FINANCIAL, SOCIAL, AND ENVIRONMENTAL PERFORMANCE
Annual Report2006
Annual Report2006
2 INDEX
Chief Executive Officer’s letter to stakeholders 4
Introduction 5
Key performance indicators (KPIs) 6
1 IDENTITY AND GOVERNANCE 12 1.1 Corporate identity 15 1.2 Sustainability governance 31
2 INFORMATION ON OPERATIONS 62 2.1 Directors’ report on consolidated year-end accounts and performance 65 2.2 Directors’ report on social and environmental performance 73 2.3 Proposals for improvement 119
Report of the auditors on the review of the social report 121 Index of GRI indicators 126 UN Global Compact principles 136 SA8000 principles 136
3 CONSOLIDATED ANNUAL ACCOUNTS 138 4 SATUTORY ANNUAL ACCOUNTS OF SABAF SpA (parent company) 176 3 CHIEF EXECUTIVE OFFICER’S LETTER Annual Report2006 Dear shareholders and readers As already done last year, for 2006 Sabaf once again presents a single version of its annual report, simultaneously setting out financial results and those concerning the social and environmental effects of its business. The aim of this choice is to underline the indissoluble bond existing between these two levels. As already stated on other occasions, accounting data and social effects can never be assessed separately.
The domestic appliance market featured a positive trend throughout 2006. This enabled Sabaf to benefit from robust growth, as expressed by the data in this publication. This was a consequence of major commercial agreements – but also of an extremely innovative product portfolio. Our strategy is in fact directly towards maximisation of profit not only fulfilling and observing shared rules but also – and above all – through the ability to identify paths that put the company ahead of the field in terms of sustainability.
In this perspective, our decision to produce new components in aluminium instead of brass was not just technical. It means the possibility of multiple processing, i.e. production of more pieces per operation, or, in just one pass, to manufacture components that, with brass, required several phases. In addition, because aluminium, based on comparable volume, is much lighter, it provides a considerable saving in terms of raw material – and therefore a cost reduction from which all our customers will benefit. Last, but certainly not least, aluminium has a much lower heavy-metal content than brass.
This has been a complex effort that, for the Group, has meant not only continued improvement of manufacturing processes but also further development and in-house construction of new machinery, tools, and moulds. As regards simple valves, today we already have new lines potentially capable of doubling our production capacity. During 2007 investments for safety valves will enable us to add further capacity.
I would also like to underline that, in 2006, Sabaf continued design and development of light alloy components. We developed a new fixed gas valve, derived from the multigas valves, and we started prototyping of the dual light alloy valve derived from the light alloy safety valve for hobs. During the year we also started studying the new aluminium thermostat.
We are thinking of long-term goals. Because of this, we are aiming for reduction of energy consumption and raw materials and for global quality improvement.
Competition is a challenge of staying power not of a short-lived sprint. There is no future if the earnings of today do not go hand in hand with the ability to plan and work for the future – not only ours but also that of the entire community, which is every company’s framework of reference.
Angelo Bettinzoli
4 INTRODUCTION
For the second year running Sabaf presents the SOCIAL REPORT (NON-FINANCIAL PERFORMANCE) AND In addition, it includes information relevant for social Group’s economic, social, and environmental STANDARDS OF PREPARATION accountability management in compliance with the performance in just one comprehensive report. For a The facts and figures contained in the section “Key SA8000 standard, which is applied by Sabaf SpA. company for which long-term sustainability is its performance indicators (KPIs), Section 1 “Identity and paradigm of reference, combined presentation of Governance” and in Section 2 “Information on CONSOLIDATED ANNUAL ACCOUNTS (FINANCIAL financial, social, and environmental facts and figures Operations” as regards Chapters 2.2 “Directors’ report PERFORMANCE) AND STANDARDS OF PREPARATION confirms its will (and need) to assess every single on social and environmental performance” and 2.3 Consolidated year-end accounts for the financial year strategy, policy, and decision in terms of all its “Commitments to improvement” constitute the Sabaf (FY) 2006 have been prepared in compliance with the implications for the business and its stakeholders. Group’s social report for the year ending on December International Financial Reporting Standards (IFRSs) 31st 2006 and will be indicated with this name in the issued by the International Accounting Standards The experimental comprehensive report presented in rest of this Report. Board (IASB) and endorsed by the European Union. 2005 won unanimous reader consensus. Those The social report has been prepared according to: Reference to IFRSs also includes all current stakeholders more focused on given topics also International Accounting Standards (IASs). Annual appreciated the possibility of having a document The 2002 Sustainability Reporting Guidelines de- accounts consist of the balance sheet, income representing the Group’s reality in all its various ›fined by the GRI (Global Reporting Initiative)/G3 statement, statement of changes in equity, cash flow dimensions. The AA 1000 (AccountAbility 1000) standards is- statement, and related explanatory notes (Section 3 ›sued by AccountAbility, as regards the social reporting of the Report: “Consolidated annual accounts”) and Preparation of the Report is based on strict process and the dialogue with stakeholders. are accompanied by the directors’ report on observance of internationally recognised standards of consolidated accounts and performance (Section 2.1 of preparation both for sustainability reporting and The social report also describes how the Group this Annual Report). financial reporting, as illustrated in detail in the Report applies the principles of the Global Compact, to which itself. Sabaf adheres. INDIVIDUAL ANNUAL ACCOUNTS OF SABAF SPA AND STANDARDS OF PREPARATION Individual FY2006 annual accounts for the direct Sabaf’s level of GRI/G3 application is A+. For details, reference should be made to the Index of GRI Indicators for parent company Sabaf SpA - presented in Section 4 of disclosure of indicators reported and to the report of the independent assurance auditor. this Annual Report - have been prepared in compliance with the International Financial Reporting Standards (IFRSs) issued by the International 2002 C C+ BB+ A A+ Accounting Standards Board (IASB) and endorsed by ln Accordance the European Union. Reference to IFRSs also includes all current International Accounting Standards (IASs). Self Annual accounts consist of the balance sheet, income Declared statement, statement of changes in equity, cash flow Mandatory statement, and related explanatory notes and are Third accompanied by the directors’ report on individual Party accounts and performance. Checked The scope of consolidation includes the direct parent
Optional company Sabaf SpA and the subsidiaries Faringosi- GRl Report Externally Assured Report Externally Assured Report Externally Assured Hinges Srl, Sabaf do Brasil Ltda., and Sabaf Checked Immobiliare Srl. Sabaf Mexico SA de cv has not been consolidated as it was not operational in FY2006.
The statement of the level of application permits clear indication of the items of the GRI Reporting Framework used The Annual Report was approved by the Board of to prepare the report. The system envisages three levels (C, B, and A). The reporting criteria of each level reflect Directors on March 23rd 2007 and presented to the growing level of application or discussion of the GRI Reporting Framework. “A” is the maximum level of appli- shareholders at the Annual General Meeting held on cation. For each level, the organisation that has obtained assurance from an independent entity can add a “+”. April 24th 2007.
5 KEY PERFORMANCE INDICATORS (KPIS)
FINANCIAL INDICATORS Annual Report2006 INCOME STATEMENT (Amounts in € ‘000) 2006 2005 2004 Sales revenues 138,263 121,014 120,527 EBITDA 39,230 34,339 33,977 EBIT 28,241 23,459 23,218 Pre-tax profit 27,084 23,141 22,321 Net profit 16,078 13,953 12,950 Net profit attributable to parent company shareholders 16,078 13,953 12,950 BALANCE SHEET AND FINANCIAL POSITION (Amounts in € ‘000) 31/12/2006 31/12/2005 31/12/2004 Non-current assets 90,404 86,214 87,666 Net working capital 25,091 25,545 23,076 Financial assets 1 2,818 234 Provisions for risks, employee benefits, and deferred taxes (14,350) (14,882) (13,132) Capital employed 101,146 99,695 97,844 Equity 89,765 90,767 79,965 Net financial debt 11,381 8,928 17,879 Total sources 101,146 99,695 97,844
OTHER FINANCIAL INDICATORS 2006 2005 2004 ROCE (return on capital employed) 27.9% 23.5% 23.7% Dividend per share (€) 0.70(*) 0.60 0.48 Net debt/equity ratio 13% 10% 22% Market capitalisation (31/12)/equity ratio 3.32 2.21 2.70 Sales progress +14.3% +0.4% +9.6% (*) Proposed dividend pending shareholder approval (Amounts in € ‘000) 2006 2005 2004 Investments in research & development 444 485 328 Other investments 15,260 9,645 19,970
(Amounts in € ‘000) 2006 2005 2004 Value of outsourced goods & services • Mechanical processing 4,010 3,775 3,875 • Enamelling and treatments 2,296 1,304 1,317 6 • Assembly 2,162 1,452 2,709 VALUE ADDED
Below we show the detailed calculation and allocation of value added among stakeholders, as per the GBS guidelines (Italian group for study of social reporting).
1. Statement of Value-Added calculation (Amounts in €’000) 2006 2005 2004 TOTAL PRODUCTION VALUE 140,598 122,760 121,865 INTERMEDIATE PRODUCTION COSTS 74,192 64,312 64,358 GROSS CORE-BUSINESS VALUE ADDED 66,406 58,448 57,507 OTHER REVENUES/(COSTS) (284) 661 (36) GROSS TOTAL VALUE ADDED 66,122 59,109 57,471 DEPRECIATION & AMORTISATION OF TANGIBLE AND INTANGIBLE ASSETS 10,969 10,951 10,798 NET TOTAL VALUE ADDED 55,153 48,158 46,673
2. Statement of Value-Added allocation
(Amounts in €’000) 2006 2005 2004 STAFF REMUNERATION Outside staff 6,121 4,787 4,993 Company employees: 15,491 13,994 13,437 a) Direct remuneration 5,296 5,084 4,838 b) Indirect remuneration 20,787 19,078 18,275 26,908 48.8% 23,865 49.6% 23,268 49.9% REMUNERATION OF PUBLIC ADMINISTRATION Direct taxes 11,006 9,188 9,371 Indirect taxes 343 230 189 11,349 20.6% 9,418 19.6% 9,560 20.5% REMUNERATION OF BORROWED CAPITAL Charges on bank loans 459 523 654 Leasing charges 323 151 211 Others 449 430 66 Interest income (443) (252) (126) 788 1.4% 852 1.8% 805 1.7% REMUNERATION OF OWNERS’ EQUITY Dividends 8,073 14.6% 6,800 14.1% 5,440 11.6 REMUNERATION OF THE COMPANY Allocations to reserves 8,005 14.5% 7,153 14.8% 7,510 16.1% OUTSIDE DONATIONS 30 0.1% 70 0.1% 90 0.2% NET TOTAL VALUE ADDED 55,153 100.0% 48,158 100.0% 46,673 100.0%
7 NON-FINANCIAL INDICATORS (YEAR-END RATIOS/FIGURES UNLESS OTHERWISE INDICATED)
NON-FINANCIAL INDICATORS Annual Report2006 HUMAN CAPITAL
2006 2005 2004 Average employee age (Sum of employee ages/total employees) years 33.8 34.3 34.6 ** Educational level - high (No. of graduates and holders of degrees and higher education certificates/total employees) % 42.1 42.2 41.6 Staff turnover (No. of leavers and dismissed employees/total employees) % 5.6 5.3 4.9 Average per capita training hours (Total training hours/total employees) hours 29 26 27 Training investments/sales % 0.23 0.19 0.17
STRUCTURAL CAPITAL
2006 2005 2004 IT budget (investments + current expenditure)/sales % 0.97 0.24 0.50 * % employees with PCs % 41.6 40.5 36.3 ** New-product development hours/total hours worked % 1.3 1.1 1.5 Process engineering hours/total hours worked (Hours worked to construct new machines for new products or to improve output capacity/hours worked ratio) % 3.0 3.8 3.9 Tangible investments/sales % 10.6 7.9 16.2 Intangible investments/sales % 0.74 0.50 0.65 Current spending for quality/sales % 0.14 0.12 0.09 Investments for quality/sales % 0.07 0.20 0.12 Customer rejects (Customer charge-backs and credit notes for returned goods/sales) % 0.06 0.07 0.08* In-house production rejects/sales % 0.41 0.36 0.42* Substandard quality costs/sales (Customer rejects + in-house rejects/sales) % 0.47 0.43 0.50*
8 RELATIONAL CAPITAL
2006 2005 2004 Strike hours for internal reasons/total employees hours 0 0 3.2 Average sales per customer (Total sales/number of customers) €/000 436 425 426 % sales from new customers (Sales from new customers/total sales) % 1.31 2.29 2.22 % incidence of top 10 customers % 47 52 53 % incidence of top 20 customers % 67 71 70 Number of samples produced for customers number 1,182 717 919 Number of different product SKUs (stock-keeping units) supplied to top 10 customers number 2,713 2,282 2,265 Customer complaints number 324 274 280* Certified supplier sales (Certified supplied sales/total supplier sales) % 54.3 49.3** 49.9** Media presence number 279 274 223 Number of financial analysts following Sabaf stock * - Sabaf SpA only on an ongoing basis number 6 7 5 ** - Excluding Sabaf do Brasil Lawsuits actioned against Group companies number 0 3 0
9 NON-FINANCIAL INDICATORS (YEAR-END RATIOS/FIGURES UNLESS OTHERWISE INDICATED)
Annual Report2006 SOCIAL INDICATORS
2006 2005 2004 Total employee headcount number 594 531 507 • Men % 64.3 62.9 60.7 • Women % 35.7 37.1 39.3 Sickness rate (Sick leave hours/total workable hours) % 3.4 3.5 3.3 Accident frequency index (No. of accidents (excluding accidents in transit) per 1 mn hours worked) 20.47 20.76 38.65 Accident gravity (Days of absence (excluding accidents in transit) per 1,000 hours worked) 0.19 0.24 0.39 Jobs created number 66 24 5 % of supplier sales from suppliers in province of Brescia % 49.6 43.0 44.8 Donations/net profit % 0.2 0.5 0.7
10 ENVIRONMENTAL INDICATORS
2006 2005 2004 Materials used • Brass metric tons 4,937 4,373 4,795 • Aluminium alloys metric tons 7,039 5,625 5,629 • Steel metric tons 7,646 7,011 6,870 Waste • Municipal-type waste metric tons 130 134 219 • Total hazardous waste metric tons 1,252 3,216 3,978 • Total non-hazardous waste metric tons 7,527 6,148 6,305 Natural gas consumption m3 ‘000 3,193 2,723 2,505 Electricity consumption MWh 24,279 20,553 18,889 CO2 emissions metric tons 21,419 18,460 16,706 Current environmental spending/sales % 0.47 0.48 0.53 Environmental investments/sales % 0.08 0.35 0.09
11 Annual Report2006 IDENTITY AND 1GOVERNANCE
12 1.1 1.2
CORPORATE SUSTAINABILITY IDENTITY GOVERNANCE 1.1.1 Group history 1.2.1 Corporate governance report 1.1.2 Business and products 1.2.2 Integration of social accountabili- ty in operating processes 1.1.3 Operating environment 1.2.3 Innovation and management of 1.1.4 Group structure intellectual capital 1.1.5 Organisation 1.1.6 Values, vision, and mission 1.1.7 Strategic design
13 1.1.1 Group history 17 1.1.2 Business and products 18 1.1.3 Operating environment 20 1.1.4 Group structure 21 1.1.5 Organisation 22 1.1.6 Values, vision, and mission 24 1.1.7 Strategic design 26 1.1.7.1 Innovation 27 1.1.7.2 Eco-efficiency 27 1.1.7.3 Safety 28 1.1.7.4 Establishment in international markets 28 1.1.7.5 Extension of components range and partnerships with multinational groups 29 1.1.7.6 Enhanced exploitation of value of intangible assets and intellectual capital 29
2006 Annual Report 1.1
14 1.1 CORPORATE IDENTITY
“Naturalmente li omini boni desiderano di sapere.”
