

The cash flow statement, which shows the changes in cash and cash equivalents (letter D. of this statement), describes in detail the cash flows that led to the change in the net financial position.

Comments on key income statement items

23. REVENUE

In 2018, sales revenue totalled € 110,065,252, down 4.9% from €115,687,029 in 2017.

Revenue by geographical area

2018 % 2017 % % CHANGE
Italy 24,762 22.5% 29,587 25.6% -16.3%
Western Europe 8,925 8.1% 8,920 7.7% +0.1%
Eastern Europe and Turkey 36,807 33.4% 35,655 30.8% +3.2%
Asia and Oceania (excluding Middle East) 4,893 4.4% 9,570 8.3% -48.9%
Central and South America 11,912 10.8% 11,331 9.8% +5.1%
Middle East and Africa 13,323 12.1% 12,703 11.0% +4.9%
North America and Mexico 9,443 8.6% 7,921 6.8% +19.2%
Total 110,065 100% 115,687 100% -4.9%

The sales analysis by geographical area shows an uneven trend in the various markets in which the Company operates. The best results were achieved on the American continent: sales in North America were sustained by the good performance of consumption; in South America, strong growth rates were recorded in the Andean countries, which more than offset the effects of the crisis in Argentina and a still stagnant demand in Brazil. Satisfactory growth rates were recorded in European markets, thanks to the consolidation of relationships with major customers and the contribution made by the acquisition in Turkey of Okida; only in Italy sales are down due to the sharp reduction in the production of domestic appliances. North Africa and the Middle East have shown signs of weakness, while the of the Company's presence on Asian markets is not yet sufficiently consolidated.

Revenue by product family

2018 % 2017 % % CHANGE
Brass valves 4,342 3.9% 5,992 5.2% -27.5%
Light alloy valves 37,603 34.2% 39,219 33.9% -4.1%
Thermostats 6,521 5.9% 7,365 6.4% -11.5%
Total valves and thermostats 48,466 44.0% 52,576 45.5% -7.8%
Standard burners 21,820 19.8% 25,127 21.7% -13.2%
Special burners 24,018 21.8% 24,136 20.9% -0.5%
Total burners 45,838 41.6% 49,263 42.6% -7.0%
Accessories and other revenues 15,761 14.3% 13,848 11.9% +13.8%
Total 110,065 100% 115,687 100% -4.9%

The sales analysis by product category shows a marked decrease in more mature products (brass valves and thermostats), while more innovative product families (light alloy valves and special burners) show an improved performance.

Average sales prices in 2018 were 0.3% lower compared to 2017.

24. OTHER INCOME

2018 2017 CHANGE
Sale of trimmings 1,424 1,457 (33)
Services
to subsidiaries
629 378 251
Contingent income 55 97 (42)
Rental income 87 89 (2)
Use of provisions
for risks and charges
26 39 (13)
Services to parent
company
40 10 30
Other income 724 578 146
Total 2,985 2,648 337

Services to subsidiaries refer to administrative, commercial and technical services provided within the scope of the Group.

25. MATERIALS

2018 2017 CHANGE
Commodities and out
sourced components
41,286 42,973 (1,687)
Consumables 3,799 3,582 217
Total 45,085 46,555 (1,470)

In 2018, the effective purchase prices of the main raw materials (aluminium alloys, steel and brass) were on average higher than in 2017, with a negative impact of 0.6% of sales. Consumption (purchases plus change in inventories) as a percentage of sales was 42.6% in 2018, compared with 41.3% in 2017.

26. COSTS FOR SERVICES

2018 2017 CHANGE
Outsourced
processing
8,815 8,681 134
Property rental 4,009 3,974 35
Electricity
and natural gas
3,271 3,314 (43)
Maintenance 3,081 3,296 (215)
Advisory services 1,977 1,676 301
Transport and export
expenses
1,394 1,408 (14)
Directors' fees 475 881 (406)
Insurance 468 444 24
Commissions 631 533 98
Travel expenses
and allowances
550 550 0
Waste disposal 378 358 20
Canteen 291 296 (5)
Temporary agency
workers
196 180 16
Other costs 2,004 2,013 (9)
Total 27,540 27,604 (64)

All-in-all, costs for services did not change significantly compared to the previous year.

Costs for advisory services related to technical (€ 564,000), sales (€ 503,000) and legal, administrative and general (€ 810,000) services.

During the year, the Board of Directors was renewed and the fees due to the directors were recalculated, with a reduction in expenses of around € 400,000. Other costs included expenses for the registration of patents, waste disposal, cleaning, leasing third-party assets and other minor charges.

188

27. PAYROLL COSTS

2018 2017 CHANGE
Salaries and wages 18,744 19,540 (796)
Social Security costs 6,099 6,249 (150)
Temporary agency
workers
1,779 1,477 302
Post-employment
benefit reserve
and other costs
1,445 1,468 (23)
Stock grant plan 321 - 321
Total 28,388 28,734 (346)

Average of the Company headcount in 2018 totalled 503 employees (376 blue-collars, 117 white-collars and supervisors, 10 managers), compared with 514 in 2017 (394 blue-collars, 110 white-collars and supervisors, 10 managers). The average number of temporary staff, with supply contract, was 47 in 2018 (42 in 2017).

In 2018, the Company made negligible use of the temporary unemployment fund. The item "Stock Grant Plan" included the measurement at 31 December 2018 of the fair value of rights to the assignment of Sabaf shares attributed to employees. For details of the Stock Grant Plan, refer to Note 42.

28. OTHER OPERATING COSTS

2018 2017 CHANGE
Losses and write
downs of trade
receivables
402 49 353
Non-income related
taxes and duties
217 238 (21)
Contingent liabilities 192 138 54
Provisions for risks 77 - 77
Other provisions 668 26 642
Other operating
expenses
296 264 32
Total 1,852 715 1,137

Non-income taxes mainly include IMU, TASI and the tax for the disposal of urban solid waste. Provisions for risks and other provisions relate to sums set aside for the risks described in Note 17.

29. WRITE-DOWNS/WRITE-BACKS OF NON-CURRENT ASSETS

2018 2017 CHANGE
Write-down Sabaf
Appliance Components
- (622) 622
Allocation to risk
provisions on equity
investments
- (60) 60
Total 0 (682) 682

In 2017, this item included the write-down of the equity investment in Sabaf Appliance Components, to bring it into line with the value of shareholders' equity at 31 December 2018. As detailed in Note 17, in these consolidated financial statements a provision of € 640,000 was made to the provision for risks on equity investments, recorded under Other operating costs, to cover future outlays expected to restore the shareholders' equity of the Chinese subsidiary, which at 31 December 2018 was negative.

30. FINANCIAL EXPENSES

2018 2017 CHANGE
Interest paid to banks 641 244 397
Banking expenses 240 209 31
Other financial
expense
37 29 8
Total 918 482 436

The increase in financial expenses to banks reflects the higher average net debt for the year. Interest paid to banks includes IRS spreads payable that hedge interest rate risks.

31. EXCHANGE RATE GAINS AND LOSSES

During the 2018 financial year, the Company reported net foreign exchange gains of € 157,000 (net losses of € 88,000 in 2017).

32. PROFITS AND LOSSES FROM EQUITY INVESTMENTS

2018 2017 CHANGE
Dividends received
from Sabaf
Immobiliare
3,000 1,500 1,500
Dividends received
from Okida Elektronik
1,322 - 1,322
Other profits from
equity investments
- 3 (3)
Total 4,322 1,503 2,819

This item includes dividends received from investee companies.

33. INCOME TAX

2018 2017 CHANGE
Current taxes 967 1,791 (824)
Deferred tax assets
and liabilities
16 (219) 235
Taxes related to pre
vious financial years
21 (502) 523
Taxes on dividends
received
182 - 182
Total 1,186 1,070 116

Current taxes include IRES of € 672,000 and IRAP of € 295,000 (€ 1,436,000 and € 355,000 respectively in 2017).

2018 2017
Theoretical income tax 2,214 2,177
Taxes related to previous financial years 18 88
Tax effect of dividends from investee companies (803) (342)
"Patent box" tax effect (323) (1,151)
"Iper e Superammortamento" tax benefit (449) (179)
Permanent tax differences 279 209
Other differences 4 9
IRES (current and deferred) 940 811
IRAP (current and deferred) 246 259
Total 1,186 1,070

Reconciliation between the tax burden booked in the financial statements and the theoretical tax burden calculated according to the statutory tax rates currently in force in Italy is shown in the following table:

Theoretical taxes were calculated applying the current corporate income tax (IRES) rate, i.e. 24%, to the pre-tax result. IRAP is not taken into account for the purpose of reconciliation because, as it is a tax with a different assessment basis from pre-tax profit, it would generate distorting effects.

In these separate financial statements, the Company recognised the tax benefit related to the Patent Box for 2018 of € 375,000 (€ 323,000 for IRES and € 52,000 for IRAP). Following the prior agreement signed with the Revenue Agency, in 2017 the benefit for the three-year period from 2015 to 2017, for a total of € 1,324,000 was recognised.

No significant tax disputes were pending at 31 December 2018.

35. SEGMENT REPORTING

34. DIVIDENDS

On 31 May 2018, shareholders were paid an ordinary dividend of € 0.55 per share (total dividends of € 6,071,000).

The Directors have recommended payment of an unchanged dividend of € 0.55 per share this year. This dividend is subject to approval of shareholders in the annual Shareholders' Meeting and was not included under liabilities in these financial statements.

The dividend proposed is scheduled for payment on 29 May 2019 (ex-date 27 May and record date 28 May).

36. INFORMATION ON FINANCIAL RISK

Categories of financial instruments

In accordance with IFRS 7, a breakdown of the financial instruments is shown below, among the categories set forth in IAS 39.

31.12.2018 31.12.2017
Financial assets
Income statement fair value
Derivative cash flow hedges (on currency) - 7
Amortised cost
Cash and cash equivalents 1,959 2,697
Trade receivables and other receivables 35,922 31,876
Non-current loans 5,246 1,668
Current loans 1,600 1,000
Other financial assets 3,630 240
Financial liabilities
Income statement fair value
Derivative cash flow hedges (on interest rates) 231 15
Amortised cost
Loans 50,999 35,226
Other financial liabilities 1,915 240
Trade payables 18,945 16,569

Within the Sabaf Group, the Company operates exclusively in the gas parts segment for household cooking. The information in the consolidated financial statements is divided between the various segments in which the Group operates.

The Company is exposed to financial risks related to its operations, mainly:

  • credit risk, with special reference to normal trade relations with customers;
  • market risk, relating to the volatility of prices of commodities, foreign exchange and interest rates;
  • liquidity risk, which can be expressed by the inability to find financial resources necessary to ensure Company operations.

It is part of Sabaf's policies to hedge exposure to changes in prices and in fluctuations in exchange and interest rates via derivative financial instruments. Hedging is done using forward contracts, options or combinations of these instruments. Generally speaking, the maximum duration covered by such hedging does not exceed 18 months. The Company does not enter into speculative transactions. When the derivatives used for hedging purposes meet the necessary requisites, hedge accounting rules are followed.

Credit risk management

Trade receivables involve producers of domestic appliances, multinational groups and smaller manufacturers in a few or single markets. The Company assesses the creditworthiness of all its customers at the start of supply and systemically at least on an annual basis. After this assessment, each customer is assigned a credit limit.

A credit insurance policy is in place, which guarantees cover for approximately 50% of trade receivables.

Credit risk relating to customers operating in emerging economies is generally attenuated by the expectation of revenue through letters of credit.

Forex risk management

The main exchange rate to which the Company is exposed is the euro/USD in relation to sales made in dollars (mainly in North America) and, to a lesser extent, to some purchases (mainly from Asian manufacturers). Sales in US dollars represented 12% of total turnover in 2018, while purchases in dollars represented 5% of total turnover. During the year, operations in dollars were partially hedged through forward sales contracts; no currency derivatives were pending at 31 December 2018.

Sensitivity analysis

With reference to financial assets and liabilities in US dollars at 31 December 2018, a hypothetical and immediate revaluation of 10% of the euro against the dollar would have led to a loss of € 270,000.