Leonardo da Vinci 15 CORPORATE IDENTITY
Annual Report2006 Parent company SABAF S.p.A.
Registred & administrative headquartes: Via dei Carpini, 1 25035 Ospitaletto (Brescia)
Contacts: Tel: +39 030 - 6843001 Fax: +39 030 – 6848249 E-mail: [email protected] Webside: http://www.sabaf.it
Tax details: R.E.A. Brescia 347512 Tax Code 03244470179 VAT no. 01786910982
Subsidiaries and equity Faringosi Hinges s.r.l. 100% interest owned by the group Sabaf Immobiliare s.r.l. 100% Sabaf do Brasil Ltda. 100% Sabaf Mexico S.A. de c.v. 100%
CORPORATE BODIES
Board of Directors Chairman Giuseppe Saleri Deputy-Chairman Gianbattista Saleri Deputy-Chairman Ettore Saleri Chief Executive Officer Angelo Bettinzoli Director Alberto Bartoli Director Leonardo Cossu Director (*) Salvatore Bragantini Director (*) Raffaele Ghedini Director (*) Alberto Federico Giua Director (*) Franco Carlo Papa Director (*) Flavio Pasotti
(*) Independent Directors
Board of Statutory Auditors Chairman Italo Lucchini Standing statutory auditor Eugenio Ballerio Standing statutory auditor Giovannimaria Seccamani Mazzoli
Independent Auditor AGN SERCA
16 1.1.1 GROUP HISTORY 1950s: In the immediate post-WWII period, in 1970s: Sabaf developed a strong specialisation Lumezzane (in the province of Brescia) in an area in the production of gas valves and strengthened a with a strong mechanical engineering vocation, business model based on significant vertical Giuseppe Saleri and his brothers founded SABAF integration and adoption of state-of-the-art process and started to process various brass products. technologies.
1960s: In the years of the Italian “economic 1980s: The design and production of burners, miracle” the household appliance sector was a alongside valves, supplemented Sabaf’s offering and front-stage player. Sabaf focused on producing the company became a supplier of the full range of valves for gas cooking appliances, components for gas appliances. i.e. components for which precision 1990s: Giuseppe Saleri took over control of the engineering is company. This and subsequent listing on the Milan essential. Bourse set the seal on the formal separation between ownership and management, delegated to managers led by the Chief Executive Officer, Angelo Bettinzoli. This organisational change was accompanied by constant quantitative and qualitative growth.
2000s: The goal of long-term sustainable growth continues to guide strategic decisions, i.e. transfer of the business to the Ospitaletto base, internationalisation of production, further expansion of the components range, and corporate governance and process management models aligned with international best practices.
17 CORPORATE IDENTITY
1.1.2 BUSINESS AND PRODUCTS Annual Report2006 THE SABAF GROUP IS ONE OF THE WORLD’S LEADING MANUFACTURERS OF COMPONENTS FOR HOUSEHOLD GAS COOKING APPLIANCES, WITH A MARKET SHARE OF SOME 50% IN EUROPE AND A GLOBAL SHARE OF ABOUT 10%. ITS CORE MARKET THEREFORE CONSISTS OF MANUFACTURERS OF HOUSEHOLD APPLIANCES, AND IN PARTICULAR OF COOKERS, HOBS, AND OVENS.THE LARGE MAJORITY OF SABAF’S SALES CONSIST OF THE SUPPLY OF ORIGINAL EQUIPMENT, WHEREAS SALES OF SPARE PARTS ARE NEGLIGIBLE.
18 The product range features three main categories:
Valves and thermostats, with or without ›thermoelectric safety devices. These are the components regulating the flow of gas to covered burners (in the oven or grill) or uncovered burners. The thermostats feature a heat-regulating device for constant maintenance of the desired temperature
Burners. These are the components that, via ›the mixing of gas with air and combustion of the gas used, produce one or more rings of flame
Hinges. These are the components permitting ›the smooth and balanced movement of oven, washing-machine, or dishwasher doors when they are opened or closed
The Group also produces and markets an extensive range of accessories, which supplement the offering of the main product lines.
The technological know-how developed by Sabaf over the years has led to creation of a unique business model, the distinctive features of which are: › Integration of R&D for products and manufacturing processes › Strongly verticalised production, in which high- value phases are performed using exclusive technologies › The ability to combine major automation with flexibility and large production runs with customisation › A constant flow of investments designed to strengthen competitive pluses.
19 CORPORATE IDENTITY
1.1.3 OPERATING ENVIRONMENT Annual Report2006 BASIC FEATURES AND TRENDS OF COOKING BASIC TRENDS IN THE COOKING-APPLIANCE THE COOKING APPLIANCE MARKET APPLIANCE MANUFACTURERS COMPONENT MANUFACTURER SEGMENT The gas cooking appliance manufacturer segment – The increasing levels of specialisation demanded and In Western Europe, which accounts for Sabaf’s core market – is distinguished by the the growing importance of manufacturing presence of very different players, i.e. automation have caused a drastic reduction in the about half of Sabaf products’ end-user ›Large multinational groups with a well-established number of cooking-appliance component market, the level of saturation reached international presence in sales and production, manufacturers and the exit from the market of possessing strong brands players unable to assure maintenance of high by cooking appliances (i.e. the number of ›Manufacturers located in countries featuring low- standards and ongoing improvement of their cost labour that aim both to exploit opportunities in competitiveness. households owning such appliances) is their home markets and to grow fast globally close to 100%. Purchases of new ›Manufacturers focused on specific markets where Manufacturers of cooking appliance components are they have leadership positions required to maintain extremely high standards of appliances are therefore mainly ›Manufacturers (mainly Italian, with a strong quality and to reduce average selling prices. The export vocation) occupying segments featuring component manufacturer’s ability to control – replacement purchases. Moving house or greater product differentiation (built-in hobs and independently and expertly – all business operating the purchase or refurbishment of a home ovens for example) or that are able to compete on levers thus becomes crucially important. price. are often occasions for the purchase of a In addition, another supplier skill that is often For years now the sector has featured a tendency to fundamental is the ability to support household new cooking appliance. The market’s outsource component design and production to appliance manufacturers in the development of new trend is therefore directly influenced by highly specialised suppliers, who, like Sabaf, are appliances. In this respect, the fact of being able to active in the world’s main markets and are able to provide the entire range of components is becoming the general economic trend and, in supply a range of products meeting individual increasingly important. markets’ specific requirements. particular, by households’ disposable Today the most dynamic components manufacturers income, consumer confidence, and the In addition, the trend to internationalise production are able to propose innovative technical and is becoming more accentuated, with production manufacturing solutions, designed to improve the real estate market trend. increasingly delocalised to countries with low-cost appliance’s performance. Conversely, in other markets the labour and lower levels of saturation. saturation level is often much lower. Moreover, the emergence of new players in the REGULATORY DEVELOPMENTS CONCERNING international scenario is causing over-supply. This in SAFETY Faster economic growth rates and a turn causes major competitive tension and will Throughout the world the trend towards safe use of probably lead to greater concentration in the sector. gas for cooking is continuing, with the aim of more favourable demographic trend than This tendency, however, is less evident in cooking minimising risks of explosion caused by valves in Western Europe add up to major appliances than in other domestic appliances. In the inadvertently left open with burners unlighted. In the cooking segment, the combination of (a) design and next few years regulatory developments are opportunities for groups such as Sabaf aesthetic quality and (b) lower capital intensity expected to feature stricter rules, both in Western permit the success also of small, strongly-innovative Europe (where in most countries thermocouple that are able to work both with manufacturers. protection of valves feeding uncovered burners is multinational household appliance not compulsory) and in many other countries (where current safety standards, when not totally inexistent, manufacturers and with local are lower). manufacturers.
20 1.1.4. SABAF GROUP STRUCTURE Today Sabaf is an industrial group that, FARINGOSI-HINGES SRL 2006 a buildable area of some 24,000 sqm was Acquired by Sabaf SpA in 2000, Faringosi-Hinges is purchased in Jundai (São Paulo) and construction besides the direct parent company Sabaf one of the main manufacturers of hinges for ovens started of a new factory, to which Sabaf do Brasil SpA, also comprises: and dishwashers. In 2006 the company – which has will transfer production during 2007. Both the a strong export vocation – achieved sales growth of design of the new factory and contracting of works +8.5% vs. 2005 with an 18.3% EBIT margin (vs. 16.8% have been directly co-ordinated by Sabaf SpA’s in 2005). Consistently with the strategy adopted by management, dedicating attention during the the parent company, Faringosi today is strongly contracting and supplier screening phase and in committed to product innovation – with the aim of design activities to the safeguarding of worker increasing standards of performance in segments safety and to environmental impact. where the company has a leadership position and of Sabaf do Brasil has 50 employees. The Brazilian developing the range in the washing segment – and manufacturing activity observes the same to process innovation, via increased automation of technological standards as those applied in Italy. the various phases of production. Specifically, the Brazilian plant is equipped with new During 2007 the Group intends to start production machinery, totally similar to that used for production of washing-machine hinges in a new factory located in Italy. Besides applying the United Nations Code of in Mexico, to meet supply commitments with a Conduct for Transnational Corporations, Sabaf takes multinational group. care to verify that the operating policies and procedures in place in Brazil are consistent with In 2006 Faringosi-Hinges achieved sales of some those of the parent company, with special reference € 12.6 mn (vs. € 11.6 mn in 2005) with EBIT of to aspects relating to social responsibility. some € 2.3 mn (€ 2 mn in 2005) and net profit of In 2006 the company achieved sales of some € 3.8 approximately € 1.2 mn (€ 1.1 mn in 2005). As at mn (€ 2.1 mn in 2005) with EBIT of €264,000 (vs. December 31st 2006 equity totalled some € 5.3 mn an EBIT loss of € -57,000 in 2005) and a net profit whilst the net financial position featured net cash of of € 167,000 (€ 182,000 in 2005). Against equity some € 900,000. of some € 7.9 mn, the company has net cash of some € 500,000. SABAF DO BRASIL LTDA Sabaf has chosen to produce certain components SABAF IMMOBILIARE SRL directly in Brazil in order to meet the needs of Given the importance of the property investments multinationals present in the country, limit exposure involved in construction of the new Ospitaletto site to foreign exchange risk, and reduce the impact on and of the desirability of purchasing residential final prices of customs duties and shipping costs, accommodation for employees, the company which make products manufactured in Europe decided to delegate operational management of its uncompetitive. Sabaf do Brasil started properties to a specific subsidiary. manufacturing operations in Guarulhos (São Paulo) in Sabaf Immobiliare Srl owns the Ospitaletto property, 2001. which it rents to the parent company Sabaf SpA. In view of the increased competitiveness of local production, the Group decided to complete the As at December 31st 2006 the company also owned entire burner production process, exploiting the 12 apartments located close to the site that are used know-how developed in all phases of the production by Sabaf SpA employees. Sabaf Immobiliare is also process. As from 2005, the operations of burner building, in the vicinity of the site, 54 new processing, assembly, and testing have been joined residential units (2- and 3-roomed apartments and by pressure die-casting of burner injector cups and town houses), earmarked on a priority basis for flame spreaders. This strategy has made our Sabaf SpA employees, with a total investment of Brazilian production more competitive and permitted some €8 mn. The initiative has been much a significant increase of activity already in 2006. Given the Group’s intention of internalising also burner-lid coining and enamelling, the existing factory is now inadequate. Consequently, during 21 CORPORATE IDENTITY
Annual Report2006 Company name Registered Share Shareholders % appreciated by employees and, as at the end of location capital ownership February 2007, 25 preliminary contracts had already Parent company been signed. Sabaf S.p.A. Ospitaletto (BS) EUR 11.533.450 In 2006 Sabaf Immobiliare achieved revenues of Subsidiaries some € 3 mn (vs. € 2.7 mn in 2005) with EBIT of Faringosi-Hinges s.r.l. Ospitaletto (BS) EUR 90.000 Sabaf S.p.A. 100% some € 1.6 mn (€ 1.4 mn in 2005) and net profit of Sabaf Immobiliare s.r.l. Ospitaletto (BS) EUR 25.000 Sabaf S.p.A. 100% € 937,000 (€ 882,000 in 2005). As at December 31st 2006 its equity totalled some € 16.1 mn and net Sabaf do Brasil Ltda Guarulhos (Brasile) BRL 22.252.275 Sabaf S.p.A. 100% financial debt amounted to approximately € 14.5 Sabaf Mexico S.A. de c.v. San Luis Potosì (Messico) MXN 1.118.000 Sabaf S.p.A. 100% mn. (These data are IFRS-compliant).
SABAF MEXICO SA DE CV In 2006 the company Sabaf Mexico SA de cv, 100% SABAF S.p.A. owned by Sabaf SpA, was founded. As at December 31st 2006 the company was not yet operational. During 2007 it will start production of hinges for washing machines, against supply commitments for a multinational group. The company will also be able to be a base for future production activities targeting the Mexican and North American markets.
FARINGOSI- SABAF HINGES Srl SABAF MEXICO S.A. de C.V. 100% DO BRASIL LTDA SABAF 100% 100% IMMOBILIARE Srl 100%
1.1.5 ORGANISATION In order to achieve its objectives the company has communication between the various functions. The adopted a functional, lean and flexible organisation organisational set-up assures a fast decision-making model to enable it to address the complexity of its process. sector and to seek to foster innovation via informal
22 ORGANISATION CHART
BOARD OF DIRECTORS
CHIEF EXECUTIVE OFFICER A.Bettinzoli
INTERNAL CONTROL G.Beschi
CHIEF FINANCIAL TECHNICAL & SALES DIRECTOR HUMAN OFFICER PRODUCTION L.Salvi RESOURCES A. Bartoli DIRECTOR M. Giacomelli F.Consadori INNOVATION AND PLANS R&D INFORMATION PROCUREMENT QUALITY CSR M. Dora TECHNOLOGY M. Piras ENVIRONMENT MANAGEMENT G. Migliorati & SAFETY SYSTEM PROCESS TECHNOLOGIES M.Tedeschi M. Giacomelli A.Venturini M.Tedeschi
BURNERS VALVES & THERMOSTATS SHEDULING TECHNICAL LABORATORY PROCESS PRODUCTION PRODUCTION LOGISTICS DEPARTMENT G. Guerrini ENGINEERING A.Venturini A. Cancarini G. Bottali M. Dora F.Venturini M.Boldini E. Romelli
MECHANICAL ELECTRICAL UNIT UNIT P.Fontana A. Raspini CORPORATE IDENTITY
1.1.6 VALUES, VISION, AND MISSION Annual Report2006 The centrality of the individual is a universal value, PROMOTING THE VALUE OF THOUGHT i.e. a “hyper-rule” applicable regardless of ›AND BELIEF: differences in time and space. In 2002 Sabaf drew up its Charter of Innovation and openness to change Values, a governance tool with which In respecting this universal value the company Sabaf’s Board of Directors expresses the operates promoting cultural diversities via the Sabaf invests in state-of-the-art technological values, standards of conduct, and ways criterion of spatial and temporal equity. solutions and in the development of its staff’s skills and professionalism, to encourage constant in which relations between Sabaf and its A similar moral commitment implies automatic innovation of the company’s processes and products stakeholders are managed. renouncement a priori to all choices that do not – which, besides strengthening its competitive edge respect the individual’s physical, cultural and moral - constitute progress for civil society in terms of Sabaf takes as its original value – and integrity, even if such decisions would be efficient, greater safety and lower environmental impact. economically beneficial, and legally acceptable. therefore as the fundamental criterion PROMOTING THE VALUE OF ACTION: for all its choices – the human individual, Respecting the value of the individual as such › leading to an entrepreneurial vision means, first and foremost, restoration in the Safety assurance centring round the development of a hierarchical order of things of “Being” to top priority over “Doing” and “Having”, and then protection and Safety is one of the lynchpins of Sabaf’s business new humanism assuring the individual’s enhancement of the “quintessential” manifestations project. dignity and freedom within a framework permitting full expression of the individual in his/her On-the-job safety in the company, defined as of shared rules of conduct. entirety. protection of workers’ physical integrity, is assured via modernisation and ongoing improvement of the workplace and adoption of stringent quality standards. innovation Consumer safety is assured by offering products featuring extremely high levels of safety and quality. THOUGHT The products in fact undergo meticulous quality control procedures, in compliance with the strictest standards present in the market, thus assuring zero defects.
PROMOTING THE VALUE OF ›COMMUNICATION:
Transparency and dialogue COMUNICATION THE Sabaf cares about the needs and legitimate INDIVIDUAL ACTION expectations of its internal and external stakeholders trasparency (employees, customers, suppliers, shareholders, financiers, competitors, the public administration,
safety and the community as a whole). Because of this, the company is committed to continuous dialogue with all its stakeholders, who are informed of the BELIEF company’s activities with the utmost transparency. Internal procedures and actual conduct are oriented towards total compliance with laws and regulations.
24 change To strengthen our technological and market To associate the growth leadership in the design, of company performance production, and sale of the with social and environmental entire range of components for sustainability, by championing domestic gas cooking appliances, a dialogue that is open via a constant focus on innovation, to stakeholders’ legitimate safety, and enhancement expectations of internal resources and skills
MISSION
To combine business decisions and results with ethical values by going beyond family capitalism and opting for a managerial rationale oriented towards not only the creation of value – but also towards the respect of values VISION
25 CORPORATE IDENTITY
1.1.7 STRATEGIC DESIGN Annual Report2006 CONSISTENTLY WITH ITS SHARED VALUES AND MISSION, THE COMPANY BELIEVES THAT THERE IS A SUCCESSFUL BUSINESS AND CULTURAL MODEL TO BE REPLICATED AND ADAPTED IN FOREIGN MARKETS AND IN ADJACENT SECTORS VIA ORGANIC GROWTH OR STRATEGIC ALLIANCES AND ACQUISITIONS. INNOVATION, SAFETY, ENHANCEMENT OF PEOPLE’S VALUE, AND SOCIO- ENVIRONMENTAL SUSTAINABILITY ARE THE DISTINCTIVE CHARACTERISTICS OF THE SABAF MODEL.
26 1.1.7.1 1.1.7.2 INNOVATION ECO-EFFICIENCY
For Sabaf innovation is one of the essential A priority underlying Sabaf’s product innovation components of its business model and one of its strategy is the quest for superior performance in main strategic levers. terms of environmental impact. Our attention to Thanks to constant innovation, the company has environmental issues take the concrete form both of succeeded in achieving excellent results, identifying (a) innovative production processes causing lower technological and manufacturing solutions amongst energy impact in product manufacturing and of (b) the most advanced and effective currently available, design of products that are eco-efficient in their and creating a virtuous circle of continuous process daily use. More specifically, innovation efforts focus and product improvement - ultimately acquiring above all on the development of products that technological skills with features difficult for reduce fuel consumption (natural or other gases) competitors to emulate. Our new manufacturing and emissions (carbon dioxide and carbon monoxide) sites in Italy and abroad are designed to assure during product use. products based on the highest technological standards available today. They are a cutting-edge model in terms of both environmental friendliness and worker ergonomics and safety. Investments in innovation have enabled the company to become a global leader in an extremely specialised niche market and, over time, to achieve high standards of technological advancement, specialisation and manufacturing flexibility. In particular, it should be noted that a key factor in the company’s success has been the know-how acquired over the years in internal development and construction of machinery, tools, and moulds.
27 CORPORATE IDENTITY
Annual Report2006 1.1.7.3 1.1.7.4 SAFETY ESTABLISHMENT IN INTERNATIONAL Safety has always been one of the indispensable MARKETS features of the company’s business project. Safety for Sabaf is not mere compliance with Sabaf pursues growth via establishment in existing standards, but a management philosophy international markets, replicating its business model aiming for continuous improvement of performance, in emerging countries and adapting it to local culture. in order to guarantee end-users an increasingly safe product. Besides investing in new-product R&D, the Consistently with its corporate values and mission, company has chosen to play an active role in the company is seeking to transfer state-of-the-art spreading safety culture, both by fostering and know-how and technology to these countries, whilst encouraging the sale of products featuring fully respecting human and environmental rights and thermoelectric safety devices, and via a complying with the United Nations Code of Conduct communication policy aiming to promote use of for Transnational Corporations. This choice is based products with thermoelectric safety devices. Sabaf on our awareness that, only by operating in a has long been a promoter in the various institutional socially responsible manner, is it possible to assure environments of the introduction of regulations the long-term development of business initiatives in making the adoption of products with thermoelectric emerging markets. safety devices obligatory. Safety has turned out to be a key factor for success in the specific business area, also because the company succeeded in anticipating demand for products with safety devices in the European market and in stimulating the spread of such products also in developing countries.
28 1.1.7.5 1.1.7.6 EXPANSION OF ENHANCED COMPONENTS RANGE EXPLOITATION OF THE AND PARTNERSHIPS WITH VALUE OF “INTANGIBLE MULTINATIONAL GROUPS ASSETS” AND INTELLECTUAL CAPITAL Ongoing expansion of our components range is intended to further increase our customers’ loyalty Enhanced exploitation of “intangible assets” is via fuller satisfaction of their needs. Its ability to essential to be able to compete effectively in the offer a full range of components is a further feature international market. distinguishing Sabaf from its competitors. This expansion is pursued via both in-house research Sabaf carefully monitors and enhances the value of and strategic alliances with other leading players in its true “intangible assets” – i.e. the great technical the sector or acquisitions in related sectors. and professional skill of people working in the company; its image now synonymous with quality The company intends to further consolidate its and reliability; and its reputation as a company collaborative relationships with customers and to attentive to social and environmental problems and strengthen its positioning as sole supplier of a full to the needs of its counterparts. Promotion of the product range in the cooking components market, idea of business and dealings with stakeholders as thanks to its ability to adapt its production “the passion for a project founded on common processes to customers’ specific requirements. ethical values in which all can symmetrically recognise themselves” is not only a moral commitment but also the true guarantee of enhanced exploitation of the value of “intangible assets”(intellectual capital). In this perspective the sharing of ethical values is the link between promotion of a business culture oriented towards social responsibility and enhanced exploitation of the value of the company’s intellectual capital. Thanks to the strong “accelerator” provided by the shared- value process, Sabaf aims to strengthen its human assets (increasing employees’ skills, sense of belonging, and satisfaction), thus aiding development of organisational capital (operating know-how and process improvement), whilst assuring constant development of relational capital (in terms of improvement of two-way relationships with stakeholders).
29 1.2.1 Corporate governance report 32 1.2.2 Integration of social accountability Part I in operating processes 52 The Sabaf governance structure 33 1.2.2.1. Developments in social accountability management system 53 Part II 1.2.2.2. Stakeholder engagement 56 Information on implementation of 1.2.2.3. Key social accountability issues the corporate governance code 34 for stakeholders and the business 58 1. Role of the board of directors 34 2. Membership of the board of directors 36 1.2.3 Innovation and management 3. Independent directors 37 of intellectual capital 60 4. Handling of confidential information and 1.2.3.1. Research and development internal dealing 39 activities 60 5. Internal board committees 40 1.2.3.2. Management of intellectual capital 61 6. Appointment of directors 40 1.2.3.3. Analysis of intellectual capita 61 7. Directors’ compensation 41 8. Internal control system 42 9. Interests of directors and transactions with related parties 46 10. Statutory auditors 46 11. Investor relations 47 Preparation of Company financial statements 48 Independent auditor 48 Share capital and major shareholders 49
2006 Annual Report 1.2
30 1.2 SUSTAINABILITY GOVERNANCE
“A me pare che quelle scientie sieno vane e piene di errori, le quali non sonno nate dall’esperientia, madre di ogni certezza, e che non terminano in nota esperientia, cioè, che la loro origine, ò mezzo, ò fine non passa per nessuno de’cinque sensi.”