Interest rate risk management

Owing to the current trend in interest rates, the Company favours fixed-rate indebtedness: medium to long-term loans originated at a variable rate are converted to a fixed rate by entering into interest rate swaps (IRS) at the same time as the loan is opened. At 31 December 2018, IRS totalling € 26.6 million were in place, mirrored in mortgages with the same residual debt, through which the Company transformed the floating rate of the mortgages into fixed rate. Considering the IRS in place, at the end of 2018 almost all medium to long-term financial debt was at a fixed rate. The derivative contracts were not designated as a cash flow hedge and were therefore recognised using the "income statement fair value" method.

Sensitivity analysis

Considering the IRS in place, at the end of 2018 almost all of the Company's financial debt was at a fixed rate. Therefore, at 31 December 2018 no sensitivity analysis was carried out in that the exposure to interest rate risk, linked to a hypothetical increase (decrease) in interest rates, is not significant.

Commodity price risk management

A significant portion of the Company's purchase costs is represented by aluminium, steel and brass. Sales prices of products are generally renegotiated annually; as a result, the Company is unable to immediately pass on to customers any changes in the prices of commodities during the year. The Company protects itself from the risk of changes in the price of aluminium, steel and brass with supply contracts signed with suppliers for delivery up to twelve months in advance or, alternatively, with derivative financial instruments. In 2018 and 2017, the Company did not use financial derivatives on commodities. To stabilise the rising costs of commodities, Sabaf preferred to execute transactions on the physical market, fixing prices with suppliers for immediate and deferred delivery.

Liquidity risk management

The management of liquidity and financial debt is coordinated at Group level. The Group operates with a debt ratio considered physiological (net financial debt / shareholders' equity at 31 December 2018 of 45%, net financial debt / EBITDA of 1.79) and has unused short-term lines of credit. To minimise the risk of liquidity, the Administration and Finance Department:

  • maintains a correct balance of net financial debt, financing investments with capital and with medium to long-term debt.
  • verifies systematically that the short-term accrued cash flows (amounts received from customers and other income) are expected to accommodate the deferred cash flows (short-term financial debt, payments to suppliers and other outgoings);
  • regularly assesses expected financial needs in order to promptly take any corrective measures. An analysis by expiration date of financial payables at 31 December 2018 and 31 December 2017 is shown below
AT 31 DECEMBER 2018 Carrying
value
Contractual
financial flows
Within 3
months
From
3 months
to 1 year
From 1 to 5
years
More than
5 years
Unsecured loans 43,580 44,414 1,795 8,422 32,621 1,576
Short-term bank loans 7,419 7,419 7,419 - - -
Payables to ARC shareholders 180 180 - 60 120 -
Payables to former Okida shareholders 1,735 1,735 1,735 - - -
Total financial payables 52,914 53,748 10,949 8,482 32,741 1,576
Trade payables 18,954 18,954 18,437 517 - -
Total 71,868 72,702 29,386 8,999 32,741 1,576
AT 31 DECEMBER 2017 Carrying
value
Contractual
financial flows
Within 3
months
From
3 months
to 1 year
From 1 to 5
years
More than
5 years
Unsecured loans 22,280 22,676 1,537 4,612 16,527 -
Short-term bank loans 10,846 10,846 10,846 - - -
Short-term Sabaf Turkey loan 2,100 2,118 - 2,118 - -
Payables to ARC shareholders 240 240 - 60 180 -
Total financial payables 35,466 35,880 12,383 6,790 16,707 0
Trade payables 16,569 16,569 15,615 954 - -
Total 52,035 52,449 27,998 7,744 16,707 0

The various due dates are based on the period between the end of the reporting period and the contractual expiration date of the commitments, the values indicated in the table correspond to non-discounted cash flows. Cash flows include the shares of principal and interest; for floating rate liabilities, the shares of interest are determined based on the value of the reference parameter at the end of the reporting period and increased by the spread set forth in each contract.

Hierarchical levels of fair value assessment

The revised IFRS 7 requires that financial instruments reported in the statement of financial position at fair value be classified based on a hierarchy that reflects the significance of the input used in determining the fair value. IFRS 7 makes a distinction between the following levels:

  • Level 1 quotations found on an active market for assets or liabilities subject to assessment;
  • Level 2 input other than prices listed in the previous point, which can be observed directly (prices) or indirectly (derived from prices) on the market;
  • Level 3 input based on observable market data

The following table shows the assets and liabilities valued at fair value at 31 December 2018, by hierarchical level of fair value assessment.

LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
Other financial liabilities (derivatives on interest rates) - (231) - (231)
Option on minorities A.R.C. - - - -
Total assets and liabilities at fair value - (231) - (231)

37. RELATIONS BETWEEN GROUP COMPANIES AND WITH RELATED PARTIES

The table below illustrates the impact of all transactions between Sabaf S.p.A. and other related parties on the balance sheet and income statement items and related parties, with the exception of the directors' fees, auditors and key management personnel which is stated in the Report on Remuneration.

Impact of related-party transactions or positions on statement of financial position items

TOTAL 2018 SUBSIDIARIES GIUSEPPE
SALERI SAPA
OTHER
RELATED PARTIES
TOTAL RELATED
PARTIES
IMPACT
ON THE TOTAL
Non-current financial
assets
5,367 5,247 - - 5,247 97.76%
Trade receivables 35,158 6,166 12 - 6,178 17.57%
Tax receivables 2,377 - 1,084 - 1,084 45.60%
Current financial
assets
5,874 1,600 - - 1,600 27.24%
Trade payables 18,945 3,895 - 5 3,900 20.59%
TOTAL 2017 SUBSIDIARIES GIUSEPPE
SALERI SAPA
OTHER
RELATED PARTIES
TOTAL RELATED
PARTIES
IMPACT
ON THE TOTAL
Non-current financial
assets
1,848 1,668 - - 1,668 90.26%
Trade receivables 31,154 1,209 - - 1,209 3.88%
Tax receivables 2,230 - 1,084 - 1,084 48.60%
Current financial
assets
1,788 1,000 - - 1,000 55.93%
Trade payables 16,573 510 - 2 512 3.09%
Current financial
payables
2,100 2,100 - - 2,100 100%

Impact of related-party transactions on income statement items

TOTAL 2018 SUBSIDIARIES GIUSEPPE
SALERI SAPA
OTHER
RELATED PARTIES
TOTAL RELATED
PARTIES
IMPACT
ON THE TOTAL
Revenue 110,065 11,520 - - 11,520 10.46%
Other income 2,985 800 40 - 840 28.14%
Materials 45,085 1,417 - - 1,147 3.14%
Services 27,540 3,991 - 22 4,013 14.57%
Capital gains on
non-current assets
496 467 - - 467 94.15%
Other operating
costs
1,852 640 - - 640 34.56%
Financial income 123 119 - - 119 96.75%
TOTAL 2017 SUBSIDIARIES GIUSEPPE
SALERI SAPA
OTHER
RELATED PARTIES
TOTAL RELATED
PARTIES
IMPACT
ON THE TOTAL
Revenue 115,687 10,239 - - 10,239 8.85%
Other income 2,648 414 10 - 424 16%
Materials 46,555 1,548 - - 1,548 3.33%
Services 27,604 3,966 - 20 3,986 14.44%
Capital gains on
non-current assets
98 97 - - 97 99.58%
Write-downs of
non-current assets
682 682 - - 682 100%
Financial income 89 80 - - 80 89.89%
Financial expenses 482 2 - - 2 0.46%

Relations with subsidiaries mainly consist of:

  • trade relations, relating to the purchase and sale of semi-processed goods or finished products with Sabaf do Brasil, Faringosi Hinges, Sabaf Turkey and Sabaf Kunshan Trading;
  • sales of machinery to Sabaf do Brasil and Sabaf Turkey, which generated the capital gains highlighted;
  • charging for the provision of intra-group technical, commercial and administrative services;
  • rental of property from Sabaf Immobiliare;
  • intra-group loans;
  • group VAT.

Transactions with the shareholder, Giuseppe Saleri S.a.p.A., comprise:

  • administration services provided by Sabaf S.p.A. to Giuseppe Saleri S.a.p.A.;
  • transactions as part of the domestic tax consolidation scheme until 2016, which generated the receivables shown in the tables.

Related-party transactions are regulated by specific contracts regulated at arm's length conditions.

38. SIGNIFICANT NON-RECURRING EVENTS AND TRANSACTIONS

Pursuant to the CONSOB memorandum of 28 July 2006, note that no significant non-recurring events or transactions, as defined by the memorandum, took place in 2018.

39. ATYPICAL AND/OR UNUSUAL TRANSACTIONS

Pursuant to CONSOB memorandum of 28 July 2006, the Company declares that no atypical and/or unusual transactions as defined by the CONSOB memorandum were executed during 2018.

40. COMMITMENTS

Guarantees issued

Sabaf S.p.A. also issued sureties to guarantee mortgage loans granted by banks to employees for a total of € 4,734,000 (€ 5,145,000 at 31 December 2017).

41. FEES TO DIRECTORS, STATUTORY AUDITORS AND EXECUTIVES WITH STRATEGIC RESPONSIBILITIES

Fees to directors, statutory auditors and executives with strategic responsibilities are described in the Report on Remuneration that will be presented to the shareholders' meeting called to approve these separate financial statements.

42. SHARE-BASED PAYMENTS

In order to adopt a medium and long-term incentive instrument for directors and employees of the Sabaf Group, on the proposal of the Remuneration and Nomination Committee, the Board of Directors prepared a specific free allocation plan of shares (the "Plan") with the characteristics described below. The Plan was approved by the Shareholders' Meeting on 8 May 2018 and the related Regulations by the Board of Directors on 15 May 2018.

Purpose of the plan

The Plan aims to promote and pursue the involvement of the beneficiaries whose activities are considered relevant for the implementation of the contents and the achievement of the objectives set out in the Business Plan, foster loyalty development and motivation of managers, by increasing their entrepreneurial approach as well as align the interests of management with those of the Company's shareholders more closely, with a view to encouraging the achievement of significant results in the economic and asset growth of the Company.

Beneficiaries of the plan

The Plan is intended for persons who hold or will hold key positions in the Company and/or its Subsidiaries, with reference to the implementation of the contents and the achievement of the objectives of the 2018-2020 Business Plan. The Beneficiaries are divided into two groups:

  • Cluster 1: Beneficiaries already identified in the Plan or who will be identified by the Board of Directors by 30 June 2018 on the Shareholders' Meeting authority.
  • Cluster 2: Beneficiaries who will be identified by the Board of Directors from 1 July 2018 to 30 June 2019 on the Shareholders' Meeting authority. On 15 May 2018, the Board of Directors identified the Beneficiaries of Cluster

1 of the Plan to whom a total of 185,600 rights have been assigned.

Subject-matter of the plan

The subject-matter of the Plan is the free allocation to the Beneficiaries of a maximum of 370,000 Rights, each of which entitles them to receive free of charge, under the terms and conditions provided for by the Regulations of the Plan, 1 Sabaf S.p.A. Share.

The free allocation of Sabaf S.p.A. shares is conditional, among other things, on the achievement, in whole or in part, with progressiveness, of the business objectives related to the ROI, EBITDA and TSR indicators.

Deadline of the Plan

The Plan expires on 31 December 2022 (or on a different subsequent date set by the Board of Directors).

Fair Value measurement methods

Considering the allocation mechanism described above, it was necessary to measure at fair value the rights assigned to receive shares of the company.