Leonardo da Vinci 31 SUSTAINABILITY GOVERNANCE
1.2.1 CORPORATE GOVERNANCE REPORT Annual Report2006 IN 2006 SABAF SPA ADOPTED THE 2006 CORPORATE GOVERNANCE CODE PUBLISHED BY BORSA ITALIANA (HEREINAFTER, THE “CODE”) AND INITIATED THE PROCESS OF ASSESSING AND IMPLEMENTING ITS RECOMMENDATIONS. THE BOARD OF DIRECTORS CONFIRMED THE COMPANY’S ADOPTION OF THE CODE BY ADOPTING A CORPORATE GOVERNANCE MANUAL. THIS MANUAL SETS FORTH THE PRINCIPLES, RULES, AND OPERATING PROCEDURES THAT WILL ENABLE THE COMPANY TO RECEIVE ITS RECOMMENDATIONS. THE CORPORATE GOVERNANCE MANUAL, WHICH CAN BE CONSULTED IN THE CORPORATE GOVERNANCE SECTION OF THE COMPANY WEBSITE AT WWW.SABAF.IT, WAS ADOPTED BY RESOLUTION OF THE BOARD OF DIRECTORS ON DECEMBER 19TH 2006. IT IS COMPLETE WITH A NUMBER OF OPERATING GUIDELINES DESIGNED TO ASSIST THE SABAF BOARD OF DIRECTORS, BOARD OF STATUTORY AUDITORS, INTERNAL CONTROL AND AUDIT COMMITTEE, AND COMPLIANCE PROGRAM SUPERVISORY COMMITTEE IN PROPERLY DISCHARGING THEIR DUTIES. 32 This report has been prepared in PART I growth. To this end Sabaf has created and published a Charter of Values (available in the Sustainability accordance with the guidelines set THE SABAF GOVERNANCE section of the website, www.sabaf.it) which is STRUCTURE considered to be the governance tool via which the forth in the Code and is organized Board of Directors renders explicit the Company’s in accordance with the instructions Sabaf’s entrepreneurial model is rendered explicit in values, standards of conduct, and commitments vis- our corporate “vision”, i.e. to combine business à-vis all stakeholders – shareholders, employees, found in the Guide to Preparation decisions and results with ethical values by going customers, suppliers, financiers, the public beyond family capitalism and opting for a administration, the community, and the environment. of the Corporate Governance managerial rationale oriented towards not only the creation of value – but also towards the respect of THE SABAF MANAGEMENT AND CONTROL Report published by Assonime and values MODEL Emittenti Titoli in February 2004. Sabaf has chosen a traditional management and The model adopted is based, in the first place, on control model, consisting of: the decision to achieve strict separation of the › a Board of Directors responsible for interests and choices of the key shareholder (the management of Company operations; Saleri family) from the interests and choices of the › a Board of Statutory Auditors responsible for Company and Group, consequently entrusting supervising: corporate management to managers not forming (i) compliance with the law and Articles of part of the key shareholder. In order to reinforce this Incorporation and adherence to principles of proper decision, the Saleri family (which, as at December management in the performance of corporate 31st 2006, owned 53.81% of Sabaf SpA’s share capital activities; via its holding Company Giuseppe Saleri SapA) has (ii) the adequacy of the Company’s organizational undertaken, also via signature of an accompanying structure, internal control system, and agreement, not to hold, executive offices (e.g. administrative/accounting system; departmental head) within Sabaf Group companies. (iii) the procedures for effective implementation of the corporate governance rules envisaged in the Expansion of the shareholder base following listing Code; on the stock exchange, admission to the STAR › the Shareholders’ Meeting, which is responsible segment (and consequently the Company’s for resolving: voluntary acceptance of stricter transparency and • on an ordinary basis, approval of the annual report disclosure rules), and the Company’s desire to and accounts, appointment and dismissal of comply consistently with applicable corporate directors and statutory auditors, their compensation, governance recommendations and best practices and their responsibilities; represent the subsequent steps taken by Sabaf • on an extraordinary basis, amendments to the towards compliance of its corporate governance Articles of Association, and the appointment, system with a model whose benchmark is that substitution, and powers of liquidators. directors act in the Company’s interest and in view of creating value for all shareholders. An independent auditing firm satisfying legal requirements is commissioned to audit the Company As a further step along this path, Sabaf’s accounts. The independent auditor is appointed by management believes that ethics founded on the the Shareholder Meeting after consultation with the centrality of the individual and respect of shared Board of Statutory Auditors. values, set at the head of the creation of value, are able to orient decisions in a manner consistent with corporate culture and contribute significantly to assuring the Company’s sustainable long-term
33 SUSTAINABILITY GOVERNANCE
Annual Report2006 PART II d) assessing the Independent Directors’ satisfaction of requirements for independence at the time they INFORMATION ON are appointed and twice annually thereafter; IMPLEMENTATION OF e) assessing the overall adequacy of the general THE CORPORATE organizational, administrative, and accounting GOVERNANCE CODE structure of Sabaf and its core subsidiaries as established by the Chief Executive Officers, with This section presents a description of the special reference to the internal control system and procedures for and degree of application of the management of conflicts of interest; in particular, recommendations set forth in the Code. In the Board of Directors shall consider the information accordance with the general “comply or explain” received from the corporate officers and rule, this section also gives the reasons why any of departments responsible for audit and control of the the application principles and criteria were only Company and its core subsidiaries; partially applied or not at all. f) assessing the Company’s general operating performance and underlying corporate risks in light 1. ROLE OF THE BOARD OF DIRECTORS of the information received from executive directors, as well as comparing actual results with what had The Board of Directors is the core body of the Sabaf been forecasted; corporate governance system. It has the power and g) upon examination of the proposals submitted by duty to manage the Company, pursuing the primary the Compensation Committee and consultation with objective of creating shareholder value over the long the Board of Statutory Auditors, determining the term, while complying with the values, standards of compensation of directors holding specific offices conduct, and commitments stated in the Sabaf and individual allocation of the overall compensation Charter of Values. The Board of Directors owed to members of the Board of Directors, unless accordingly takes all decisions necessary or useful the Shareholder Meeting has not already done so; for accomplishing the Company’s corporate purpose. h) examining and approving on a prior basis those transactions by Sabaf and its subsidiaries that would Without prejudice to the exclusive responsibilities have a significant impact on its operations, assets, and prerogatives envisaged by law and the Articles and financial position, especially if they are to be of Association, the Board of Directors has the carried out with related parties or involve a potential following responsibilities: conflict of interest (in this regard, the Board of Directors adopted Guidelines on February 13th 2007 a) examining and approving the Company’s and that define the procedures for approval and Group’s strategic, business, and financial plans and execution by the Company and its subsidiaries of budgets, taking into account information received significant transactions with related parties or in from executive directors, as well as the Sabaf which a director has a vested interest; reference is corporate governance system and the organization made to Section 9 hereunder); of the Group headed by the Company; i) reviewing and approving the periodic reports b) delegating and revoking the authority of executive envisaged by applicable laws and regulations; directors, defining the limits, terms and conditions j) defining the principles for implementation of the for exercise of their powers, and the frequency (at Company’s social responsibility; least once quarterly) with which the delegated k) at least once a year, assessing the size, officers must report to the Board of Directors on the membership, and operation of the Board of Directors activities they performed pursuant to their and its committees, as well as establishing criteria delegations of authority; for selection of the specialized professionals whom c) establishing committees within the Board of the Board deems appropriate as new members. Directors, defining their membership and operating Accordingly, on February 13th 2007 the Sabaf Board procedures, as well as assigning their duties and of Directors approved Guidelines for implementation responsibilities; of the Corporate Governance Manual. After 34 considering various approaches to improving the The Company Corporate Governance Manual states performance of directors, the Board of Directors that core subsidiaries are those subsidiaries that decided that the individual directors would evaluate represent at least 25% of the Group’s total assets, themselves, by filling out and returning specific shareholders’ equity, or pre-tax income, as well as questionnaires, and then discussing the results with those subsidiaries identified by the Board of the Board as a whole. The first Board of Directors Directors that, even if they fall short of those evaluation will be conducted in 2007. thresholds, contribute to development and realization of the Group’s policies and strategic In regard to the internal control system, which is plans. None of the subsidiaries of Sabaf S.p.A. was better described in Section 8 hereunder, the Board considered a core subsidiary in FY2006. of Directors is responsible for: To ensure that directors would be able to dedicate l) defining and approving the guidelines for the the time necessary to perform their assigned duties internal control system, so that the principal diligently, the Board of Directors passed a resolution strategic risks confronting Sabaf and its subsidiaries on April 28th 2006 that defines the maximum are properly identified and adequately measured, number of positions that each director may hold on managed, and monitored; the board of directors or board of statutory auditors m) assigning the Sabaf Chief Executive Officer (or of companies listed on regulated markets inside and another executive director) the task of supervising outside Italy, as well as at financial, banking, the performance of the internal control systems of insurance, or other large companies: the Company and its core subsidiaries; n) on motion by the director assigned to supervise a) executive directors: a maximum of three offices, performance of the internal control system and after not counting the positions held within the Group; consulting with the Internal Control & Audit Committee, appointing and dismissing one or more b) non-executive directors: a maximum of seven Chief Internal Auditors, defining their compensation offices, not counting the positions held in the in accordance with Company policies; financial companies envisaged in Article 113 of the o) approving decisions to establish the internal audit Italian Consolidated Banking Act (“Testo Unico function either within the Company or outsourcing it Bancario”). to external organizations, after assessing their professional qualifications and independence; Except as otherwise envisaged in the Articles of p) as part of its responsibilities for assessing the Association, the Board of Directors shall meet adequacy of the general organizational, periodically, and at least once every quarter, as well administrative, and accounting structure mentioned as whenever the Chairman deems necessary or hereinabove at subsection e), assessing the appropriate. It shall also meet upon request by the adequacy, effectiveness, and actual performance of directors and statutory auditors, as envisaged by the internal control system at least once annually; law and the Articles of Association (i.e. upon request q) adopting the Company Charter of Values, by at least one director or at least two statutory Corporate Governance Manual, Organization auditors). During FY2006 the Board met eight times. Operation and Control Model pursuant to Legislative Decree 231/2001, and the other corporate governance procedures of Sabaf, making the relevant changes and additions, as well as extending these documents and procedures to subsidiaries when deemed appropriate; r) appointing the Compliance Program Supervisory Committee envisaged in Legislative Decree 231/2001.
35 SUSTAINABILITY GOVERNANCE
Annual Report2006 2. MEMBERSHIP OF THE BOARD OF that holds office until shareholders’ approval of the DIRECTORS FY2008 annual report and accounts.
The Company Articles of Association envisage that The size of Board membership was increased to 11 the Shareholder Meeting may determine the number members, of which the majority (6) are non- of directors, between a minimum of three and a executive directors. The following individuals were maximum of fifteen. The high maximum number of confirmed as executive directors: Chairman directors reflects the need to dispose of a Board of Giuseppe Saleri, Vice Chairman Gianbattista Saleri, Directors that best meets the needs of the Chief Executive Officer Angelo Bettinzoli, and the Company. It also allows Sabaf to draw on Chief Financial Officer, Alberto Bartoli. Ettore Saleri, professionals with different backgrounds and to a member of the family that controls the Company, bring their different skills and expertise together in was also designated as executive director. The such a way as to address current and future needs following individuals were confirmed as non- more effectively, while maximizing shareholder executive directors: Leonardo Cossu (business value. expert), Raffaele Ghedini (an expert in scientific and technological research, training, and consulting), The Board of Directors designates the executive and Franco Carlo Papa (an expert on corporate non-executive directors from amongst the directors governance, finance, and business development, as appointed by the Shareholder Meeting. Executive well as former chairman of AIAF-Associazione directors are those who are: Italiana Analisti Finanziari), and Flavio Pasotti (businessman and chairman of Apindustria Brescia). (a) the Chief Executive Officers of Sabaf or its core Newly appointed members to the Board of Directors subsidiaries, including the Chairmen with individual are Salvatore Bragantini (former commissioner at delegations of operating authority or those having a CONSOB) and Alberto Federico Giua (Professor of specific role in the development of Company Product Innovation and Development at the strategies; Università Cattaneo in Castellanza). Elio Borgonovi (full professor at the Università Bocconi in Milan) (b) directors with management positions at Sabaf or was director until April 28th 2006. its core subsidiaries. Directors’ professional résumés are available on our So that the opinions of non-executive directors website www.sabaf.it in the Corporate Governance carry significant weight in the Board of Directors section. decision-making process, it is envisaged that a majority of director seats be held by non- Below we disclose the offices held by Sabaf executive directors. Sabaf believes that a Board directors as directors or statutory auditors of other of Directors with a high proportion of highly listed companies, in financial, banking and/or qualified non-executive and independent directors insurance companies, and/or in large companies: attests to its concern for the interests of minority shareholders and represents an additional step • Giuseppe Saleri is Chairman of Giuseppe Saleri forward towards assuring the long-term SapA, the financial Company that controls Sabaf sustainability of Company development. SpA;
In order to prevent excessive concentration of • Angelo Bettinzoli is a director of Gefran SpA; power in any one person within the Company, the office of Chairman is kept separate from that of the • Leonardo Cossu is a director of Leonessa Chief Executive Officer, who has primary Fiduciaria Srl, Chairman of the Board of Statutory responsibility for management of the Company. Auditors of Guido Berlucchi & C. SpA, and a statutory auditor of Banca Valori SpA, Bossini SpA, The Annual General Meeting of shareholders held on Brawo SpA, Finber SpA, and Infracom Italia SpA; 36 April 28th 2006 appointed the Board of Directors • Franco Carlo Papa is an independent director of THE LEAD INDEPENDENT DIRECTOR DMT S.p.A., director of IGI SGR S.p.A., Chairman of the Board of Statutory Auditors of Gecofin S.p.A. and Since the Chairman of the Board of Directors is Metalwork S.p.A., and statutory auditor of Arnoldo the person in charge of Sabaf, the Board of Mondadori Editore S.p.A. Directors meeting held on April 28th 2006 designated Franco Carlo Papa as Lead • Salvatore Bragantini is Chairman of APEI SGR Independent Director. The Lead Independent S.p.A. and PROMAC S.p.A., Vice Chairman of IW Bank Director holds this office for the entire term of the S.p.A., director of Unicredit Banca Mobiliare S.p.A., Board of Directors and is the principal point of Interpump Group S.p.A., Aeroporto G. Marconi di contact and co-ordination for the requests and Bologna S.p.A., and member of the Supervisory contributions made by non-executive directors, Board of KME (Germany). and in particular independent directors.
THE CHIEF EXECUTIVE OFFICER The Lead Independent Director collaborates with the Chairman in order to ensure that the Directors The Chief Executive Officer (CEO), Angelo Bettinzoli, receive complete and prompt information regarding is responsible for running the Company according to adoption of resolutions by the Board of Directors the strategic guidelines defined by the Board of and exercise of its powers of direction, co- Directors. The CEO co-ordinates all corporate ordination, and supervision of Company and Group functions, assuring a swift decision-making process, activities. together with efficient and transparent management. The CEO is vested with ample In preparation for Board meetings, the Lead delegated powers concerning all operational areas of Independent Director assists the Chairman in the Company, with separate powers of signature, reviewing the documents to be sent in advance to within the limit of € 1 million per individual directors and statutory auditors, so that they may transaction. offer effectively participate on an informed basis at The CEO reports to the Board at least on a quarterly those meetings, as well as assessing cases where basis on activities performed and provides a unexpected needs or urgent situations limit the qualitative and quantitative description of any amount of information that can be provided in significant, atypical, unusual, or related-party advance. transactions. The Lead Independent Director also co-ordinates the THE CHAIRMAN AND VICE CHAIRMEN Board of Directors self-evaluation process.
The Chairman calls meetings of the Board, co- ordinates Board activity and guides proceedings in 3. INDEPENDENT DIRECTORS its meetings. In the case of his impediment, a Vice Chairman performs his functions. An adequate number of non-executive directors are The Chairman and Vice Chairmen are vested with independent, in the sense that they do not have nor ample delegated powers within the limit of have recently had direct or indirect relationships € 500,000 per individual transaction. These with Sabaf or parties connected with Sabaf such as powers have been delegated to the Chairman and to influence their independent judgement. Vice Chairmen to assure more streamlined management and are specifically designed to To ensure the presence of an adequate number of ensure that there are never any management independent directors, Sabaf has adopted the “hiatuses” if the CEO is unable to exercise his functions.
37 SUSTAINABILITY GOVERNANCE
Annual Report2006 following proportions (which are more restrictive or professional relationship on a case-by-case basis, than those required by Borsa Italiana for companies according to the specific situations. Nevertheless, listed in the STAR segment): the Board always considers the following types of relationships to be “significant”: (i) when there are up to five members on the Board: at least two independent directors; › commercial or financial transactions carried out during the current and previous year, as well as (ii) when there are between six and ten members on professional services provided during the current and the Board: at least three independent directors; previous year either directly or indirectly (e.g. through subsidiaries or in which the director holds a (iii) when there are between eleven and fifteen significant position, or is the partner of a professional members on the Board: at least four independent or consulting firm), if these transactions: directors. • were not carried at arm’s length market The Sabaf Board of Directors evaluates satisfaction conditions, or of the requirements for independence by focusing more on substance than on form. Accordingly, a • even if they were carried out at arm’s length director’s independence is compromised when he: market conditions, exceed 5% of the revenues of the supplier or beneficiary enterprise (in the case of a) owns – directly, indirectly (through subsidiaries, commercial or financial transactions) or exceed 5% of trustees, intermediaries, or otherwise) or on behalf the director’s income or € 100,000 (for professional of third parties – equity interests in Sabaf such as to services); enable him to exercise control or considerable influence over the Company, or is a participant in › employment relationships with Sabaf in the shareholders agreements for the control or exercise previous three fiscal years; of considerable influence over Sabaf; d) is a close relative of a person who is in one of the b) holds, or has held in the previous three fiscal situations described hereinabove. For this purpose, years, a significant position at Sabaf, one of its core “close relative” means the spouse, cohabiting partner, subsidiaries, or a joint venture of Sabaf, or at a and cohabiting relatives, blood relatives and relatives Company or organization that, either singly or with by marriage to the fourth degree (i.e. cousins); others through a shareholders agreement, controls Sabaf or is able to exercise considerable influence e) receives or has received in the previous three over it. In this context, a “significant position” at fiscal years significant compensation in addition to Sabaf means the office of Chairman, Vice Chairman, the “fixed” compensation as a non-executive director executive director, or executive with strategic from Sabaf or from a subsidiary or parent company, responsibilities (hereinafter, “key managers”); including participation in incentive schemes linked to Company performance, including share-based c) has or has had – directly, indirectly (e.g. through incentive schemes; subsidiaries or in which he holds a significant position, as defined hereinabove, or as partner in a f) is a shareholder or director of a Company or professional or consulting firm), or on behalf of third organisation belonging to the network of the firm parties – a commercial, financial, or professional retained as the issuer’s independent auditor; relationship with Sabaf, one of its subsidiaries, or with any of its key managers, or with the majority g) was a director of Sabaf for more than nine years shareholder or group of shareholders that control it, in the last twelve years; such as to influence his independence of judgement, or has been an employee of one of the h) is an executive director at another Company aforementioned parties. The Board of Directors where a Sabaf executive director was director. assesses the relevance of the commercial, financial, 38 The Board of Directors may periodically define other 4. HANDLING OF CONFIDENTIAL situations that could compromise a director’s INFORMATION AND INTERNAL DEALING independence. CONFIDENTIAL INFORMATION With the abstention of those concerned, the Board of Directors reviews satisfaction by independent The CEO manages the processing of confidential directors of the requirements for independence after information in accordance with a specific procedure they have been appointed and then twice annually for internal management and external disclosure of thereafter, upon approval of the draft annual report documents and information concerning the and the half-year report. Company. This procedure must be proposed by the CEO and approved by the Board of Directors. Satisfaction of these requirements, as defined in the Special attention is devoted to the management of Corporate Governance Manual, was reviewed for the inside information, as defined in Article 181 of the first time on December 19th 2006, following Consolidated Law on Finance (i.e. information that adoption of the Manual. In accordance with the new has not been made public and, if it were made criteria, Salvatore Bragantini, Raffaele Ghedini, public, would be likely to have a significant effect on Alberto Federico Giua, Franco Carlo Papa and Flavio the price of relevant listed financial instruments). Casotti were confirmed as independent directors. However, following the application of the new This procedure pursues the aims of careful, secure, criteria, Leonardo Cossu, until then an independent and confidential management of this type of director of the Company, was no longer considered information, as well as disclosure of symmetrical, as such since he had been a director of Sabaf S.p.A. non-selective, prompt, complete, and adequate for more than nine years. inside information. Corporate officers are obliged to maintain the confidentiality of information and The independent directors meet whenever documents acquired in the performance of their necessary and at least once annually. The other tasks and to comply with the procedure referred to directors may not attend these meetings. They shall in this section. discuss and exchange views on issues deemed of interest for management of the Board of Directors INTERNAL DEALING or the Company. This may include the sharing of strategic, general, and technical experiences, and The Company has adopted an Internal Dealing Code experiences outside the Company that might be that defines disclosure obligations and mandatory useful to Sabaf itself. In particular, the independent conduct in transactions involving financial directors shall exchange views on potential conflicts instruments that are executed by “relevant persons,” (or divergence) between the interests of as envisaged by law and regulatory requirements. shareholders and the interests of all or some This Code was adopted in 2006, superseding the directors. The meetings might conclude with previous one, and receives recent statutory and suggestions for improving the governance of Sabaf. regulatory amendments. The Lead Independent Director shall bring those suggestions to the attention of the Board of For the purposes of the Code, “relevant persons” at Directors at its first meeting thereafter. the Sabaf Group are: • the directors and statutory auditors of Sabaf The independent directors met once in 2006. S.p.A.; • The administrative & finance manager, the commercial manager, and the investor relations manager of Sabaf SpA;
39 SUSTAINABILITY GOVERNANCE
Annual Report2006 • the directors and general managers (if appointed) At beginning of 2007, the Committees appointed one of the principal subsidiaries of Sabaf S.p.A.; principal of their members to act as Chairman, with the subsidiaries are construed to be those companies responsibility of co-ordinating and organizing work that are consolidated on a line-by-line basis and that and communicating with the Board of Directors. meet at least two of the following conditions, on the basis of their last approved financial statements: The Committees meet whenever their Chairman total assets exceeding € 7.5 million, shareholders’ deems appropriate or on request by one of their equity exceeding € 7.5 million euros, total revenues members and, in any event, at least twice a year. exceeding € 15 million. None of the subsidiaries The Company makes available its own facilities and currently satisfies these conditions. conference call or videoconference equipment for use by the Committees. In 2006, 15 internal dealing transactions were disclosed and reported to the public, as required by Minutes shall be drafted and signed by the law. Details on these transactions can be found at participants of each Committee meeting. The www.sabaf.it, in the Investor Relations/Internal minutes shall be transcribed in a minute book kept Dealing section. together with other corporate documents in a room with limited, controlled access at the Company’s The Code prohibits relevant persons from executing registered office. any transaction seven or fewer days prior to the date of Sabaf S.p.A. Board of Directors meetings The Committees must report on their activities at called to approve financial statements or budgets. least once annually to the Board of Directors, offering suggestions and recommendations on the matters for which they are responsible. 5. INTERNAL BOARD COMMITTEES In performing their assigned duties, the Committees At the first meeting it held after being appointed on shall have free access to corporate information and April 28th 2006, the Board of Directors established a functions as necessary. They may retain the Compensation Committee and Internal Control & assistance of qualified external consultants within the Audit Committee. Both committees may make limits of their assigned budgets. proposals and offer advice but do not have decision- making authority. These Committees had also been established by the previous Board of Directors 6. APPOINTMENT OF DIRECTORS whose term expired on April 28th 2006. The voting list system for the appointment of The Corporate Governance Manual adopted on directors is not currently used. The Company will December 19th 2006 specifies that the Committees amend its Articles of Association by June 30th 2007 have a minimum of three members. Their members in compliance with new statutory (Article 147-ter of shall be chosen from among those directors the Consolidated Law on Finance) and regulatory considered qualified in terms of their personal skills, requirements and introduce the voting list system. expertise, and availability to discharge the duties The purpose of this change is to ensure that at least and functions assigned to the Committee. The one member of the Board of Directors represents Manual also envisages that each Committee be minority shareholders. allotted funds upon their formation, to be used exclusively in order to defray the expenses incurred The Shareholder Meeting held on April 28th 2006 in discharging their assigned duties. The elected the directors for 2006-2008. The directors Committees must account for these expenditures to designated by the majority shareholder Giuseppe the Board of Directors. This last measure was not Saleri S.a.p.A. were unanimously elected by the applied in 2006 but will be implemented in 2007. meeting participants in a secret vote, as envisaged
40 by law. When the vote was held, and after The Corporate Governance Manual envisages that expressing his own reservations in regard to the the compensation of executive directors be decided voting procedures, the Chairman of the Shareholder by the Board of Directors upon examination of Meeting informed the attending shareholders that proposals by the Compensation Committee (as while the secret voting procedure would be illustrated hereunder) and consultation with the followed, they had the right to declare their vote Board of Statutory Auditors. This rule came into openly in order to render the proceedings more effect on the date that the Manual was approved transparent and productive. (December 19th 2006).
Since the Company is legally controlled by a single The Company Corporate Governance Manual also shareholder, a Nominations Committee was not set envisages that: up inside the Board of Directors. › part of the compensation of executive directors The Corporate Governance Manual adopted on (as well as that of key managers) be tied to the December 19th 2006 envisages that the call of operating results realized by Sabaf and/or meeting for the Shareholder Meeting must be sent achievement of specific targets previously set by the out at least 30 days prior to the scheduled date of Board of Directors or, in the case of key managers, the meeting. Furthermore, this call of meeting must by the CEO; also ask the shareholders to deposit their list of candidates for a director’s seat, including the › executive directors and key managers may be curriculum vitae of each candidate with complete the beneficiaries of share-based inventive schemes; personal information and summary of his professional qualifications and experience, as well as › the compensation of executive directors be certification that he would qualify as an independent commensurate with the commitment each one is director, if applicable. The shareholders must asked to make, taking any membership on one or deposit their candidate lists at the registered office more internal committees into account. Their of the Company at least 15 days before the compensation is not tied either to the operating Shareholder Meeting. The candidate lists and results achieved by Sabaf or to the share-based information about the candidates shall be promptly incentive schemes, unless decided with cause by the published on the Sabaf website. Shareholder Meeting.
On May 6th 2003 the Sabaf S.p.A. Shareholder 7. DIRECTORS’ COMPENSATION Meeting resolved in favour of a capital increase to service a stock option plan reserved for certain The compensation of individual directors is set at a directors and employees. The stock option plan in level sufficient to attract, retain, and motivate place had the following characteristics: directors possessing the professional qualifications • Number of options granted: 666,500 necessary for successful performance of their duties. • Vesting date: 15 April 2006 • Exercise period: 1 July – 31 October 2006 When it appointed the Board of Directors, the • Strike price: € 14.38 per share Shareholder Meeting held on April 28th 2006 defined the amount of compensation to be paid to directors A total of 199,950 stock options accrued on the basis during the three-year period 2006-2008. of the Group’s operating performance and in accordance with the conditions for exercise At the meeting held to delegate authority and envisaged in the plan (achievement of pre-set duties, the Board of Directors then allocated the EBITDA and EBIT targets). This resulted in the overall compensation approved by the Shareholder subscription of 199,950 shares by the beneficiaries in Meeting to the individual directors. 2006. The remaining 466,550 options, which cannot be exercised, have expired. 41 SUSTAINABILITY GOVERNANCE
Annual Report2006 No stock option plan exists at the date of this 8. INTERNAL CONTROL SYSTEM report. The Compensation Committee is reviewing the incentive system for the CEO, directors holding The internal control system of the Company and its specific positions, and key managers in view of core subsidiaries is comprised by a set of rules, making relevant recommendations and proposals to procedures, and organizational structures designed to the Board of Directors. prevent or reasonably curtail business risks and achieve the following objectives: effective, efficient The Notes to the Financial Statements contain business operating processes; protection of corporate specific information on the compensation paid to assets; complete, reliable, and timely accounting and each director, including stock options. financial reporting; and compliance of business conduct with laws, regulations, and corporate COMPENSATION COMMITTEE directives and procedures.
The Board of Directors Compensation Committee The internal control system of Sabaf and its core has four non-executive members (Cossu, Ghedini, subsidiaries involves all Company employees. Its Giua, and Pasotti), a majority of whom are proper functioning is assured by the contribution of a independent. series of persons that are assigned different roles and responsibilities. The Compensation Committee is responsible for: The Company Board of Directors bears ultimate • making proposals to the Board of Directors, in the responsibility for the internal control system, defining absence of the persons directly concerned, for its guidelines, periodically reviewing its adequacy compensation of the CEO and directors holding within the scope of the Company’s business, and specific positions, monitoring application of the providing periodic disclosures to the market. It does decisions taken by the Board. Specifically in regard so by drawing on the support of Company personnel to the portion of compensation tied to the and officers, particularly the Internal Control & Audit Company’s operating results, the relevant Committee and the Chief Internal Auditor. The recommendations are accompanied by suggestions Board’s specific responsibilities in regard to the for the associated targets and evaluation criteria, in internal control system are described in Section 1 order to align the compensation of the CEO and hereinabove. directors holding specific positions with the shareholders’ medium-long term interests and the Within the scope of the responsibilities assigned to growth targets set by the Board of Directors; him by the Board of Directors for supervision of the internal control system, the Chief Executive Officer • evaluating the criteria for compensation of key issues guidelines for implementation of the internal managers, overseeing their proper application (on control system, overseeing: the basis of information provided by the CEO) and (a) the design, realization, and operation of the making general recommendations on the subject to system, constantly monitoring its overall adequacy, the Board. effectiveness, and efficiency with the support of the Chief Internal Auditor and the Internal Audit In making recommendations to the Board concerning Department; (b) updates of the internal control directors compensation and evaluation of system according to operating conditions and the compensation policies for key managers, the statutory and regulatory context; (c) identification of Compensation Committee must consider all the the principal risks faced by the Company, to be roles, offices, and responsibilities assigned to the presented periodically for examination by the Board director or key manager, as well as all compensation of Directors. accorded at the Group level.
42 The Internal Control & Audit Committee is The Internal Control & Audit Committee has three responsible for making proposals and providing non-executive members (Bragantini, Cossu, and advice to the Board of Directors that will support it Papa), a majority of whom are independent. All in discharging its responsibilities for the internal members of the Committee have adequate control system. In particular, this involves experience in accounting and financial matters. assessments and decisions regarding the internal control system, approval of the annual and half-year The Internal Control & Audit Committee meetings accounts, and relations between the Company and are attended by the Chairman of the Board of the independent auditor. The Internal Control & Statutory Auditors or another statutory auditor Audit Committee has specific responsibility for the designated by him, as well as the Chief Internal following duties: Auditor, who shall act as secretary. a) together with the Chief Administrative Officer and In 2006, the Committee expressed opinions on: the independent auditors, verify whether accounting • planning of the internal control activities, standards and policies are properly applied and particularly the decision to outsource the internal uniform for preparation of the consolidated financial auditing function; statements; • compliance with corporate disclosure and market abuse obligations; b) on request by the CEO, issue opinions on specific • analysis of the Organization, Operation and aspects concerning identification of the principal Control Model pursuant to Legislative Decree business risks as well as the design, realization, and 231/2001; management of the internal control system; • analysis of the draft Corporate Governance Manual; c) examine the work plan and periodic reports • documentation of outstanding hedges of financial prepared by the Chief Internal Auditor; risks and their recognition in Company accounts. d) assess the proposals made by accounting firms to The Chief Internal Auditor is appointed by the Board become the Company’s independent auditor, the of Directors upon recommendation by the CEO, in work plan prepared for audits, and the results set the latter’s capacity as supervisor of the internal forth in its report and any letter of suggestions; control system. The Chief Internal Auditor assists the Board of Directors, the Internal Control & Audit e) monitor the effectiveness of the independent Committee, the CEO, and departmental heads in auditing process; discharging their duties regarding internal control and risk management systems. In particular, the f) on request by the Board of Directors, issue Chief Internal Auditor: a) assists the CEO and opinions prior to and regarding transactions with department heads with the design, management, related parties or in which a director might have an and monitoring of the internal control system; b) interest, either on his own account or that of others; plans audits of the adequacy and operation of the internal control system implemented according to a g) perform any other tasks that are assigned to it by risk-based approach; c) verifies compliance with the the Board of Directors; procedures implemented for management of significant risks, issuing an assessment of the ability h) report on its activity and the adequacy of the of the internal control system to achieve an internal control system to the Board of Directors at acceptable level of overall risk. least once every six months, upon approval of the annual accounts and half-year reports.