194

The main assumptions made at the beginning of the vesting period of the plan are illustrated below:

FAIR VALUE MEASUREMENT METHODS - RIGHTS RELATING O OBJECTIVES MEASURED IN ROI
2018 2019 2020 2018-2020
Share price at the start of the vesting period 19.48 19.48 19.48 19.48
Risk free rate -0.2846% -0.1641% -0.0497% -0.0497%
Expected volatility 31% 29% 27% 29%
Dividend yield 2.30% 2.30% 2.30% 2.30%
Strike Price 19.48 19.48 19.48 19.48
6.83
Total value on ROI
Rights on ROI 33.40% Fair Value 2.28
FAIR VALUE MEASUREMENT METHODS - RIGHTS RELATING TO OBJECTIVES MEASURED IN EBITDA
2018 2019 2020 2018-2020
Share price at the start of the vesting period 19.48 19.48 19.48 19.48
Risk free rate -0.2846% -0.1641% -0.0497% -0.0497%
Expected volatility 31% 29% 27% 29%
Dividend yield 2.30% 2.30% 2.30% 2.30%
Strike Price 19.48 19.48 19.48 19.48
Total value on EBITDA 8.97
Rights on EBITDA 33.30% Fair Value 2.99
FAIR VALUE MEASUREMENT METHODS - RIGHTS RELATING TO OBJECTIVES MEASURED IN TSR
2018 2019 2020
Share price at the start of the vesting period 19.48 19.48 19.48
Risk free rate -0.2846% -0.1641% -0.0497%
Expected volatility 31% 29% 27%
Dividend yield 0.00% 0.00% 0.00%
Strike Price 22.61 25.32 28.34
Total value on TSR 6.00
Rights on TSR 33.30% Fair Value 2.00
Fair Value per share at initial date of the vesting period 7.27

In line with the date on which the beneficiaries became aware of the assignment of the rights and terms of the plan, the grant date was set at 15 May 2018, the accounting impacts of the plan for the first half of 2018 are illustrated in Note 13 and Note 27 of these Financial statements.

Summary of public grants pursuant to Article 1, paragraphs 125-129, Italian Law no. 124/2017

In compliance with the requirements of transparency and publicity envisaged pursuant to Italian Law no. 124 of 4 August 2017, article 1, paragraphs 125- 129, which imposed on companies the obligation to indicate in the explanatory notes "grants, contributions, and in any case economic advantages of any kind", the following are the details of the relative amounts, accounted for "on a cash basis".

STATUTORY
REFERENCES
CONTRIBUTION
VALUE
DISBURSING
SUBJECT
Patent Box 1,307 Italian State
Super ammortamento
(Super amortisation)
179 Italian State
Energy-intensive
contributions
509 Italian State
Total 1,995

Patent Box:

concerning the reduced taxation of income from intangible assets, the reference regulations of which are contained in the 2015 Stability Law (Italian Law 23/12/2014 no.190) Articles from 37 to 45.

Super ammortamento (Super amortisation):

it allows an over-estimation of 130% of the newly purchased or leased instrumental investments, the reference regulations of which are contained in Law no. 205 of 27 December 2017.

Energy-intensive contributions:

Accessible grants for companies that consume a lot of electricity, whose regulatory reference is the MISE Decree of 21 December 2017.

List of investments with additional information required by CONSOB (communication DEM6064293 of 28 July 2006)

IN SUBSIDIARIES 1
COMPANY NAME REGISTERED
OFFICES
SHARE
CAPITAL AT
31 DECEMBER
2018
SHAREHOLDERS OWNERSHIP
%
SHAREHOLDERS'
EQUITY
AT 31 DECEMBER
2018
2018
PROFIT
(LOSS)
Faringosi Hinges s.r.l. Ospitaletto (BS) EUR 90,000 Sabaf S.p.A. 100% EUR 7,248,309 EUR 996,255
Sabaf Immobiliare s.r.l. Ospitaletto (BS) EUR 25,000 Sabaf S.p.A. 100% EUR 21,341,974 EUR 759,565
Sabaf do Brasil Ltda Jundiaì (Brazil) BRL 24,000,000 Sabaf S.p.A. 100% BRL 48,305,068 BRL
6,954,784
Sabaf US Corp. Plainfield (USA) USD 100,000 Sabaf S.p.A. 100% USD -28,342 USD 51,140
Sabaf Appliance
Components
(Kunshan) Co., Ltd.
Kunshan
(China)
EUR 4,400,000 Sabaf S.p.A. 100% CNY -4,347,931 CNY
-4,407,939
Sabaf Beyaz Esya
Parcalari Sanayi Ve
Ticaret Limited Sirteki
Manisa (Turkey) TRY 28,000,000 Sabaf S.p.A. 100% TRY 139,948,685 TRY
67,735,385
Sabaf Appliance
Components Trading
(Kunshan) Co., Ltd. in
liquidation
Kunshan
(China)
EUR 200,000 Sabaf S.p.A. 100% CNY 1,955,552 ----
A.R.C. s.r.l. Campodarsego
(PD)
EUR 45,000 Sabaf S.p.A. 70% EUR 5,289,518 EUR 655,460
Sabaf S.p.A. 30%
Okida Elektronik
Sanayi ve Tickaret A.S
Istanbul
(Turkey)
TRY 5,000,000 Sabaf Beyaz Esya
Parcalari Sanayi
Ve Ticaret Limited
Sirteki
70% TRY 34,726,075 TRY
27,193,127

Other significant equity investments

None.

196

1Values taken from the separate financial statements of subsidiaries, prepared in accordance with locally applicable accounting standards

Origin, possibility of utilisation and availability of reserves

DESCRIPTION AMOUNT POSSIBILITY
OF UTILISATION
AVAILABLE
SHARE
AMOUNT SUBJECT
TO TAXATION FOR
THE COMPANY IN THE CASE
OF DISTRIBUTION
CAPITAL RESERVE:
Share premium reserve 10,002 A, B, C 10,002 0
Revaluation reserve, Law
413/91
42 A, B, C 42 42
Revaluation reserve, Law
342/00
1,592 A, B, C 1,592 1,592
RETAINED EARNINGS:
Legal reserve 2,307 B 0 0
Other retained earnings 58,657 A, B, C 58,657 0
VALUATION RESERVE:
Post-employment benefit
actuarial reserve
(456) 0 0
Reserve for stock grant plan 321 0 0
TOTAL 72,465 70,293 1,634

KEY:

A. for share capital increase

B. to hedge losses

C. for distribution to shareholders

Statement of revaluations of equity assets at 31 December 2018

GROSS VALUE CUMULATIVE
DEPRECIATION
NET VALUE
Law 72/1983 137 (137) 0
1989 merger 516 (467) 49
Investment property Law 413/1991 47 (43) 4
1994 merger 1,483 (1,091) 392
Law 342/2000 2,870 (2,454) 416
5,053 (4,192) 861
Law 576/75 205 (205) 0
Plant and machinery Law 72/1983 2,219 (2,219) 0
1989 merger 6,140 (6,140) 0
1994 merger 6,820 (6,820) 0
15,384 (15,384) 0
Industrial and commercial equipment Law 72/1983 161 (161) 0
Other assets Law 72/1983 50 (50) 0

TOTAL 20,648 (19,787) 861

GENERAL INFORMATION

Sabaf S.p.A. is a company organised under the legal system of the Republic of Italy.

APPENDIX

Information as required by Article 149-duodecies of the CONSOB Issuers' Regulation

The following table, prepared pursuant to Article 149-duodecies of the CONSOB Issuers' Regulation, shows fees relating to 2018 for auditing services and for services other than auditing provided by the Independent Auditor. No services were provided by entities belonging to the network.

(€/000) PARTY PROVIDING
THE SERVICE
FEES PERTAINING
TO THE 2018 FINANCIAL YEAR
Audit EY S.p.A. 20
Certification services EY S.p.A. ---
Other services EY S.p.A. 16 2
Total 36

CERTIFICATION OF SEPARATE FINANCIAL STATEMENTS pursuant to Article 154-bis of Italian Legislative Decree 58/98

Pietro Iotti, the Chief Executive Officer, and Gianluca Beschi, the Financial Reporting Officer of Sabaf S.p.A., have taken into account the requirements of Article 154-bis, paragraphs 3 and 4, of Legislative Decree 58 of 24 February 1998 and can certify:

  • the adequacy, in relation to the business characteristics and
  • the actual application

of the administrative and accounting procedures for the formation of the separate financial statements during the 2018 financial year.

They also certify that:

  • the separate financial statements:
  • were prepared in accordance with the international accounting policies recognised in the European Community in accordance with EC regulation 1606/2002 of the European Parliament and Council of 19 July 2002 and with the measures issued in implementation of Article 9 of Italian Legislative Decree 38/2005;
  • are consistent with accounting books and records;
  • provide a true and fair view of the financial position and performance of the issuer;
  • the report on operations contains a reliable analysis of the performance and results of operations and the situation at the issuer, along with a description of the key risks and uncertainties to which it is exposed.

Ospitaletto, 26 March 2019

Chief Executive Officer

Pietro Iotti

The Financial Reporting Officer Gianluca Beschi

Key Audit Matters
-- ------------------- --

204

205

Report of the Board of Statutory Auditors to the Shareholders' Meeting of SABAF S.p.A.

in accordance with Art. 2429, paragraph 2 of the Italian Civil Code and Art. 153 of Italian Legislative Decree no. 58/1998

To the Shareholders' Meeting of the Company SABAF S.p.A.

Introduction

The Board of Statutory Auditors of SABAF S.p.A. (hereinafter also "SABAF" or "Company"), pursuant to Art. 153 of Italian Legislative Decree no. 58 of 1998 (hereinafter also TUF) and Art. 2429, paragraph 2 of the Italian Civil Code, is called upon to report to the Shareholders' Meeting called to approve the Financial Statements on the supervisory activity carried out during the financial year in the performance of its duties, also in the capacity of "internal control and audit committee", on any omissions and reprehensible facts found and on the results of the financial year, as well as to formulate proposals regarding the Financial Statements, the approval thereof and matters falling within its competence.

Note, first of all, that the Board of Directors decided to make use of the longer term envisaged in Art. 2364 of the Italian Civil Code and Art. 8 of the Articles of Association for the call of the Shareholders' Meeting to approve the 2018 financial statements, owing to the existence of the relative conditions. The financial statements report is in any case made available to the public in full within the terms of Art. 154-ter of the TUF (within four months from the end of the financial year). The decision was taken by the Board, as explained in the Report on Operations, as SABAF is required to prepare the consolidated financial statements, in consideration of requirements related to the relevant obligations and fulfilments.

During the year ended 31 December 2018 and up to date, the Board of Statutory Auditors carried out its supervisory activities in compliance with Law provisions, Rules of Behaviour of the Board of Statutory Auditors of listed companies issued by the Italian Board of Certified Public Accountants and Bookkeepers, the CONSOB provisions on corporate controls, the Corporate Governance Code, as well as by the provisions contained in Art. 19 of Italian Legislative Decree 39/2010.

The financial statements of SABAF were prepared in accordance with the IAS/IFRS international accounting standards issued by the International Accounting Standards Board (IASB) and approved by the European Union, as well as in accordance with the provisions issued by CONSOB in implementation of Article 9, paragraph 3, of Italian Legislative Decree 38/2005.

The Company's Financial Statements were prepared in accordance with the law and accompanied by the documents required by the Italian Civil Code and the TUF. Moreover, in accordance with law provisions, the Company prepared the Consolidated financial statements and the Consolidated disclosure of non-financial information for the year 2018.

The Board of Statutory Auditors acquired the information necessary for the performance of the supervisory duties assigned to it by attending the meetings of the Board of Directors and the Board Committees, the hearings of the Company's and the Group's management, the information acquired from the competent company structures, as well as through the additional control activities carried out.

Appointment and Independence of the Board of Statutory Auditors

The Board of Statutory Auditors in office at the date of this Report was appointed by the Shareholders' Meeting of 8 May 2018 in the persons of Alessandra Tronconi (Chairman), Luisa Anselmi (Statutory Auditor), Mauro Giorgio Vivenzi (Statutory Auditor), as well as Paolo Guidetti and Stefano Massarotto (Alternate Auditors). The control body will remain in office for three financial years and will expire on the date of the Shareholders' Meeting called to approve the Financial Statements for the year 2020.

The appointment was made on the basis of two lists submitted by the Shareholders Giuseppe Saleri S.a.p.a and Quaestio Capital SGR S.p.A. respectively, in compliance with the applicable law, regulatory and statutory provisions. The Chairman of the Board of Statutory Auditors and one Alternate Auditor were drawn from the list that obtained the lowest number of votes.

The composition of the Board of Statutory Auditors complies with the gender distribution criterion set forth in Art. 148 of Italian Legislative Decree no. 58 of 1998.

At the time of its appointment and subsequently on 15 May 2018, the Board of Statutory Auditors checked the existence of the independence requirement as part of the broader process of self-assessment of the control body pursuant to Standard Q.1.1 of the Rules of Behaviour of listed companies; the check was carried out on the basis of the criteria envisaged by the aforesaid Standards and by the Corporate Governance Code applicable to independent directors.