43 SUSTAINABILITY GOVERNANCE
Annual Report2006 In performing these tasks, the Chief Internal Auditor ORGANIZATION, OPERATION AND CONTROL reports directly to the CEO and reports on his work MODEL PURSUANT TO LEGISLATIVE DECREE at least every six months to the Internal Control & 231/2001 Audit Committee and the Board of Statutory Auditors. Sabaf adopted the Organization, Operation and Control Model pursuant to Legislative Decree The Chief Internal Auditor has direct access to all 231/2001 (hereinafter, the “Model”) in 2006. The information useful for performance of his assigned Model is designed to thwart the possibility that duties. In order to assess the assess the adequacy criminal offences falling under the scope of and actual operation of the internal control system, Legislative Decree 231/2001 be committed. This he relies on an internal auditing organization decree envisages the administrative liability of the outsourced to external service providers. Company in the case of certain types of criminal Consequently, he is allocated a budget by the Board offences committed by employees or outside staff in of Directors that is adequate for performing his the Company’s interest. The general part of the assigned duties. Model is available in the Investor Relations / Corporate Governance section of the website Pursuant to the guidelines issued by the Board of www.sabaf.it. Directors and the directives received to implement them, the departmental heads are responsible for The Model is a set of general principles, rules of managing, implementing, and monitoring the conduct, means of control and organizational, training effective operation of the internal control system and information activity, and disciplinary system within the scope of their respective purviews, design to prevent the commission of criminal ensuring that adequate procedures are adopted for offences. management of the risks posed by the activities in their areas of responsibility. The Model also envisages the mandatory creation of a Supervisory Committee (SC), which is responsible Within the structure of the internal control system, for assessing the adequacy of the Model (i.e. its real certain organizational units perform different types ability to prevent offences); supervising application of control monitoring activities, including the and compliance with the Model by means of ongoing activities of the Quality, Safety, & Environment audits; auditing individual acts, compliance with Service, and other activities performed by the adopted protocols, the level of familiarity with the Human Resources Department and the Information Model in the organization, and specific reports of Systems Service. A continuous flow of information infractions; updating the Model. The Model envisages amongst the heads of these services and that the SC have at least two members, with general departments is assured in support of the internal legal and labour law, accounting, inspection, and control system evaluation process. internal audit expertise. At least one of the members of the Supervisory Committee must be selected from Within the limits of their respective roles, all within the Company (namely, the head of Internal employees contribute to effective operation of the Control), while at least one must be independent of internal control system. the Company, be particularly qualified and have experience in the sector in which Sabaf S.p.A. operates.
On August 2nd 2006 the Sabaf S.p.A. Board of Directors appointed the Supervisory Committee for the three-year period 2006 – 2008. The members of the Supervisory Committee are the Chief Internal Auditor and an independent legal counsel.
44 COMPONENTS OF THE INTERNAL CONTROL control); these managers implement mechanisms for SYSTEM continuous supervision on a daily basis in order to detect any irregularities in the performance of The essential components of the internal control activities on a timely basis; system of Sabaf and its core subsidiaries consist of the documentation that is constantly produced and b) by the Administration and Finance Department; as updated by the Company to define rules of Conduct, part of its budget control activities, it audits assignment of duties and delegations of Company performance and achievement of responsibility, objectives and methods for operational cost, effectiveness, and efficiency assessment of risks and performance of the entire targets; organization and of individuals. They include the following: c) by the Chief Internal Auditor on an independent basis and through Internal Audit, to assess the • the Charter of Values; adequacy and actual operation of the internal • rules concerning the corporate and organizational control system based on a work plan defined structure and delegations of authority; starting from a review of corporate risks and other • the mechanisms for segregation of functions available information. These monitoring activities within the organization (as reflected in the corporate are also carried out as support for the Supervisory information systems), designed to prevent over- Committee pursuant to Legislative Decree 231/2001. concentration of decision-making and authorization, implementation/executive, accounting, and EXCHANGE OF INFORMATION BETWEEN BODIES audit/control powers and functions; AND OFFICERS RESPONSIBLE FOR CONTROL AT • policies for development and professional growth SABAF of human resources; • systems for the definition of corporate objectives Sabaf sets up meetings and exchanges of and auditing and monitoring of business information amongst the various bodies and officers performance; responsible for auditing and monitoring the • management and financial reporting systems, as organizational, administrative, accounting, and well as systems for internal and external internal control systems of the Company and its communication; core subsidiaries. • the body of corporate procedures as a whole, including those envisaged in the Organization, More specifically, without prejudice to statutory Operation and Control Model adopted by Sabaf provisions regarding statutory auditors and the pursuant to Legislative Decree 231/2001 and those independent auditor, the Corporate Governance introduced pursuant to Law 262/2005 concerning Manual envisages that a joint meeting be held by administrative and accounting procedures for the the following bodies and officers at least ten days preparation of financial statements. before the Board of Directors approves the draft annual report and half-year report of Sabaf: The internal control system also includes the auditing and continuous monitoring processes • Internal Control & Audit Committee carried out at the various levels of the organization • Board of Statutory Auditors by internal Company entities and external • Supervisory Committee pursuant to Legislative organizations (internal auditing, Supervisory Decree 231/2001 Committee, etc.). In particular, corporate risks and • Internal Auditor controls are monitored: • Independent Auditor a) by the individual departmental and unit heads within the scope of their responsibilities (line
45 SUSTAINABILITY GOVERNANCE
Annual Report2006 During this meeting, exchanges of information are 9. INTERESTS OF DIRECTORS AND envisaged concerning the principal findings and/or TRANSACTIONS WITH RELATED PARTIES problems revealed during audits of the organizational, administrative, accounting, and Guidelines implementing the Corporate Governance internal control structures. Manual, which were approved by the Board of The internal control bodies and officers held their Directors on February 13th 2007, define what are first meeting in accordance with the Corporate considered transactions with related parties and Governance Manual on March 8th 2007. those in which a director has an actual or potential interest on his own behalf or of someone else, ASSESSMENT OF THE INTERNAL CONTROL whether or not that interest conflicts with the SYSTEM Company’s interest.
In light of the Board of Director’s duty to assess the These Guidelines also set forth the rules for properly adequacy, effectiveness, and actual operation of the identifying, approving, and executing these internal control system at least once annually, and transactions. In particular, the document defines the on the basis of the information and material measures designed to ensure that these transactions collected with the support of the Internal Control & are executed transparently, in accordance with Audit Committee and other internal and external formal and substantial rules of fairness, and specifies bodies and offices assigned responsibility for control the operating rules for identification and adequate of the Group, the Board of Directors holds that the management of situations where a director has an existing internal control system as a whole is interest on his own behalf or of someone else. adequate considering the nature of the business, that it will permit achievement of corporate objectives, and that it was functional as a whole in 10. STATUTORY AUDITORS 2006. The statutory auditors are appointed in accordance This assessment, which refers to the general system with a transparent procedure regulated by the of internal control, reflects the inherent limits of that Company Articles of Association. However, this system. Although it was well conceived and procedure is subject to revision by June 30th 2007 in functioning, the internal control system can assure compliance with statutory and regulatory achievement of company objectives only within the amendments. limits of “reasonable certainty.” The current mechanism for appointing statutory Guidelines implementing the Corporate Governance auditors is based on lists submitted by the Manual, which were approved on February 13th shareholders who either singly or together with 2007, set forth detailed rules governing the others own at least three per cent of the voting disclosure an evaluation processes that the Sabaf shares at the Ordinary Shareholder Meeting. Board of Directors uses to assess the Group’s internal control system. The process involves all The lists must be deposited at the registered office individuals and bodies responsible for the design, of the Company at least ten days prior to the date implementation, and/or monitoring of the Group’s scheduled for the Shareholder Meeting on its first internal control system. This procedure will be call. This rule shall be mentioned in the call of adopted beginning with the FY2007 assessment of meeting. The deposited lists shall be promptly the internal control system. published by the Company on its website.
Each list must be deposited together with the curriculum vitae of the candidates, certification by the individual candidates that they accept their
46 candidacy, certification under their own 11. INVESTOR RELATIONS responsibility that they are not legally ineligible or unqualified (pursuant to Article 148(3) TUF), and The Sabaf Board of Directors makes every effort to certification that they satisfy legal integrity establish an ongoing and transparent dialogue with requirements (Article 148(4) TUF). shareholders and foster the fullest possible attendance of shareholders at Shareholder Meetings. This procedure was followed for election of the Board of Statutory Auditors by the Shareholder Accordingly, the following measures are taken: Meeting on April 28th 2006, which appointed the Board of Statutory Auditors for the three-year period • Shareholder Meetings are normally attended by all 2006 – 2008 (Italo Lucchini, Eugenio Ballerio, and directors; Giovannimaria Seccamani Mazzoli). The Consolidated Law on Finance (TUF), as amended by • during Shareholder Meetings, directors – through Law 262/2005, envisages that the Chairman of the the Chairman and/or CEO – provide information to Board of Statutory Auditors be appointed by the shareholders on the Company and Group, in Shareholder Meeting but chosen from among the compliance with regulations governing disclosure of statutory auditors elected by the minority inside information. More specifically, the Board of shareholders. Italo Lucchini was consequently Directors reports to the Shareholder Meeting on elected Chairman, as he had been nominated on a activities that it has performed and those that are minority shareholder list. planned, with special reference to significant transactions and transactions with related parties. It The Board of Statutory Auditors verifies that the also endeavours to ensure that shareholders receive independent directors actually satisfy the adequate information as necessary for them to requirements for independence after their make informed decisions on matters falling under appointment and then at least once annually the purview of the Shareholder Meeting; thereafter, forwarding the results of this audit to the Sabaf Board of Directors in time for preparation of • a Shareholder Meeting Regulation is in effect, the Corporate Governance Report. having the purpose of governing the orderly proceedings of ordinary and extraordinary The first such audit, which confirmed that the Shareholder Meetings, while also fostering independent directors satisfied the additional shareholder participation and exercise of their voting requirements of independence, was carried out on rights. The Regulation is available on the website March 8th 2007. www.sabaf.it, in the Investor Relations/Corporate Governance section; The Company adopted a series of measures to facilitate and assure effective performance of the • a specific section dedicated to shareholders is set Board of Statutory Auditors’ duties. The Company up within the Company’s official website. The defined inter alia the internal information flows section provides information about Sabaf and the necessary to assure prompt and complete Group of relevance for shareholders, so that they disclosures to the Board of Statutory Auditors can exercise their rights on a knowledgeable basis. pursuant to Article 150 (1) of the Consolidated Law It also publishes the procedures envisaged for on Finance. The Company also encourages attendance at and exercise of voting rights at the exchanges of information amongst its own control Shareholder Meeting, as well as documents bodies and officers. regarding the topics listed on the agenda, including the lists of director and statutory auditor candidates, The Board of Statutory Auditors systematically complete with their personal information and meets with the statutory auditors of the parent professional qualifications; company and subsidiaries in order to exchange information. 47 SUSTAINABILITY GOVERNANCE
Annual Report2006 • an Investor Relations Manager is available; PREPARATION OF COMPANY FINANCIAL STATEMENTS • if there are significant changes in the market capitalization of Sabaf stock or its shareholding The Company will amend its Articles of Association structure, the Board of Directors considers the by June 30th 2007 to comply with legal possibility of proposing that the Shareholder Meeting requirements governing the preparation of its amend the Articles of Association in regard to the financial statements and reports (Article 154-bis of percentages established for exercise of the actions the Consolidated Law on Finance) and appoint the and prerogatives established to protect minority manager in charge of doing so. shareholders. In 2006 the Company initiated the process of compliance with these measures. Specifically, it performed a specific analysis of the financial During 2006 Sabaf met analysts and fund managers reporting processes (closing of accounts and in Milan, London, Paris, Helsinki, Stockholm and preparation of annual and interim statutory and Copenhagen. A total of over 100 meetings took consolidated financial statements) in order to assess place. The Company also took part in presentation and document existing controls to assure the of annual and midyear interim results by STAR (high- reliability of its accounting and financial data. quality small/medium caps) companies in Milan and London. INDEPENDENT AUDITOR
Sabaf’s financial communication policy adheres to On April 28th 2006 the Shareholder Meeting retained the standards set in the Guide to Market Disclosure the firm AGN Serca as independent auditor of its of Information (Guida per l’Informazione al Mercato) financial statements for FY2006, FY2007, and published by the Ref. Forum on corporate FY2008. information in June 2002.
48 SHARE CAPITAL AND MAJOR SHAREHOLDERS
Sabaf SpA’s share capital consists of 11,533,450 ordinary shares with a par value of € 1.00 each.
As at December 31st 2006 the following shareholders owned equity interests in excess of 2%:
Giuseppe Saleri S.a.p.A. 53.81% Nazionale Fiduciaria S.p.A. 3.97% Sycomore Asset Management SA 3.36% Columbia Wanger Asset Management LP 2.37% Bestinver Gestion SGIIC SA 2.01%
The Company Giuseppe SapA, which controls Sabaf SapA, does not perform activities of direction and co-ordination of the latter pursuant to Sections 2497 et seq. of the Italian Civil Code.
Ospitaletto, March 23rd 2007
49 SUSTAINABILITY GOVERNANCE
ATTACHMENT 1 STRUCTURE OF BOARD OF DIRECTORS AND INTERNAL COMMITTEES FOR THE PERIOD JANUARY 1ST 2006 – APRIL 28TH 2006 Annual Report2006
Board of Dirextors Internal Control Compensation & Audit Committee Committee Office Members Executive Non-executive Independent **** No. of *** **** *** **** other offices ** Chairman Saleri Giuseppe • 100% 1 Vice-Chairman Saleri Gianbattista • 100% 0 • Chief Executive Officer Bettinzoli Angelo • 100% 1 Director Bartoli Alberto • 100% 0 Director Cossu Leonardo • 100% 7 • 100% • Director Papa Franco Carlo • 100% 5 • 100% Director Borgonovi Elio • 100% 0 • 100% Director Ghedini Raffaele • 100% 0 • Director Pasotti Flavio • 50% 0 • * An asterisk beside the name indicates that the director was designated via lists submitted by minority shareholders. ** This column shows the number of offices held by the person concerned as director or statutory auditor in other companies listed in regulated Italian and international markets; in financial, insurance or banking companies; or in companies of major size. *** In this column an indicates the director’s committee membership. **** This column shows• directors’ percent attendance of meetings.
ATTACHMENT 2
BOARD OF STATUTORY AUDITORS FOR THE PERIOD JANUARY 1ST 2006 – APRIL 28TH 2006
Office Members Percent attendance No. of other of BoSA meetings offices ** Chairman Nobolo Alberto 100% 0 Statutory auditor Ghisoni Sergio 100% 0 Statutory auditor Cisotto Angelo* 100% 0 Substitute statutory auditor Guidetti Paolo - 0 Substitute statutory auditor Mattei Marco* - 0 Number of meetings held in period: 2 * The asterisk shows that the statutory auditor was designated via lists submitted by minority shareholders. ** This column shows the number of offices held by the person concerned in other companies listed in Italian regulated markets.
50 ATTACHMENT 3 STRUCTURE OF BOARD OF DIRECTORS AND INTERNAL COMMITTEES FOR THE PERIOD JANUARY 1ST 2006 – APRIL 28TH 2006
Board of Directors Internal Control Compensation & Audit Committee Committee Office Members Executive Non-executive Independent **** No. of other *** **** *** **** offices ** Chairman Saleri Giuseppe • 100% 1 Vice-Chairman Saleri Gianbattista • 100% 0 Vice-Chairman Saleri Ettore • 83% 0 Chief Executive Officer Bettinzoli Angelo • 100% 1 Director Bartoli Alberto • 100% 0 Director Cossu Leonardo • 100% 7 • 100% • 100% Director Papa Franco Carlo • 83% 5 • 100% Director Bragantini Salvatore • 67% 7 • 50% Director Giuia Alberto Federico • 67% 0 • 100% Director Ghedini Raffaele • 100% 0 • 100% Director Pasotti Flavio • 100% 0 • 100% * An asterisk beside the name indicates that the director was designated via lists submitted by minority shareholders. ** This column shows the number of offices held by the person concerned as director or statutory auditor in other companies listed in regulated Italian and international markets; in financial, insurance or banking companies; or in companies of major size. *** In this column an indicates the director’s committee membership. **** This column shows• directors’ percent attendance of meetings.
ATTACHMENT 4
BOARD OF STATUTORY AUDITORS FOR THE PERIOD APRIL 28TH 2006 – DECEMBER 31ST 2006
Office Members Percent attendance No. of other of BoSA meetings offices ** Chairman Lucchini Italo* 100% 3 Standing statutory auditor Ballerio Eugenio 100% 1 Standing statutory auditor Seccamani Mazzoli Giovannimaria 75% 2 Substitute statutory auditor Guidetti Paolo - 0 Substitute statutory auditor Bellini Pierluigi* - 0 Number of meetings held in period: 4 * The asterisk shows that the statutory auditor was designated via lists submitted by minority shareholders. ** This column shows the number of offices held by the person concerned in other companies listed in Italian regulated markets.
51 SUSTAINABILITY GOVERNANCE
1.2.2 INTEGRATION OF SOCIAL ACCOUNTABILITY IN OPERATING PROCESSES Annual Report2006 IN ORDER TO TRANSLATE THE VALUES AND PRINCIPLES OF SUSTAINABLE DEVELOPMENT INTO CHOICES OF ACTION AND OPERATING ACTIVITIES, SABAF IS APPLYING ProGReSS© - “RESPONSIBLE MANAGEMENT PROCESS FOR SUSTAINABLE DEVELOPMENT” – A SYSTEM THAT, VIA A STANDARD METHODOLOGY, HARMONISES EXISTING OPERATING APPROACHES IN JUST ONE RESPONSIBLE MANAGEMENT PROCESS DESIGNED TO APPLY EXCELLENCE-ORIENTED PATHS.
52 1.2.2.1 DEVELOPMENTS IN THE SOCIAL ACCOUNTABILITY MANAGEMENT PROCESS
The prime factors in this process are: Definition of key indicators, capable of monito- ring› our economic, social, and environmental perfor- Sharing of values, mission and of the integrated mance policy› for sustainable development Adoption of a reporting system able to inform Adoption of a training/action process, able to ›the various categories of stakeholders effectively implement› improvements via inter-functional pro- jects involving employees and featuring specific rou- Definition of a stakeholder feedback system, in tes in terms of training and organisational communi- ›order to share and define together with stakeholders cation. Once again in 2006, Sabaf continued, as a the improvement path to be implemented. means of involving employees in the socially respon- sible management process initiated by the Group, quarterly publication of the company newsletter, which, among the various topics concerning compa- ny life, also addresses CSR issues.
Development of an internal control & audit ›system capable of monitoring both achievement of objectives set and also any ethical risks, as well as of verifying implementation of the company’s com- mitments to stakeholders
SABAF’S PATH TO EXCELLENCE
CSR REPORT LISTING IN STAR SEGMENT ISO 9001 - 2000 ISO 14001 GLOBAL INTEGRATED MODEL 231 COMPACT ANNUAL REPORT STAKEHOLDER ENGAGEMENT DEVELOPMENT OF CORPORATE ISO 9001 SYSTEM INTELLECTUAL SA8000 GOVERNANCE CAPITAL MANUAL CUSTOMER SATISFACTION SURVEY CHARTER OF VALUES ANALYSIS OF ORGANISATIONAL CLIMATE
1993 2000 2001 2002 2003 2004 2005 2006 Time line
53 SUSTAINABILITY GOVERNANCE
Annual Report2006 ADOPTION OF MODEL 231 Based on this activity, Sabaf SpA: During 2006 Sabaf SpA adopted what is known in ›Identified business activities where crimes and Italy as “Model 231”, i.e. the organisational and administrative offences could potentially be commit- operating model, required by Italian Legislative ted Decree 231/2001 (the Corporate Liability Law). The ›Identified the persons and corporate functions model is intended to prevent the committing of involved in performance of such activities relevant offences as so defined by the Decree. The ›Analysed the potential risks and also the potential latter in fact established the administrative liability and possible ways in which offences might be com- of a legal entity in the case of some types of crimes mitted committed by employees or outside staff in the ›Defined and, as necessary, tightened the internal company’s interest. control system.
This Organisational Model consists of a combination As a result of this analysis, four areas of activity at of (a) general rules (Standards of Conduct) and (b) risk were identified, i.e. operating rules (Protocols), observance of which – in ›Dealings with the public administration in the nor- performing activities forming part of processes mal course of business (for example: management potentially at risk – permits prevention of illicit, of inspections by government officials) and activities improper, and irregular conduct. The Standards of functional to perpetration of related administrative Conduct and Protocols are also intended to make offences (for example: cash flow management) their recipients aware of how they should conduct ›Preparation of financial reporting data (income themselves in processes at risk and to identify the statement, balance sheet, and cash flow statement) persons responsible as well as those involved. for subsequent disclosure ›Dealings with the Board of Statutory Auditors and The Organisation Model establishes the obligation of with the independent auditor notification of the body delegated to oversee the ›Management, circulation and external disclosure Model’s operation and observance. It also includes a of confidential and privileged information. disciplinary system for sanctions of failure to observe the Model by recipients of the Standards of With respect to this potential risk profile, Sabaf SpA Conduct and Protocols. has decided to regulate processes relating to the following specific types of crimes and offences Article 6, paragraph II, letter a) of the Legislative contemplated by the Legislative Decree: Articles 24 Decree expressly establishes that the Organisational and 25 of the Legislative Decree (crimes against the Model must “identify activities where crimes might public administration), Article 25/3 (corporate be committed”. In this respect, Sabaf SpA has crimes), and Article 26/6 (market abuse). analysed and mapped business activities, the ways in which decisions are formed and taken within The Standards of Conduct and Protocols are individual company areas, and internal control integrated with the other procedures and systems. organisation charts and with the system of delegation of powers already existing in Sabaf SpA. This analysis was formed, also with the aid of The company considers Model 231 to be an essential outside professionals, via review of corporate part of its internal control and oversight system. It is documentation (activities, main processes, committed to creating conditions enabling the Model organisation charts, powers of attorney, and to be effectively operational and adequate and also organisational instructions, etc.) and interviews with to assuring adequate operation of the Supervisory the heads of the various units. Committee.
Analysis and creation of the Organisational Model Model 231 is available on the corporate Website progressed in several phases and in such a way as www.sabaf.it in the Investor Relations/Corporate to permit reconstruction of the work done: Governance section.
54 ADOPTION OF THE CORPORATE GOVERNANCE MANUAL
Sabaf has deemed it consistent with its corporate policies to adopt – even although this is not compulsory – a Corporate Governance Manual to regulate the principles, rules, and operating approaches that enable the Company to reflect and apply the recommendations of Borsa Italiana’s Corporate Governance Code. The aim is to assure transparency of management and an equitable balance between the company’s power and the interests of shareholders and of the other stakeholders.
On December 19th 2006 Sabaf’s Board of Directors therefore adopted a Manual that sets out the principles and rules of operation of the company’s governance model. In early 2007 this was followed by a number of operating guidelines established for the purposes of proper performance of activities pertaining to Sabaf’s Board of Directors and control bodies. Contents are described in detail in the Corporate Governance Report (Section 1.2.1).
55 SUSTAINABILITY GOVERNANCE
1.2.2.2 STAKEHOLDER ENGAGEMENT Annual Report2006 IDENTIFICATION OF STAKEHOLDERS › Community: this consists of the local community With the term “stakeholders” Sabaf identifies all with which the company has dealings, schools and those groups of individuals – consisting of individual the academic world, end-users of household persons, organisations and communities – that appliances (consumers) and, more in general, the directly influence the company’s business or that are entire civil society with which the company has or directly or indirectly affected by it. may have dealings › Environment: this is interpreted as being both In its socially responsible management approach, the local territorial context in which the company Sabaf interacts with and involves all its performs its manufacturing activities and as the stakeholders, both internal (staff and shareholders) wider environmental context potentially affected by and external (customers, suppliers, financiers, public the Group’s activities or products. administration, competitors, the community, and the environment), making precise commitments to each FEEDBACK METHODS of them. As regards its ongoing dialogue with stakeholders, the Group bases its approach on the draft AA 1000 In this Annual Report we present the main SES (Stakeholder Engagement Standard), which is the information concerning Sabaf’s relationships or first internationally recognised guideline for this “dealings” with stakeholders, identified as follows: aspect. Staff: members of staff are all those who have ›a relationship of dependent or outside employment The dialogue takes the form of a series of meetings with the company based on a hierarchical and exchanges of notes with the various stakeholder relationship. The category also includes agents and categories – which are involved periodically and those who “represent” Sabaf in the outside systematically: environment and look after the company’s relations with stakeholders Employees: biennial employee satisfaction surveys, Shareholders: these are the majority meetings with employees, and panel discussions with ›shareholders, Italian and non-Italian institutional trade union organisations investors, and private shareholders Customers: biennial customer satisfaction surveys Customers: our customers are household Suppliers: a questionnaire and a biennial meeting appliance› manufacturers, ranging from large with suppliers multinationals to niche SMEs Shareholders: a questionnaire for financial analysts Suppliers: these are the suppliers of raw and investment fund managers; one-to-one meetings materials,› machinery, equipment, goods, and with managers of ethical funds; and presentation to services shareholders at the AGM of the Annual Report Financiers: these are the banks and other combining financial, economic, and social financial› institutions that contribute to financial performance support of the company Community & institutions: multi-stakeholder panel Competitors: these are all companies producing discussions attended by representatives of civil components› for domestic gas cooking appliances society and institutions. Public Administration: this category consists of ›central government bodies and agencies, regional Section 2.2 summarises, for each stakeholder group, governments and local authorities, and public stakeholder engagement results in the last year. agencies such as local health departments (“ASL”), the state occupational insurance and accident prevention agency (“INAIL”), and the state pension and welfare agency (“INPS”), etc.
56 COMMUNITY ENVIRONMENT
PUBLIC COMPETITORS ADMINISTRATION
FINANCIERS CUSTOMERS SUPPLIERS
SHAREHOLDERS STAFF
SABAFSABAF
57 SUSTAINABILITY GOVERNANCE
1.2.2.3 KEY SOCIAL ACCOUNTABILITY ISSUES FOR STAKEHOLDERS AND THE BUSINESS Annual Report2006 WITHIN THE SPHERE OF ITS BUSINESS, THE GROUP CONSIDERS THE ISSUES OUTLINED BELOW AS THE MOST IMPORTANT ONES, IN TERMS OF ACTUAL OR POTENTIAL EFFECTS ON STAKEHOLDERS.