The outcome of the check was communicated (pursuant to Art. 144-novies, paragraph 1-ter of CONSOB Regulation no. 11971 of 1999, Art. 8.C.1 of the Corporate Governance Code and Standard Q.1.1 of the Rules of Behaviour of listed companies) to the Board of Directors, which issued the relevant press release on 26 June 2018.

This assessment was carried out again on 12 March 2019 and consequently communicated to the Board of Directors, which disclosed it in the Report prepared pursuant to Art. 123 bis of the TUF.

Supervision and control of the Board of Statutory Auditors

Supervisory activity on compliance with the law and articles of association

In carrying out its duties, the Board of Statutory Auditors carried out the supervisory activities required by Art. 2403 of the Italian Civil Code, Art. 149 of Italian Legislative Decree No. 58 of 1998, Art. 19 of Italian Legislative Decree No. 39/2010, CONSOB recommendations on corporate controls and the activities of the Board of Statutory Auditors and referring to the indications contained in the Corporate Governance Code, as well as the Rules of Behaviour of the Board of Statutory Auditors of listed companies.

Therefore, as part of its functions, the Board of Statutory Auditors:

  • attended the meetings of the Shareholders and Board of Directors, monitoring compliance with the statutory, legislative and regulatory provisions regulating the operation of the Company's bodies as well as compliance with the principles of proper management;
  • supervised, for what of direct concern, the adequacy of the Company's organisational structure and compliance with the principles of proper management, through direct observation, gathering information from heads of the corporate functions and meetings with the Independent auditors to exchange data and information;
  • assessed and supervised the adequacy of the internal control system and the administrative and accounting system, as well as its reliability in providing a fair presentation of operational transactions, through the information of the heads of the respective functions, the examination of company documents and the analysis of the results of the work carried out by the Independent Auditors;
  • held 11 meetings during the year, lasting approximately 2 hours, and also attended all the meetings of the Board of Directors, as well as of the board committees (Control and Risk Committee, Remuneration and Nomination Committee);
  • supervised the adequacy of the reciprocal flow of information between SABAF and its subsidiaries pursuant to Art. 114, paragraph 2, of Italian Legislative Decree no. 58 of 1998, ensured by the instructions issued by the Company's management to Group companies;
  • supervised compliance with the rules of "Market abuse", "Protection of savings" and "Internal Dealing", with a special reference to the processing of inside information and the procedure for the dissemination of statements and information to the public. The adjustment of the procedure adopted by the Company for the management of inside and relevant information, drawn up in the light of CONSOB Guidelines no. 1/2017, was monitored;
  • supervised the implementation by SABAF of the new regulations deriving from the entry into force of European Regulation no. 2016/679 on the protection of personal data.

Moreover, the Board:

• obtained from the Directors adequate information on the business carried on and major economic and financial operations carried out by the Company and its subsidiaries pursuant to Art. 150, paragraph 1 of the TUF. In this regard, the Board of Statutory Auditors paid special attention to the fact that the transactions approved and implemented complied with the law and the Articles of Association and were not imprudent or risky, in contrast with the resolutions adopted by the Shareholders' Meeting, in potential conflict of interest or such as to compromise the integrity of the Company's assets;

  • held meetings with representatives of the Independent Auditors pursuant to Art. 150, paragraph 3 of the TUF and there were no significant data and/ or information to be reported;
  • had exchanges of information with corresponding control bodies (if any) of the companies directly or indirectly controlled by SABAF S.p.A. pursuant to Art. 151, paragraph 1 and 2 of the TUF;
  • supervised the procedures for effective implementation of the corporate governance rules envisaged in the Corporate Governance Code complied with, as adequately represented in the Report on Corporate Governance and Ownership Structure, in compliance with Art. 124-ter of the TUF and Art. 89-bis of the Issuers' Regulations;
  • checked, in relation to the periodic assessment to be carried out pursuant to Application Principle 3.C.5 of the Corporate Governance Code, as part of the supervision of the procedures for effective implementation of the corporate governance rules, the correct application of the assessment criteria and procedures adopted by the Board of Directors, with regard to the positive assessment of the independence of the Directors.

As required by Application Principle 1.C.1, letter g) of the Corporate Governance Code, the Board of Directors expressed its assessment of the size and composition of the Board and its operation, as well as the size, composition and operation of the board committees. The assessment - carried out on the basis of the results of a self-assessment questionnaire - used the assessment criteria already adopted in the previous year, filled in by all the members of the Board of Directors.

The Board also acknowledges that it has issued a favourable opinion:

  • on the Policy on the composition of corporate bodies prepared pursuant to Art. 123-bis, paragraph 2, letter d-bis of the TUF;
  • on the appointment of the manager responsible for preparing the accounting documents;
  • on the appointment and remuneration to be assigned to the head of the Internal Audit Department as required by Application Principle 7.C.1 of the Corporate Governance Code;
  • at the suggestion for remuneration of directors holding special positions, pursuant to Art. 2389 of the Italian Civil Code, also in the light of the assessments of the Remuneration and Nomination Committee; the Board of Statutory Auditors also certified the consistency of the 2018 - 2020 Stock Grant Plan in favour of directors and employees of the Company and its subsidiaries and of the related Implementation Regulations with the Company's Remuneration Policy. The Board also expressed a favourable opinion on the Regulations for the implementation of the Stock Grant Plan;
  • with regard to the annual Audit Plan prepared by the Head of the Internal Audit Department.

The Board of Statutory Auditors also gave its consent, pursuant to Art. 2426, paragraph 1, number 5, of the Italian Civil Code, to the recognition in the financial statements of development costs with a multi-year use of € 284,000.

Supervisory activity on the adequacy of the administrative and accounting system and the auditing activity

Pursuant to Art. 19 of Italian Legislative Decree 39/2010 (Consolidated External Audit Act), the Board of Statutory Auditors is required to supervise:

  • the financial reporting process;
  • the effectiveness of the internal control and risk management systems;
  • the External audit of annual accounts and consolidated accounts;
  • the independence of the Independent Auditors, specifically as far as the provision of non-audit services is concerned.

The Board of Statutory Auditors carried out its activities in collaboration with the Control and Risk Committee in order to coordinate their responsibilities and avoid overlapping of activities.

Financial reporting process

The Board of Statutory Auditors supervised the existence of rules and procedures relating to the process of formation and dissemination of financial information. In this regard, it should be noted that the Report on Corporate Governance and Ownership Structure illustrates how the Group defined its Internal Control and Risk Management System in relation to the financial reporting process at the consolidated level. The Financial Reporting Officer is Gianluca Beschi.

The Financial Reporting Officer is supported by the Internal Audit Department to check the operation of the administrative and accounting procedures through control testing.

The Board of Statutory Auditors acknowledges that it has received adequate information on the monitoring of business processes with an administrative and accounting impact within the Internal Control System, carried out both during the year in relation to the regular management reports, and during the closing of the accounts for the preparation of the Financial Statements, in compliance with the monitoring and certification requirements to which SABAF S.p.A. is subject pursuant to Italian Law no. 262/2005. In particular, the Board of Statutory Auditors acknowledged the Risk Assessment for 2018, as well as the periodic update on testing activities pursuant to Italian Law no. 262/2005.

The adequacy of the administrative and accounting system was also assessed through the acquisition of information from the heads of the respective departments and the analysis of the results of the work carried out by the Independent Auditors. Note that during the 2018 financial year no updates were made to the administrative and accounting procedures prepared pursuant to Italian Law 262/2005 and adopted by SABAF.

No particular critical issues or elements hindering the issue of the certification by the Financial Reporting Officer and by the Chief Executive Officer concerning the adequacy of the administrative and accounting procedures for the preparation of the financial statements of SABAF S.p.A. and the Consolidated Financial Statements for the year 2018 emerged.

The Board of Statutory Auditors supervised compliance with the regulations related to the preparation and publication of the Half-Yearly Report and the Interim Management Reports, as well as the settings given to them and the correct application of the accounting standards, also using the information obtained from the Independent Auditors.

Furthermore, it is acknowledged that:

  • the Independent Auditors appointed to carry out the external audit currently in office, EY S.p.A., were appointed for the 2018-2026 period at the Shareholders' Meeting held on 8 May 2018: the procedure for the appointment was carried out in compliance with the provisions of Article 16 of Regulation (EU) 2014/537. The Board of Statutory Auditors in office at that time submitted to the Board of Directors a reasoned recommendation containing the name of two Independent Auditors suitable to replace the one that is due to expire, expressing preference for one of them. This recommendation was developed at the end of a detailed selection procedure that was carried out in compliance with the provisions contained in Regulation (EU) 2014/537;
  • the Independent Auditors appointed to audit the company illustrated to the Board of Statutory Auditors the checks carried out and did not report any findings in the periodic meetings with the Board of Statutory Auditors;
  • the Board of Statutory Auditors supervised the auditing of the annual and consolidated financial statements, obtaining information and periodically discussing with the Independent Auditors, also in the light of the recent changes introduced with regard to the Independent Auditors' report.

In particular, all the main phases of the audit activity were illustrated to the Board of Statutory Auditors, including the identification of the risk areas, with a description of the related audit procedures adopted; moreover, the main accounting principles applied by SABAF have been followed.

The Board also acknowledges that the Independent Auditors EY S.p.A. issued their opinions on the Consolidated Financial Statements and the Separate Financial Statements today (April 12, 2019) and also issued on the same date the Additional Report to the Internal Control and Audit Committee pursuant to Article 11 of Regulation (EU) 2014/537.

The reports on the Separate financial statements and the Consolidated financial statements do not give rise to any observations or requests for information.

It is also acknowledged that the Independent Auditors expressed, in the reports mentioned above, a positive opinion with regard to consistency with the financial statements and compliance with the law with reference:

  • to the Management report;
  • to the information referred to in Art. 123-bis, paragraph 4, Italian Legislative Decree 58/98 contained in the Report on corporate governance and ownership structure.

In the audit work, a special attention was paid to the key aspects relating to the impairment test and Purchase Price Allocation. Moreover, the reports issued by the Independent Auditors do not reveal any significant shortcomings in the Company's internal control system for financial information and accounting system.

The Board of Statutory Auditors supervised the independence of the Independent Auditors EY S.p.A., verifying the type and extent of services other than auditing with reference to SABAF and its subsidiaries and obtaining explicit confirmation from the Independent Auditors that the independence requirement was met. The statement on independence has been included, pursuant to Art. 11, paragraph 2, letter a), of Regulation (EU) 2014/537, in the above-mentioned Additional Report.

The fees paid by the SABAF Group to the Independent Auditors and to the companies belonging to the network of the Independent Auditors themselves are as follows:

ASSETS AMOUNT EUR/000
Audit 82
Certification services -
Other services 16
Total 98

In the light of the above, the Board of Statutory Auditors considers that the Independent Auditors EY S.p.A. meet the requirement of independence.

Note that in 2018 there were changes in the scope of the audit, in relation to the inclusion in the consolidation area of the company Okida Elektronik Sanayi Limited Sirket as a result of its acquisition in September by the Group. Okida was consolidated as from 4 September 2018, contributing to the Group's total turnover of approximately € 4 million.

Supervisory activity on the adequacy of the internal control system and the organisational structure

The Board of Statutory Auditors assessed and supervised the adequacy of internal control and the effectiveness of the internal control and risk management systems. The Board of Statutory Auditors acknowledges that it has verified the most significant activities carried out by the overall internal control and risk management system by attending the meetings of the Control and Risk Committee (also with functions of Committee for related-party transactions) attended by:

  • members of the Control and Risk Committee;
  • members of the Board of Statutory Auditors;
  • the Chief Executive Officer and director in charge of the internal control and risk management system;
  • the Internal Audit department and its Head;
  • the Financial Reporting Officer.

The Board of Statutory Auditors also acknowledges that it attended the periodic meetings among the Company's control bodies attended by:

  • members of the Control and Risk Committee;
  • members of the Board of Statutory Auditors;
  • the Independent Auditors;
  • the Chief Executive Officer and Director in charge of the internal control system;
  • the Financial Reporting Officer;
  • the Internal Audit department and its Head;
  • the Supervisory Body.

In particular, as part of these activities, the Board of Statutory Auditors acknowledges that it has received and examined:

  • the periodic reports on the activities carried out, prepared by the Control and Risks Committee and the Internal Audit department;
  • the reports drawn up at the end of the verification and monitoring activities by the Internal Audit department, with the relative results, the recommended actions and the controls on the implementation of the aforesaid actions;

• periodic updates on the development of the risk management process, the outcome of the monitoring and assessment activities carried out by Internal Audit and the objectives achieved.

The Board of Statutory Auditors then reviewed every six months the periodic reports on the activities carried out by the Supervisory Body and examined the activity plan and the budget allocated for 2018. Similarly, the Board of Statutory Auditors acknowledged the compliance with the provisions of Italian Legislative Decree no. 231/2001 and the activity plan for 2018, examining and agreeing with the amendments made during the year to the Organisation and Management Model pursuant to Italian Legislative Decree no. 231/2001.

Following the activities carried out during the 2018 financial year, as detailed above, the Board of Statutory Auditors shared the positive assessment expressed by the Control and Risk Committee with regard to the adequacy of the Internal Control and Risk Management System.

With reference to the internal control system, the Board of Statutory Auditors acknowledges that, after the 2018 reporting period, on 5 February 2019, Marcandalli, Head of the Internal Audit department and member of the Supervisory Body, resigned, effective as from 1 May 2019. A new department head is currently being selected.

Supervisory activity on compliance the principles of proper management

During 2018, in line with the 2018-2022 Business Plan, SABAF carried out an important operation aimed at achieving growth through acquisitions of the Group: as described in the Report on Operations, in September 2018 the Group purchased 100% of Okida Elektronik Sanayi Limited Sirket (30% directly from Sabaf S.p.A., the remaining 70% indirectly purchased through the Turkish subsidiary Sabaf Beyaz Esya), for a total investment of € 24.1 million. This transaction is considered strategic in that it allows the Group to implement its strategy of expanding its range of products in components for domestic appliances and acquiring expertise in the electronics sector.

In terms of ordinary operations, SABAF's activities continued in line with previous years and consisted of industrial activities, strategic and management coordination of the Group, the search for the optimisation of the Group's financial flows, as well as the search and selection of equity investments with the aim of accelerating the Group's growth.

The Sabaf Group also carried out organic investments of € 11.5 million mainly aimed at increasing the production capacity of special burners, completing the automation of production of light alloy valves and interconnection of production plants with management systems (Industry 4.0).

Moreover, following the supervision and control activities carried out during the year, the Board of Statutory Auditors can certify that:

  • during the course of the activity carried out, no omissions, irregularities or reprehensible or significant facts that would require reporting to the control bodies or mention in this Report emerged;
  • no reports were received by the Board of Statutory Auditors pursuant to Art. 2408 of the Italian Civil Code, nor has it received any complaints from third parties;

  • no transactions have been identified with third parties, intra-group and/ or related parties such as to highlight atypical and/or unusual profiles, in terms of content, nature, size and timing;

  • all the transactions and management choices adopted are inspired by the principle of correct information and reasonableness and comply with the 2018-2022 Business Plan approved by the Board of Directors.

Supervisory activity on implementation of the corporate governance rules

The Board of Statutory Auditors assessed the application of the corporate governance rules set out in the Corporate Governance Code that SABAF complies with and the relative level of compliance, also by analysing the Report on Corporate Governance and ownership structure and comparing its contents with what emerged during the general supervisory activity carried out during the year. Moreover, compliance with the obligation on the part of SABAF to inform the market in its report on corporate governance of its level of compliance with the Code itself was assessed, also in accordance with the provisions of Article 123 bis of the TUF. The Board of Statutory Auditors is of the opinion that the report on corporate governance was prepared in accordance with the provisions of Art. 123-bis of the TUF and the Corporate Governance Code and following the format made available by the Corporate Governance Committee of Borsa Italiana S.p.A.

Supervisory activities in relation to the Financial Statements, the Consolidated financial statements and the Consolidated disclosure of non-financial information

With regard to the Separate financial statements for the year ended 31 December 2018, the Consolidated financial statements for the year ended 31 December 2018 and the related Report on operations, note the following:

• the Board of Statutory Auditors ascertained, through direct audits and information obtained from the Independent Auditors, compliance with law provisions regulating their formation, the layout of the Financial statements, the Consolidated financial statements and the Report on Operations, and the financial statement formats adopted, certifying the correct use of the accounting standards described in the explanatory notes and the Report on operations. In particular, the Board of Statutory Auditors analysed the results of the impairment test carried out, in accordance with IAS 36, on the individual CGUs that coincide with the equity investments in Faringosi Hinges s.r.l., A.R.C. s.r.l. and Okida Elektronik ("Hinges" CGU for Faringosi Hinges s.r.l.; "Professional burners" CGU for A.R.C. s.r.l.; "electronic components" CGU for Okida Elektronik).

In particular, note that the test was carried out:

  • for the purposes of the Separate financial statements of Sabaf S.p.A. (and, in relation to Okida Elektronik, of Sabaf Turkey), to assess the recoverability of the amount of investments and

  • for the purposes of the Consolidated Financial Statements, to make sure that the net capital invested in the CGUs (including goodwill and other intangible assets deriving from the Okida acquisition) was lower than its recoverable amount.

In this regard, note that the Independent Auditors, in their reports, accurately described the audit procedures carried out with reference to the impairment tests, as "key aspects of the audit" and to which, therefore, the Board of Statutory Auditors refers. Therefore, the Board of Statutory Auditors supports the procedures adopted and the results obtained, which show values in use that are significantly higher than the carrying values of the equity investments and assets;

  • in pursuance of CONSOB Resolution 15519/2006, the effects of transactions with related parties are expressly indicated in the financial statements. In pursuance of this Resolution in the Explanatory Notes, it is specified that during the year there were no significant non-recurring events or operations and no transactions deriving from atypical and/or unusual operations were carried out;
  • the Financial statements are in keeping with the facts and information of which the Board of Statutory Auditors has become aware within its supervisory duties and its control and inspection powers;
  • as far as the Board of Statutory Auditors is aware, the Directors, when preparing the financial statements, did not depart from the law provisions pursuant to Art. 2423, paragraph 5 of the Italian Civil Code;
  • the Chief Executive Officer and the Financial Reporting Officer issued the certificate, pursuant to Art. 81-ter of CONSOB Regulation no. 11971/1999 as amended and Art. 154-bis of Italian Legislative Decree 58/1998 (TUF);
  • the Report on Operations complies with legal requirements and is consistent with the data and results of the Financial Statements; it provides the necessary information on the activities and significant transactions of which the Board of Statutory Auditors was informed during the year, on the main risks of the Company and its subsidiaries, on intra-group and related-party transactions, as well as on the process of adapting the corporate organisation to the principles of corporate governance, in accordance with the Corporate Governance Code for listed companies;
  • pursuant to the provisions of Art. 123-ter of Italian Legislative Decree 58/1998 (TUF), the Remuneration Report is presented to the Shareholders' Meeting: the Board of Statutory Auditors examined and agreed with the approach followed in preparing this report, at a joint meeting with the Remuneration Committee.

In relation to the presentation of the Consolidated disclosure of non-financial information, the Board of Statutory Auditors, in compliance with Italian Legislative Decree no. 254 of 30 December 2016, supervised compliance with the provisions set out in the decree itself and in CONSOB resolution no. 20267 of 18 January 2018 for the preparation of the statements in question, also acquiring the certification issued by the appointed auditor EY S.p.A. on 12 April 2019. This activity did not reveal any facts that could be reported in this report.

Supervisory activity on relationships with Subsidiaries and parent companies

The Board of Statutory Auditors supervised the adequacy of the instructions given by the Company to the subsidiaries, in accordance with Art. 114, paragraph 2 of Italian Legislative Decree 58/1998.

Periodic meetings with the management and the company in charge of Internal Audit did not reveal any critical elements to be reported in this report.

Finally, we acknowledged that to date no communications have been received from the Control Bodies of the Subsidiaries and/or parent companies containing findings to be noted in this report.

Supervisory activity on related-party transactions

In relation to the provisions of Art. 2391 bis of the Italian Civil Code, the Board of Statutory Auditors acknowledges that the Board of Directors adopted a procedure for the regulation of Related-Party Transactions, whose main objective is to define the guidelines and criteria for identifying related-party transactions and setting out roles, responsibilities and operating methods so as to guarantee, for such transactions, adequate information transparency and the related procedural and substantial correctness.

That procedure was prepared in compliance with what was established by the CONSOB Regulation on Related Parties (no. 17221 dated 21 March 2010) and was amended during the year by the Board of Directors on 25 September 2018.

The Board of Statutory Auditors supervised the effective application of the rules by the Company and has no observations to make in this regard in this Report.

Proposal to the Shareholders' Meeting

The Board of Statutory Auditors expresses its favourable opinion for the approval of the Separate financial statements as at 31 December 2018 and has no objections to make to the draft resolution presented by the Board of Directors as formulated in the Directors' Report on Operations.

Ospitaletto, 12 April 2019

The Board of Statutory Auditors

Chairman

Alessandra Tronconi

Statutory Auditor Luisa Anselmi

Statutory Auditor Mauro Vivenzi

Adapting to change

Sabaf experiences small and big transformations by learning from the past and looking to the future with an open and innovative vision, developing our qualities and improving performance. This creates growth and improvement possibilities.

Report on remuneration

pursuant to Article 123-ter of the TUF and Article 84-quater of the Issuers' Regulations

Section I - Remuneration policy.............................................................................. 215

Section II – Remuneration of the members of the board of directors and the board of statutory auditors and other executives with strategic responsibilities in 2018.............219

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SECTION I - REMUNERATION POLICY

Sabaf S.p.A.'s General Remuneration Policy (hereinafter also "remuneration policy"), approved by the Board of Directors on 22 December 2011 and updated on 20 March 2013, 4 August 2015 and 26 September 2017, defines the criteria and guidelines for the remuneration of members of the Board of Directors, Executives with strategic responsibilities and members of the Board of Statutory Auditors.

The remuneration policy was prepared:

  • pursuant to Article 6 of the Corporate Governance Code of listed companies, approved in March 2010 and subsequent amendments and supplements;
  • in line with Recommendations 2004/913/EC and 2009/385, which were incorporated into law with Article 123-ter of the Consolidated Law on Finance (TUF).

1. Corporate bodies and persons involved in preparing, approving and implementing the remuneration policy

SHAREHOLDERS' MEETING

  • Determines the remuneration due to the members of the Board of Directors, including a fixed amount and attendance fees
  • Resolves remuneration plans based on the allocation of financial instruments with regard to directors and employees
  • Gives a non-binding vote on the first section of the Report on Remuneration (Remuneration Policy)

BOARD OF DIRECTORS

  • At the suggestion of the Remuneration and Nomination Committee and subject to the opinion of the Board of Statutory Auditors, determines the fee for Directors holding specific positions
  • Defines the remuneration policy of Executives with strategic responsibilities
  • After obtaining the opinion of the Remuneration and Nomination Committee, resolves to sign Non-competition agreements with regard to the Chief Executive Officer and to executives
  • At the suggestion of the Remuneration and Nomination Committee, defines incentive plans based on short- and long-term variable remuneration to be assigned to the Chief Executive Officer and to the Executives with strategic responsibilities
  • At the suggestion of the Chief Executive Officer, defines the incentive plans based on short-term variable remuneration for company Management and other employees
  • At the suggestion of the Remuneration and Nomination Committee, resolves to assign non-monetary benefits to executives
  • Makes proposals to the Shareholders' Meeting on remuneration plans based on the allocation of financial instruments with regard to directors and employees
  • Prepares the Report on Remuneration pursuant to Article 123-ter of the Consolidated Law on Finance and Article 84-quater of the Issuers' Regulations

No independent experts or advisors contributed to the preparation of the policy, nor were the remuneration policies of other companies used for reference purposes.

The Board of Directors is responsible for properly implementing the remuneration policy.

REMUNERATION AND NOMINATION COMMITTEE

  • Makes proposals to the Board of Directors, in the absence of the persons directly concerned, for remuneration of the Chief Executive Officer and Directors holding specific positions
  • Examines, with the support of the Human Resources Department, the policy for the remuneration of executives, with a special attention to Executives with strategic responsibilities
  • Makes suggestions and proposals to the Board of Directors concerning the setting of targets on which the annual variable component and longterm incentives for the Chief Executive Officer and Executives with strategic responsibilities should be dependent, in order to ensure alignment with shareholders' long-term interests and the company's strategy
  • Assesses the level of achievement of the short- and long-term variable incentive targets of Directors and executives
  • Prepares the proposals to the Board of Directors of remuneration plans based on financial instruments
  • Assesses the adequacy, actual application and consistency of the remuneration policy, also with reference to the actual company performance, making suggestions and proposals for change
  • Follows the development of the regulatory framework of reference and best market practices on remuneration, getting inspired by them for formulating the remuneration policy and identifying aspects for improving the Report on Remuneration

The Remuneration and Nomination Committee currently in office comprises four non-executive members, the majority of them independent (Daniela Toscani, Stefania Triva and Alessandro Potestà), with the knowledge and experience in accounting, finance and remuneration policies that is deemed adequate by the Board of Directors.

BOARD OF STATUTORY AUDITORS

  • The Board of Statutory Auditors expresses the opinions required by the regulations in force on proposals for remuneration of Directors holding specific positions
  • The Board of Statutory Auditors, i.e. the Chairman of the Board of Statutory Auditors or another Statutory Auditor designated by him/her can attend the meetings of the Remuneration and Nomination Committee

HUMAN RESOURCES DEPARTMENT

Actually enacts what is decided upon by the Board.

2. Purpose of the remuneration policy

The Company's intention is that the Remuneration Policy:

  • ensures the competitiveness of the company on the labour market and attracts, motivates and increases the loyalty of persons with appropriate professional expertise;
  • protects the principles of internal equity and diversity;
  • brings the interests of the management into line with those of the shareholders;
  • favours the creation of sustainable value for shareholders in the medium to long term and maintains an appropriate level of competitiveness for the company in the sector in which it operates.

Attacts, motivates and increases the loyalty of PERSONS with appropriate professional expertise

Favours the creation of SUSTAINABLE VALUE for shareholders in the medium to long term

Brings the interests of the MANAGEMENT into line with those of the SHAREHOLDERS

Protects the principles of INTERNAL EQUITY and DIVERSITY

3. Remuneration policy guidelines and instruments

The definition of a fair and sustainable remuneration package takes into account three main tools:

  • Fixed remuneration
  • Variable remuneration (short- and medium- to long-term)
  • Benefits

Each remuneration component is analysed below.

FIXED ANNUAL COMPONENT

The fixed component of the remuneration of the Directors is such that it is able to attract and motivate individuals with appropriate expertise for the roles entrusted to them within the Board and is set with reference to the remuneration awarded for the same positions by other listed Italian industrial groups of a similar size.

The Shareholders' Meeting decides on the remuneration of the members of the Board of Directors, including a fixed amount and attendance fees.

With regard to the remuneration for Directors holding special offices, the Board of Directors, at the proposal of the Remuneration and Nomination Committee and subject to the opinion of the Board of Statutory Auditors, determines the additional fixed remuneration.

Directors who sit on committees formed within the Board (Internal Control and Risk Committee, Remuneration and Nomination Committee) are granted remuneration that includes a fixed salary and attendance fees intended to reward the commitment required of them.

Executives with strategic responsibilities are paid a fixed annual remuneration, determined so that it is sufficient in itself to guarantee an appropriate basic salary level, even in the event that the variable components are not paid owing to a failure to reach the targets.

The members of the Board of Statutory Auditors are paid a fixed remuneration, the amount of which is determined by the Shareholders' Meeting, at the time of their appointment.

INDEMNITY AGAINST THE EARLY TERMINATION OF EMPLOYMENT

There is an agreement for the Chief Executive Officer regulating ex ante the economic part concerning the early termination of the employment relationship. There are no agreements for other Directors or other Executives with strategic responsibilities regulating ex ante the economic part concerning the early termination of the employment relationship. For the end of the relationship for reasons other than just cause or justified reasons provided by the employer, it is the Company's policy to pursue consensual agreements to end the employment relationship, in accordance with legal and contractual obligations.

The Company does not provide directors with benefits subsequent to the end of their mandate.

The Company has entered into non-competition agreements with the Chief Executive Officer and with certain executives who report to him, the terms of which were approved by the Board of Directors, after obtaining the opinion of the Remuneration and Nomination Committee.

COMPONENTS CORPORATE OFFICES
OF THE REMUNERATION Executive
Directors
Non-Executive
Directors
Members
of committees
within the BoD
Executives
with strategic
responsibilities
Auditors
FIXED COMPONENTS Fixed remuneration
for the office
of Director
Fixed remuneration
for the office
of Director
Fixed remuneration
for Directors members
of committees
within the BoD
Collective National
Contract for Industrial
Fixed remuneration
Fixed remuneration
for Directors holding
special positions
Attendance fee Attendance fee Managers
INDEMNITY AGAINST
THE EARLY TERMINATION
OF EMPLOYMENT
Remuneration
for non-competition
agreement
(only for Chief
Executive Officer)
N/A N/A Remuneration
for non-competition
agreement
N/A

SHORT-TERM VARIABLE COMPONENT (ANNUAL)

The Board of Directors, at the suggestion of the Remuneration and Nomination Committee and in accordance with the budget, defines an MBO plan, for the benefit of:

• Executives with strategic responsibilities

TARGETS BENEFICIARIES

• other persons, identified by the Chief Executive Officer, among the managers who report directly to him or who report to the aforementioned managers.

This plan sets a common target (Group EBIT, which is considered to be the Group's main indicator of financial performance) and quantifiable and measurable individual targets economic-financial, technical-productive and/or socio-environmental in nature.

The targets of the Chief Executive Officer and of the Executives with strategic responsibilities are decided by the Board of Directors, at the suggestion of the Remuneration and Nomination Committee, in accordance with the budget.

The targets of the other beneficiaries of the incentive plans are defined by the Chief Executive Officer, in accordance with the budget.

ANNUAL MBO

Non-executive directors are not granted any variable remuneration.

LONG-TERM VARIABLE COMPONENT

In compliance with the Shareholders' Meeting resolution, at the suggestion of the Remuneration and Nomination Committee, and after obtaining the opinion of the Board of Statutory Auditors, the Board of Directors approves a longterm incentive plan based on financial instruments (stock grants).

The Beneficiaries, if not already identified in the Plan, are identified by the Board of Directors among the members of the Board of Directors and/or among the managers of the Company or its Subsidiary companies who hold or will hold key positions in the implementation of the Business Plan. In the case of the Chief Executive Officer and/or Executives with strategic responsibilities of the Company, the identification is made on the suggestion of the Remuneration and Nomination Committee.

The Board of Directors identifies the total number of rights to be assigned to each beneficiary (within the limits set by the Shareholders' Meeting). All or part of the shares are allocated by the Board of Directors at the end of the vesting period; for the Chief Executive Officer and Executives with strategic responsibilities, the allocation is made on the suggestion of the Remuneration and Nomination Committee.

The allocation of shares is related to predetermined (business and individual) performance targets measurable and linked to the creation of value for shareholders over the long term and extends over three years coinciding with the mandate of the Board of Directors (2018-2020).

STOCK GRANT PLAN

Related to the budget Related to the Business Plan

• EXECUTIVE DIRECTORS (excluding the Chairman)
• EXECUTIVES WITH STRATEGIC RESPONSIBILITIES
• OTHER MANAGERS PROPOSED
BY THE CHIEF EXECUTIVE OFFICER
• CHIEF EXECUTIVE OFFICER
• CFO
• OTHER MANAGERS IDENTIFIED BY THE BOD
who hold or will hold key positions
in the implementation of the Business Plan
• COMMON TARGET: GROUP EBIT
• INDIVIDUAL TARGETS: ECONOMIC/FINANCIAL
AND TECHNICAL AND PRODUCTIVE
• COMMON BUSINESS TARGETS: EBIT, ROI, TSR
• INDIVIDUAL PERFORMANCE TARGETS:
IDENTIFIED BY THE BOD FOR EACH BENEFICIARY
COMPONENTS CORPORATE OFFICES
OF THE REMUNERATION Executive directors and Other
executives with strategic
responsibilities
Other persons identified
by the CEO/BoD
VARIABLE
COMPONENTS
SHORT-TERM VARIABLE
COMPONENT
Annual MBO plan based
on achieving a common target
and individual targets
Annual MBO plan based
on achieving a common target
and individual targets
LONG-TERM VARIABLE
COMPONENT
Stock Grant Plan based on achieving
business targets and individual
performance targets
Stock Grant Plan based on achieving
business targets and individual
performance targets

BENEFICIARIES

TARGETS

NON-MONETARY BENEFITS

Third-party civil liability insurance policy: the Company has taken out a third-party civil liability insurance policy in favour of directors, statutory auditors and executives for unlawful acts committed in the carrying-out of their respective duties, in violation of obligations established by law and the Articles of Association, with the sole exclusion of deliberate intent. The taking-out of this policy is approved by the Shareholders' Meeting.

Life insurance policy and cover for medical expenses: the Company also provides a life insurance policy and cover for medical expenses (FASI) for executives, as established by the Collective National Contract for Industrial Managers; moreover, it has taken out an additional policy to cover medical expenses not covered by FASI reimbursements.

Company cars: at the suggestion of the Remuneration and Nomination Committee, the Board of Directors also assigns company cars to executives.

Accommodation costs: at the suggestion of the Remuneration and Nomination Committee, the Board of Directors can provide for housing to be made available to executives, for the possibility to reimburse the rent of the house or for the temporary reimbursement of the costs of accommodation in a hotel.

ENTRY BONUS

With the aim of attracting highly professional individuals, the Board may decide to give entry bonuses to newly hired executives.

CLAW BACK CLAUSES

As from 2018, the Company established mechanisms for the ex-post adjustment of the variable remuneration component or claw back clauses to demand the return of all or part of the variable components of remuneration paid out (or to withhold deferred sums), which were determined on the basis of data subsequently found to be clearly incorrect.

REMUNERATION FOR OFFICES IN SUBSIDIARIES

Directors and other executives with strategic responsibilities may be paid remuneration – exclusively as a fixed amount – for offices held in subsidiaries. In addition to the approval of the subsidiaries' corporate bodies, this remuneration is subject to the favourable opinion of the Remuneration and Nomination Committee.

COMPONENTS CORPORATE OFFICES
OF THE REMUNERATION Executive
Directors
Non-Executive
Directors
Executives
with strategic
responsibilities
Auditors
BENEFITS
AND
OTHER
COMPONENTS
NON-MONETARY
BENEFITS
Third-party liability
insurance policy
Third-party liability
insurance policy
Third-party liability
insurance policy
Life insurance policy
to cover medical expenses (FASI),
supplementary medical expenses
Company cars
Third-party liability
insurance policy
OFFICES
IN SUBSIDIARIES
Fixed remuneration
for offices in subsidiaries
N/A Fixed remuneration for offices
in subsidiaries
N/A

4. Remuneration of the Board of Directors, Chairman and Vice Chairmen of the Board of Directors, Chief Executive Officer, Executives with strategic responsibilities and Board of Statutory Auditors

REMUNERATION OF THE BOARD OF DIRECTORS

The Shareholders' Meeting is responsible for determining the annual gross remuneration (maximum amount) due to the Directors, including a fixed amount and attendance fees.

The members of the Board are covered by a third-party civil liability insurance policy for unlawful acts committed in the exercise of their respective duties, in violation of obligations established by law and the Articles of Association, with the sole exclusion of deliberate intent. The taking-out of this policy is approved by the Shareholders' Meeting.

REMUNERATION OF THE CHAIRMAN OF THE BOARD OF DIRECTORS AND VICE CHAIRMAN

No variable remuneration is paid to the Chairman and Vice Chairman of the Board of Directors, but only remuneration in addition to those of directors for special offices held.

REMUNERATION OF THE CHIEF EXECUTIVE OFFICER

The remuneration of the Chief Executive Officer includes the following components:

Fixed remuneration for the office of Director: the Chief Executive Officer is the recipient of the fixed remuneration for the office of Director (pursuant to Article 2389 paragraph I Italian Civil Code).

Third-party civil liability insurance policy: The Company has taken out a third-party civil liability insurance policy for unlawful acts committed in the carrying-out of their respective duties, in violation of obligations established by law and the Articles of Association, with the sole exclusion of deliberate intent. The taking-out of this policy is approved by the Shareholders' Meeting. Long-term variable component: the long-term incentive is dependent on the achievement of performance targets, proposed by the Remuneration and Nomination Committee to the Board of Directors, and extends over three years, coinciding with the mandate of the Board of Directors.

If the Chief Executive Officer is also assigned an executive management role within the Sabaf Group, the Board decides on the assignment of the following additional remuneration instruments:

• Fixed annual gross salary: the fixed remuneration is determined so that it is sufficient in itself to guarantee an appropriate basic salary level, even in the event that the variable components are not paid owing to a failure to reach the targets.

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  • Non-competition agreement: assignment of a fixed annual remuneration against the signing of a Non-competition Agreement with the Company.
  • Short-term variable component: annual incentive, dependent on the achievement of the targets envisaged by the MBO plan, approved by the Board of Directors at the suggestion of the Remuneration and Nomination Committee. On the occasion of the annual approval, the Board of Directors decides on the maximum amount of the annual variable component, the methods and timing for its payment.
  • Benefits: the benefits envisaged for the management of the Company can be assigned: Life insurance policy and cover for medical expenses, assignment of company car; reimbursement of the rent for the house.

REMUNERATION OF EXECUTIVES WITH STRATEGIC RESPONSIBILITIES

Fixed annual gross remuneration: employment relationships with Executives with strategic responsibilities are regulated by the Collective National Contract for Industrial Managers. In this regard, fixed remuneration is determined so that it is sufficient in itself to guarantee an appropriate basic salary level, even in the event that the variable components are not paid owing to a failure to reach the targets.

Short- and long-term variable components: Executives with strategic responsibilities are the recipients of short- and long-term incentive plans (ref. paragraph 3). At the time of approval of short- and long-term incentive plans, the Board of Directors is responsible for setting the maximum amounts of variable remuneration, the methods and timing for the payment of this remuneration.

Benefits: Executives with strategic responsibilities receive the benefits envisaged for the executives of the Company (Life insurance policy and cover for medical expenses; assignment of company car) and are covered by an occupational risk policy.

REMUNERATION OF THE BOARD OF STATUTORY AUDITORS

The amount of remuneration for Statutory Auditors is set by the Shareholders' Meeting, which establishes a fixed amount for the Chairman and the other Statutory Auditors.

The members of the Board are covered by a third-party civil liability insurance policy for unlawful acts committed in the exercise of their respective duties, in violation of obligations established by law and the Articles of Association, with the sole exclusion of deliberate intent. The taking-out of this policy is approved by the Shareholders' Meeting.

SECTION II – REMUNERATION OF THE MEMBERS OF THE BOARD OF DIRECTORS AND THE BOARD OF STATUTORY AUDITORS AND OTHER EXECUTIVES WITH STRATEGIC RESPONSIBILITIES IN 2018

This section, by name of Directors and Statutory Auditors:

  • describes each of the items that make up the remuneration, showing their consistency with the remuneration policy of Sabaf;
  • analytically illustrates the remuneration paid in the financial year under review (2018), for any reason and in any form, by the Company or by subsidiaries or affiliates, identifying any components of this remuneration that relate to activities undertaken in previous years to the year under review.

The components of the remuneration paid to directors for 2018

The remuneration paid to directors for 2018 consisted of the following components:

  • An annual fixed remuneration, approved by the Shareholders' meeting of 8 May 2018 that the Board of Directors decided to divide, in compliance with the maximum limit of €400,000.00 established by the Shareholders' Meeting, as follows:
  • €20,000 assigned to each director without distinction,
  • €10,000 assigned to each member of the committees set up within the Board itself (Internal Control and Risk Committee and Remuneration and Nomination Committee);
  • additional remuneration of €160,000 divided among the Chairman of the Board of Directors, Vice Chairman and Chief Executive Officer as detailed in the table below;
  • An attendance fee of €1,000, due to non-executive directors only, for every occasion on which they attend Board of Directors' meetings and the meetings of committees formed within the Board.

A fixed remuneration component for employment and a fixed remuneration for offices in subsidiaries are paid to executive directors appointed as executives.

With reference to variable components, which are intended only for executive directors (excluding the Chairman), the following is pointed out:

  • In relation to the annual variable incentive plan established for 2017, remuneration of €66,282 accrued in the previous financial year (and disbursed in 2018).
  • With reference to the annual incentive plan for 2018, the Chief Executive Officer Pietro Iotti accrued variable remuneration of €73,000, whereas the Director Gianluca Beschi accrued variable remuneration of €26,374, for the partial achievement of the targets of the 2018 MBO plan.

In implementation of the Policy in 2018, Sabaf introduced a stock grant plan aimed at the Group's executive directors and executives who hold or will hold key positions in the implementation of the Business Plan. Beneficiaries already identified in the Plan include the Chief Executive Officer and Director Gianluca Beschi. The assignment of shares is subject to the achievement of company targets (based on ROI, TSR and EBITDA) and individual targets over the three-year period 2018 to 2020, consistent with the objectives of the Business Plan. For further details, please refer to the information contained in the Information Document prepared pursuant to Article 114-bis of Italian Legislative Decree no. 58 of 24 February 1998, of Article 84-bis of Consob resolution no. 11971/99, submitted to the Shareholders' Meeting on 8 May 2018.

Remuneration of Statutory Auditors for 2018

The remuneration paid to the Statutory Auditors for 2018 consists of a fixed remuneration determined by the Shareholders' Meeting of 8 May 2018, amounting to a total of €70,000.

The remuneration of other executives with strategic responsibilities for 2018

The remuneration of other executives with strategic responsibilities (Technical Director and two Sales Managers) consists of a fixed remuneration for employment totalling €420,743 , and following variable remuneration:

  • With reference to the variable incentive plan (MBO) of 2017, during 2018, remuneration totalling €95,980 was paid.
  • For a breakdown of the remuneration paid in 2018, please refer to the tables below (Table 1, Table 2 and Table 3), which contain remuneration paid to Directors and Statutory Auditors, and, at the aggregate level, to other executives with strategic responsibilities, taking into account any office held for a fraction of a year. Remuneration received from subsidiaries and/or affiliates, with the exception of that waived or paid back to the Company, is also indicated separately.

With particular reference to Table 1, the column:

  • "Fixed remuneration" shows, for the portion attributable to 2018, the fixed remuneration approved by the Shareholders' meeting (and distributed with resolution of the Board of Directors), including the remuneration received for the carrying-out of special offices (pursuant to Article 2389, paragraph 3, Italian Civil Code. attendance fees as approved by the Board of Directors; employee salaries due for the year gross of social security contributions and income taxes owed by the employee.
  • "Remuneration for attendance at Committee meetings", shows, for the portion relating to 2018, the remuneration due to directors who attended the meetings of the Committees set up within the Board and the related attendance fees.
  • "Bonus and other incentives" includes the variable remuneration accrued during the year, for monetary incentive plans. This value corresponds to the sum of the amounts provided in Table 3 in the "Bonus for the year - payable/paid", "Bonus of previous years - payable/paid" and "Other bonuses" columns.
  • "Non-monetary benefits" shows, according to accrual and tax liability criteria, the value of outstanding insurance policies and the company cars assigned.
  • "Other remuneration" shows, for the portion attributable to 2018, any other remuneration resulting from other services provided.

  • With reference to the variable incentive plan (MBO) for 2018, remuneration totalling €51,635 accrued. Its payment is deferred and dependent upon the continuation of the employment relationship.

Remuneration totalling €94,500 was also disbursed by subsidiaries.

The three executives with strategic responsibilities are among the Beneficiaries of the stock grant plan, approved in 2018, in implementation of the Remuneration Policy. For further details, please refer to the information contained in the Information Document prepared pursuant to Article 114-bis of Italian Legislative Decree no. 58 of 24 February 1998, of Article 84-bis of Consob resolution no. 11971/99, submitted to the Shareholders' Meeting on 8 May 2018.

  • "Total" shows the sum of the amounts provided under the previous items.

For a breakdown of other items, see attachment 3A, statement 7-bis and 7-ter of Consob Regulation 11971 of 14 May 1999.

Table 2 shows the information relating to the stock grant plan approved by the Shareholders' Meeting and aimed at the Group's executive directors and executives who hold or will hold key positions in the implementation of the Business Plan. Specifically, the column:

  • "Financial instruments assigned in previous financial years not vested during the financial year" shows the financial instruments assigned in previous years and not vested during the year, indicating the vesting period;
  • "Financial instruments assigned during the financial year" shows the financial instruments assigned during the year, indicating the fair value at the assignment date, the vesting period, the assignment date and the market price at the assignment;
  • "Financial instruments vested during the year and not assigned" shows the number and type of instruments vested during the financial year and not assigned;
  • "Financial instruments vested during the year and attributable" contains information on instruments vested during the financial year of reference and attributable, indicating the value at the vesting date;

"Vesting period" means the period between the time when the right to participate in the incentive scheme is assigned and the time when the right accrues. Financial instruments vested during the financial year and not assigned are financial instruments for which the vesting period ended during the financial year and which were not assigned to the recipient for failure to meet the conditions under which the assignment of the instrument was conditional (for example, failure to meet performance targets).

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The value at the vesting date is the value of the financial instruments accrued, even if not yet paid (for example, due to the presence of lock up clauses), at the end of the vesting period.

For a breakdown of other items, see attachment 3A, statement 7-bis and 7-ter of Consob Regulation 11971 of 14 May 1999.

Table 3 contains information on monetary incentive plans for members of the administration body and other executives with strategic responsibilities; in particular, it shows:

For the section "Bonus for the year"

  • In the column "payable/paid", the bonus accrued for the year for the targets reached during the year and paid or payable because not subject to further conditions (known as upfront fee).
  • The column "Deferred" shows the bonus dependent on the targets to be reached during the year but not payable because subject to further conditions (known as deferred bonus).

For the section "Bonus of previous years"

  • The column "No longer payable" shows the sum of bonuses deferred in previous years still to be paid at the beginning of the financial year and no longer payable for failure to meet the conditions to which they are subject.
  • The column "Payable/Paid" shows the sum of bonuses deferred in previous years still to be paid at the beginning of the financial year and paid during the year or payable.
  • The column "Still deferred" shows the sum of bonuses deferred in previous years still to be paid at the beginning of the financial year and still deferred.

Lastly, the column "Other bonuses" shows the bonuses for the year not explicitly included in specific ex ante defined plans.

Finally, pursuant to Article 84-quater, paragraph four of the Consob Issuers' Regulations, Table 4 shows shareholdings in Sabaf S.p.A. held by directors and executives with strategic responsibilities, as well as their non-separated spouses and dependent children, directly or through subsidiaries, trust companies or third parties, as shown in the shareholder register, communications received and other information acquired from the same parties. This includes all persons who held office during the year, even for only part of the year. The number of shares held is shown by individual director and in aggregate form for executives with strategic responsibilities.

TAB. 1 - Remuneration paid to members of the Board of Directors and Board of Statutory Auditors and other executives with strategic responsibilities in 2018

(FIGURES IN EURO)

BOARD OF DIRECTORS

Name Remuneration Variable remuneration
(non equity)
Non Fair Value Indemnity for
end of office or
and surname Office Period
of office
Expiry of office Fixed
remuneration
for attendance
at Committee
meetings
Bonus
and other
incentives
Profit sharing monetary
benefits
Other
remuneration
Total of equity
remuneration
termination of
employment
relationship
Giuseppe
Saleri
Chairman 1 Jan -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 160,000(a) 0 0 0 0 0 160,000 0 0
(II) Remuneration from subsidiaries and affiliates 8,000 0 0 0 0 0 8,000 0 0
(III) Total 168,000 0 0 0 0 0 168,000 0 0

(a) of which €20,000 as Director and €140,000 as Chairman

Nicla
Picchi
Vice Chairman 1 Jan -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 39,000(a) 14,000(b) 0 0 0 15,000 68,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 5,000 5,000 0 0
(III) Total 39,000 14,000 0 0 0 20,000(c) 73,000 0 0

(a) of which €20,000 as director, €10,000 as Vice Chairman' and €9,000 as board meeting attendance fees

(b) of which €10,000 as a member of the Internal Control and Risk Committee and €4,000 in Committee meeting attendance fees

(c) of which €15,000 as member of the Sabaf S.p.A. Supervisory Body and €5,000 as member of the Supervisory Body of the subsidiary Faringosi Hinges s.r.l.

Pietro
Iotti
Chief Executive
Officer
1 Jan -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 330,000(a) 0 33,333 0 10,171 0 373,505 0 0
(II) Remuneration from subsidiaries and affiliates 22,000 0 0 0 0 0 22,000 0 0
(III) Total 352,000 0 33,333 0 10,171 0 395,505 0 0

(a) of which €20,000 as director, €10,000 as Chief Executive Officer, and €300,000 as General Manager (including €30,000 relating to Remuneration for non-competition agreement)

Gianluca
Beschi
Director 1 Jan -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 161,265(a) 0 32,949 0 5,466 0 199,681 0 0
(II) Remuneration from subsidiaries and affiliates 41,000 0 0 0 0 0 41,000 0 0
(III) Total 202,265 0 32,949 0 5,466 0 240,681 0 0

(a) of which €20,000 as director and €141,265 as Administration, Finance and Control Director

Renato
Camodeca
Director 1 Jan -
31 Dec 2018
23 January
2019
(I) Remuneration at Sabaf S.p.A. 30,000(a) 28,000(b) 0 0 0 0 58,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 30,000 28,000 0 0 0 0 58,000 0 0

(a) of which €20,000 as director and €10,000 as BoD meeting attendance fees

222

(b) of which €10,000 as a member of the Internal Control and Risk Committee, €10,000 as a member of the Remuneration and Nomination Committee and €8,000 as Committee meeting attendance fees

(FIGURES IN EURO)

BOARD OF DIRECTORS

Name
and surname
Office Period
of office
Expiry of office Fixed
remuneration
Remuneration
for attendance
at Committee
Bonus
and other
Variable remuneration
(non equity)
Profit sharing
Non
monetary
benefits
Other
remuneration
Total Fair Value
of equity
remuneration
Indemnity for
end of office or
termination of
employment
meetings incentives relationship
Alessandro
Potestà
Director 1 Jan -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 28,000(a) 11,000(b) 0 0 0 0 39,000 0 0
(I) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 28,000 11,000 0 0 0 0 39,000 0 0

(a) of which €20,000 as director and €8,000 as BoD meeting attendance fees

(b) of which €10,000 as a member of the Remuneration and Nomination Committee and €1,000 as Committee meeting attendance fees

Claudio
Bulgarelli
Director 8 May -
31 Dec 2018
Approval of
2020 financial
statements
28,000(a) 2,667(b) 0 0 0 0 30,667 0 0
(I) Remuneration at Sabaf S.p.A.
(II) Remuneration from subsidiaries and affiliates
0 0 0 0 0 0 0 0 0
(III) Total 28,000 2,667 0 0 0 0 30,667 0 0

(a) of which €20,000 as director and €8,000 as BoD meeting attendance fees

(b) of which €1,667 as a member of the Remuneration and Nomination Committee and €1,000 as Committee meeting attendance fees

Daniela
Toscani
Director 8 May -
31 Dec 2018
Approval of
2020 financial
statements
27,000(a) 11,000(b) 0 0 0 0 38,000 0 0
(I) Remuneration at Sabaf S.p.A.
(II) Remuneration from subsidiaries and affiliates
0 0 0 0 0 0 0 0 0
(III) Total 27,000 11,000 0 0 0 0 38,000 0 0

(a) of which €20,000 as director and €7,000 as BoD meeting attendance fees

(b) of which €10,000 as a member of the Internal Control and Risk Committee and €1,000 in Committee meeting attendance fees

Stefania
Triva
Director 8 May -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 25,000(a) 8,333(b) 0 0 0 0 33,333 0 0
0 0 0 0 0 0 0 0 0
(III) Total (II) Remuneration from subsidiaries and affiliates 25,000 8,333 0 0 0 0 33,333 0 0

(a) of which €20,000 as director and €5,000 as BoD meeting attendance fees

(FIGURES IN EURO)

DIRECTORS NO LONGER IN OFFICE DURING THE YEAR UNDER REVIEW

Name
and surname
Office Period
of office
Expiry of office Fixed
remuneration
Remuneration
for attendance
at Committee
meetings
Bonus
and other
incentives
Variable remuneration
(non equity)
Profit sharing
Non
monetary
benefits
Other
remuneration
Total Fair Value
of equity
remuneration
Indemnity for
end of office or
termination of
employment
relationship
Cinzia
Saleri
Vice Chairman 1 Jan -
8 May 2018
Approval of
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 0 0 0 0 0 0 0 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 0 0 0 0 0 0 0 0 0
Roberta
Forzanini
Vice Chairman 1 Jan -
8 May 2018
Approval of
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 0 0 0 0 0 0 0 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 0 0 0 0 0 0 0 0 0
Ettore
Saleri
Vice Chairman 1 Jan -
8 May 2018
Approval of
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 0 0 0 0 0 0 0 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 0 0 0 0 0 0 0 0 0
Giuseppe
Cavalli
Director 1 Jan -
8 May 2018
Approval of
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 2,000(a) 3,000(b) 0 0 0 0 5,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 2,000 3,000 0 0 0 0 5,000 0 0
(a) of which €2,000 as BoD meeting attendance fees
(b) of which €3,000 as Committee meeting attendance fees
Approval of
Fausto
1 Jan -
Director
2017 financial
Gardoni
8 May 2018
statements
(I) Remuneration at Sabaf S.p.A. 2,000(a) 4,000(b) 0 0 0 0 6,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 2,000 4,000 0 0 0 0 6,000 0 0
(a) of which €2,000 as BoD meeting attendance fees

(b) of which €4,000 as Committee meeting attendance fees

Anna
Pendoli
Director 1 Jan -
8 May 2018
Approval of
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 2,000(a) 0 0 0 0 0 2,000 0 0
0 0 0 0 0 0 0 0 0
(II) Remuneration from subsidiaries and affiliates
(III) Total
2,000 0 0 0 0 0 2,000 0 0

(a) of which €2,000 as BoD meeting attendance fees

224

(FIGURES IN EURO)

BOARD OF STATUTORY AUDITORS

Remuneration Variable remuneration
(non equity)
Non Fair Value Indemnity for
end of office or
Name
and surname
Office Period
of office
Expiry of office Fixed
remuneration
for attendance
at Committee
meetings
Bonus
and other
incentives
Profit sharing monetary
benefits
Other
remuneration
Total of equity
remuneration
termination of
employment
relationship
Alessandra
Tronconi
Chairman 8 May -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 30,000 0 0 0 0 0 30,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 30,000 0 0 0 0 0 30,000 0 0
Luisa
Anselmi
Standing
Auditor
1 Jan -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 20,000 0 0 0 0 0 20,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 20,000 0 0 0 0 0 20,000 0 0
Mauro
Vivenzi
Standing
Auditor
8 May -
31 Dec 2018
Approval of
2020 financial
statements
(I) Remuneration at Sabaf S.p.A. 20,000 0 0 0 0 0 20,000 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0
(III) Total 0 0 0 0 0 20,000 0 0

AUDITORS NO LONGER IN OFFICE DURING THE YEAR UNDER REVIEW

Antonio
Passantino Chairman
1 Jan -
8 May 2018
Approval of
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 0 0 0 0 0 0 0 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 0 0 0 0 0 0 0 0 0
Approval of
Enrico
Broli
Standing
Auditor
1 Jan -
8 May 2018
2017 financial
statements
(I) Remuneration at Sabaf S.p.A. 0 0 0 0 0 0 0 0 0
(II) Remuneration from subsidiaries and affiliates 0 0 0 0 0 0 0 0 0
(III) Total 0 0 0 0 0 0 0 0 0

OTHER EXECUTIVES WITH STRATEGIC RESPONSIBILITIES

Other executives with strategic
responsibilities (3)
1 Jan -
31 Dec 2018
n/a
(I) Remuneration at Sabaf S.p.A. 420,743(a) 0 95,980 0 15,781 0 532,504 0 0
94,500 0 0 0 0 0 94,500 0 0
(III) Total (II) Remuneration from subsidiaries and affiliates 95,980 0 15,781 0 627,004 0 0

(a) remuneration including €44,613 related to Remuneration for non-competition agreement

TAB. 2 - Incentive plans based on financial instruments, other than stock options, for members of the board of directors, general managers and other executives with strategic responsibilities

(FIGURES IN EURO)

FINANCIAL INSTRUMENTS
Name Office Plan assigned in previous
financial years not vested
during the financial year
assigned during financial year vested during
financial year and
not assigned
year and assigned vested during financial pertaining to
the financial
year
and surname Number
and type
of financial
instruments
Vesting
period
Number and
type of financial
instruments
Fair Value
at the
assignment
date
Vesting
period
Assignment
date
Market price
on assignment
Number and
type of financial
instruments
Number
and type
of financial
instruments
Value at
vesting date
Fair value
Pietro
Iotti
Chief
Executive
Officer
Remuneration
at Sabaf S.p.A.
2018
Stock
Grant
Plan
(May
2018)
- - 56,000 rights
corresponding
to 56,000
shares
407,120 3 years 15 May
2018
€ 19.48 /
share
- - - 96,985
Gianluca
Beschi
Director
Remuneration
at Sabaf S.p.A.
2018
Stock
Grant
Plan
(May
2018)
- - 33,600 rights
corresponding
to 33,600
shares
244,272 3 years 15 May
2018
€ 19.48 /
share
- - - 58,191
Other executives with
strategic responsibilities
(3)
Remuneration
at Sabaf S.p.A.
2018
Stock
Grant
Plan
(May
2018)
- - 46,000 rights
corresponding
to 46,000
shares
334,420 3 years 15 May
2018
€ 19.48 /
share
- - - 93,521
TOTAL 985,812 - 248,697

226

TAB. 3 - Monetary incentive plans for members of the board of directors and other executives with strategic responsibilities

(FIGURES IN EURO)

Bonus for the year Bonus of previous years
Name
and surname
Office Plan Payable / Paid Deferred Deferment period No longer
payable
Payable / Paid Still
deferred
Other bonuses
Pietro
Iotti
Chief Executive
Officer
Remuneration
at Sabaf S.p.A.
2017 MBO Plan
(March 2017)
0 0 0 33,333 0 0
Remuneration
at Sabaf S.p.A.
2018 MBO Plan
(March 2018)
0 73,000 March 2019 0 0 0 0
Gianluca
Beschi
Executive
Director
Remuneration
at Sabaf S.p.A.
2017 MBO Plan
(March 2017)
0 0 0 32,949 0 0
Remuneration
at Sabaf S.p.A.
2018 MBO Plan
(March 2018)
0 26,374 March 2019 0 0 0 0
Other executives with strategic
responsibilities (3)
Remuneration
at Sabaf S.p.A.
2017 MBO Plan
(March 2017)
0 0 0 95,980 0 0
Remuneration
at Sabaf S.p.A.
2018 MBO Plan
(March 2018)
0 51,635 March 2019 0 0 0 0
Total 0 151,009 0 162,262 0 0

TAB. 4 - Shareholdings of members of the administration and control bodies and other executives with strategic responsibilities

(FIGURES IN EURO)

Name
and surname
Office Type of Ownership Investee Company No. shares held
at 31 Dec 2017
No. shares acquired No. shares sold No. shares held
at 31 Dec 2018
Saleri
Giuseppe
Chairman Indirect through
the subsidiary
Giuseppe Saleri S.a.p.A.
Sabaf S.p.A. 2,766,313 - - 2,766,313
Iotti Pietro Chief Executive
Officer
Direct Sabaf S.p.A. 10,000 1,000 - 11,000
Toscani Indirect through spouse Sabaf S.p.A. - 2,419 - 2,419
Daniela Director Direct Sabaf S.p.A. - 498 - 498
Bulgarelli
Claudio
Director Indirect through
the company Fintel Srl
Sabaf S.p.A. 850,000 - - 850,000
Vivenzi
Mauro
Giorgio
Auditor Indirect through spouse Sabaf S.p.A. - 600 - 600

CONCEPT AND GRAPHIC DESIGN: ALL CREATIVE AGENCY - ALLCREATIVE.AGENCY

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