58 CORPORATE GOVERNANCE AND PROTECTION CUSTOMER RELATIONS OF MINORITY SHAREHOLDERS Sabaf encourages the establishment of long-term Given concentration of the controlling interest in the relationships with its customers, which aid hands of just one shareholder (the Saleri family), innovation in components and finished products. Sabaf undertakes to assure – also in future – Customer relations are increasingly formalised with substantially total separation between ownership long-term agreements. and management. Sabaf also undertakes to assure the presence of an adequate number of highly- CONSUMER PROTECTION qualified independent directors, such as to ensure Sabaf guarantees the utmost safety of its products that their judgement carries significant weight in and actively encourages the application of decision-making. increasingly strict standards in all its markets of reference. RELATIONS WITH STAFF Sabaf makes use of the types of flexible working SUPPLIER RELATIONS envisaged by current Italian legislation and, in Sabaf’s growth in size during the last few years has particular, of temporary labour. The Group been accompanied by the Group’s growing role in undertakes to assure strict compliance with relevant the supply chain. Sabaf is committed to monitoring regulations and to keep trade-union representatives its own supply chain – specifically via application of regularly informed of the use of atypical types of the SA8000 standard – and avoids any exploitation working. of a dominant position versus smaller and less There is an increasingly significant presence of non- organised suppliers. EU personnel, prevalently of the Islamic religion, which poses new complexities in the management ENVIRONMENT of relations with and among staff. Sabaf works Environmental implications play a fundamental role actively to foster integration, assures equal in our process and product innovation. Our most opportunities for every worker and, at the same recent product innovations assure significant energy time, asks all staff to respect different sensibilities saving and a reduction of fuel consumption and gas and to share the fundamental values stated in our emissions by users. Charter of Values. Internalisation of production is becoming increasingly important. As at the end of 2006 Sabaf do Brasil accounted for 8.4% of all Group employees. Sabaf undertakes to assure, via appropriate management systems, that the stated commitments made to staff are fully and tangibly implemented at all Group production sites.
In Section 2 Sabaf describes the activities in place to assure particularly careful management of all these issues and to achieve effective implementation of the stated commitments made to shareholders. 59 SUSTAINABILITY GOVERNANCE
1.2.3 INNOVATION AND MANAGEMENT OF INTELLECTUAL CAPITAL Annual Report2006 1.2.3.1 As regards burners, study started of a new burner RESEARCH AND with the air intake located underneath created DEVELOPMENT WORK specifically for the high-end market. Study also started of a new dual burner for the Chinese market. For Sabaf innovation is a distinctive feature of its business model and one of its primary strategic As regards hinges, work was done on a new levers. Thanks to constant innovation, the company variable-fulcrum external-cam hinge for doors has succeeded in achieving excellent results, weighing up to 15 kg, whilst hinges with built-in identifying technological and manufacturing solutions brakes have been developed for dishwashers. amongst the most advanced and effective currently available, and creating a virtuous circle of continuous Processes were improved with the construction of process and product improvement, ultimately pre-assembly and final assembly machines for acquiring technological skills with features difficult internal-cam hinges for doors weighing from 12 to 20 for competitors to emulate. kg and construction of an automatic lubrication system for blanking and coining lines. During the last few years we have given R&D We have also studied and created new snap-in activity an unparalleled boost. After more than 50 switches that are less voluminous in terms of height years of production of brass valves and thermostats, and a new rotary switch for the North American Sabaf has designed light alloy valves. Full-scale market. production of simple light alloy valves started (22% of total simple valve production) whilst that of light Improvement of production processes continued alloy safety valves will start in 2007. The range will throughout the Group, accompanied by the be completed in 2007 with the design of light alloy development and in-house construction of machinery, thermostats. The technical characteristics of the tools, and moulds. new products and their benefits in terms of energy saving and environmental impact are described in the section “Sabaf and the Environment”.
In 2006, thanks to the Group’s distinctive feature - i.e. the ability to design products plus production processes organically – we completed development of the new light alloy fixed gas valve, derived from the multigas valve’s platform. Prototyping started during the year of the light alloy dual valves, derived from the light alloy safety valve for hobs. In addition, study started of the new aluminium thermostat.
60 1.2.3.2 1.2.3.3 ANALYSIS OF MANAGEMENT OF INTELLECTUAL CAPITAL INTELLECTUAL CAPITAL Sabaf has identified, tested, and publishes a series of Today Sabaf has developed an operating system indicators considered capable of monitoring the capable of generating: process of intellectual capital generation in three dimensions, i.e. “Sustainability value” – relating to the ability to create› value in a sustainable manner, combining Human capital – relating to the know-how of the business growth with eco-efficiency and respect of ›people working in Sabaf, and to their skills, capabili- the values that create growing legitimation and ty, expertise and personal quality reputation Structural capital – relating to the company’s “Intellectual asset value” – relating to people’s ›ability to acquire, express, organise, appropriate, ›ability to learn, to the skills acquired over the years transfer and protect knowledge and know-how by the company, and to the ability to create relatio- nal networks. Relational capital – relating to the value genera- ›ted by the degree of co-operation (vs. conflictuality) In the firm belief that long-term development is in relations with stakeholders. based on proper management of sustainability and intellectual capital, Sabaf intends to develop an Key intellectual capital indicators are shown at the integrated information management system applying beginning of this Annual Report among the “Key it both: performance indicators (KPIs)”. Inwardly – as support for decision-making processes (in the strategic sphere as well as in the operating and administrative spheres) Outwardly – to inform the public of development of the company’s more “intangible” value.
Management and measurement of intellectual- capital assets is consistent with the methodological approach used to draw up Sabaf’s Annual Report. Besides this, Sabaf has also started to try out a system capable of managing and measuring not only sustainability performance but also performance in terms of intellectual capital.
61 Annual Report2006 INFORMATION 2ON OPERATIONS
62 2.1 2.2 2.3
DIRECTORS’ REPORT ON DIRECTORS’ CONSOLIDATED REPORT ON YEAR-END SOCIAL AND ACCOUNTS AND ENVIRONMENTAL PROPOSALS FOR PERFORMANCE PERFORMANCE IMPROVEMENT The domestic appliance market 2.2.1 Sabaf and its staff Attestation of procedural com- pliance of social report Group business and financial 2.2.2 Sabaf and its shareholders status Index of GRI indicators 2.2.3 Sabaf and its customers Research and development UN Global Compact principles activities 2.2.4 Sabaf and its suppliers SA8000 principles Corporate governance system 2.2.5 Sabaf and its financiers (reference) 2.2.6 Sabaf and its competitors Organisation, Operating & Control Model pursuant to Italian 2.2.7 Sabaf and the Public Legislative Decree 231/2001 Administration Stock option incentive plan of 2.2.8 Sabaf and the community May 6th 2003 2.2.9 Sabaf and the environment Personal data protection Financial derivatives Atypical or unusual transactions Infragroup and related-party transactions Significant events after year-end and expected business progress
63 The home appliances market 66 Group business and financial status 67 Research and development activities 70 Corporate governance system (reference) 70 Organisation, Operating & Control Model pursuant to Italian Legislative Decree 231/2001 71 Stock option incentive plan of May 6th 2003 71 Personal data protection 71 Derivative financial instruments 71 Atypical or unusual transactions 71 Intercompany and related parties transactions 71 Major events occurring after year-end and expected business progress 71
2006 Annual Report 2.1
64 2.1 DIRECTORS’ REPORT ON CONSOLIDATED YEAR-END ACCOUNTS AND PERFORMANCE
“Chi perde il vedere, perde la veduta e la bellezza de l’universo e resta a similitudine d’un che sia chiuso in vita in una sepoltura, nella quale habbia moto e vita. Hor non vedi tu, che l’occhio abbraccia la bellezza di tutt’il mondo?”
Leonardo da Vinci 65 DIRECTORS’ REPORT ON CONSOLIDATED YEAR-END ACCOUNTS AND PERFORMANCE
THE HOME APPLIANCES MARKET Annual Report2006 THE COOKING APPLIANCES MARKET UPSWING DROVE THE HOME APPLIANCES MARKET INCREASE IN 2006: DATA PROVIDED BY PROMETEIA-ANIE INDICATE A 2.4% INCREASE IN HOUSEHOLD DEMAND AT CONSTANT PRICES AS COMPARED TO A 1.9% DECREASE IN 2005.
66 GROUP BUSINESS AND FINANCIAL STATUS The market experienced a positive growth throughout 2006. Commercial partnerships together with an extremely innovative products portfolio produced a strong growth: sales revenues were € 138.3 mn (121 mn in 2005), EBITDA was € 39.2 mn (€ 34.3 mn in prior year), EBIT was € 28.2 mn (€ 23.5 mn in prior year) and net profits were € 16 mn (€ 14 mn as at December 31st 2005).
(Amounts in €‘000) 2006 2005 Change Change% Sales revenues 138,263 121,014 17,249 14.3 EBITDA 39,230 34,339 4,891 14.2 EBIT 28,241 23,459 4,782 20.4 Pre-tax profit 27,084 23,141 3,943 17.0 Net profit 16,078 13,953 2,125 15.2 Basic earnings per share (euro) 1,394 1,231 0,163 13.2 Diluted earnings per share (euro) 1,394 1,228 0,166 13.5
Sales performance by product line was as detailed below:
SALES BY PRODUCT LINE (Amounts in €‘000) 2006 2005 Change Change% Simple valves 12,134 8,719 3,415 39.2 Valves with safety devices 25,683 24,698 985 4.0 Thermostats 15,367 14,504 863 6.0 Total valves and thermostats 53,184 47,921 5,263 11.0 Burners 57,776 50,017 7,759 15.5 Hinges 12,388 11,485 903 7.9 Accessories and other revenues 14,915 11,591 3,324 28.7 Total 138,263 121,014 17,249 14.3
67 DIRECTORS’ REPORT ON CONSOLIDATED YEAR-END ACCOUNTS AND PERFORMANCE
Annual Report2006 The growth was spread out over all product lines. the slight downturn in 2005. The simple valves product line reported the strongest increase (also due to improved sales in The geographical breakdown of revenues was as the light-alloy gas dispensers business). The burners follows: product line also reported a significant increase after
SALES BY GEOGRAPHICAL AREA (Amounts in €‘000) 2006 % 2005 % Change% Italy 69,010 49.9 61,344 50.7 12.5 Western Europe 15,680 11.4 15,502 12.8 1.1 Eastern Europe and Turkey 24,675 17.8 25,022 20.7 -1.4 Asia 9,268 6.7 8,035 6.6 15.3 Latin America 8,253 6.0 4,878 4.0 69.2 Africa 5,843 4.2 3,082 2.6 89.6 North America & Mexico 4,666 3.4 2,061 1.7 126.4 Oceania 868 0.6 1,090 0.9 -20.4 Total 138,263 100.0 121,014 100.0 14,3
The most remarkable progress in sales was reported The hedging strategies implemented by means of for those extra-European regions where the Group’s commodity derivatives stabilized customer prices market shares are the lowest and where it made a throughout 2006 as compared to 2005. commitment to foster growth. The increase in the Asia, Africa, America and Oceania areas’ aggregate With regard to operating margins, EBITDA stood at figure exceeds 50%, thus upholding the Group’s 28.4% of total sales, EBIT grew by 1% to reach 20.4% growth strategy, which was also a result of the from 19.4% in prior year due to lower depreciation range of innovative products for each of such areas. expenses, EBT went from 19.1% to 19.6% while net Italy’s still holding substantial market shares due to profits were 11.6% from 11.5%, as the tax rate applied the liveliness of Italian manufacturers who managed was 40.6% from 39.6%. to be competitive by virtue of a wide range of products, of their specialization in “built-in” products In FY2006, the cost of commodities (brass and and the strength of their brands. Western Europe aluminium alloys) increased sharply, the negative reports a slight improvement while Eastern impact of which was limited by hedging strategies European trend is twofold: while the Poland region implemented using financial derivatives. reported a very sharp downturn (home appliance Materials and services procurement expenses manufacturers turned to less structured Group increased while labour costs remained unchanged. competitors offering low quality-low cost products), Turkey’s sales boosted as a result of the strong The dollar depreciation occurred during the year dynamism of local manufacturers, both for domestic (dollar sales are in the amount of approximately 10% sales and for export sales. of total sales) caused a foreign exchange loss of about € 369 thousand (from a € 535 thousand gain in prior year).
68 Finance expense as a percentage of sales decreased Cash flow (net profits plus depreciation/amortization) further, amounting to 0.57% (0.7% in 2005). rose to € 27.1 mn from € 25 mn in 2005, reaching an overall figure of 19.6% of total revenues (20.6% in 2005). CAPITAL AND FINANCIAL STATUS
Reclassification based on financial criteria is reported as follows:
(Amounts in €‘000) 31/12/2006 31/12/2005 Non-current assets 90,404 86,214 Current assets 61,521 53,869 Current liabilities (36,430) (28,324) Net working capital 25,091 25,545 Current financial assets 1 2,818 Provisions for liabilities & charges and post-employment benefits (14,350) (14,882) Net capital employed 101,146 99,695 Net short-term financial position 3,539 9,173 Net medium/long-term debt (14,920) (18,101) Net financial debt (11,381) (8,928)
Equity 89,765 90,767
Cash flows during the year are summarised in the following table:
(Amounts in €‘000) 2006 2005 Opening net short-term debt (cash) 9,173 6,408
Operating cash flow 27,253 24,286 Cash flow from investment activities (15,480) (9,021) Cash flow from financing activities (327) (9,103) Change in net shareholders' equity (17,080) (3,397) Cash flow for the period (5,634) 2,765 Closing net short-term debt (cash) 3,539 9,173
69 DIRECTORS’ REPORT ON CONSOLIDATED YEAR-END ACCOUNTS AND PERFORMANCE
Annual Report2006 In 2006, the Sabaf Group invested approximately RESEARCH & DEVELOPMENT WORK € 15.5 mn in fixed assets. The most important items refer to the purchase or in-house construction of The new light-alloy fixed gas tap developed in 2006, machinery for use in production of light alloy valves. derived from the multi-gas tap platform, is a result of Total net working capital amounted to € 25.1 mn the group's primary feature which consists in the against € 25.5 mn in the previous FY: it accounted organic designing of products and production for 18.1% of sales, compared to 21.1% of 2005. On the processes. assets side, the increase in inventories was Prototype development of dual type light-alloy gas remarkable (owing to the launch of new products) taps, which derive from the valve gas tap for light- while the growth in trade receivables was weaker. alloy hobs, also started during the year. On the liabilities side, trade payables suffered a A study on the new aluminium thermostat was strong increase (due to the rise in raw materials started in the financial year. procurement expenses) along with tax payables. As to the burners product line, research also started Current financial assets are no longer reported on to develop a new burner bearing an entrainment air the face of the balance sheet; the amounts reported system from below the surfaces, specifically for the financial year ended December 31st 2005, designed for the top market and another study is were related to the net fair value of hedging being conducted to develop a new dual burner for commodity derivatives. the Chinese market. Self-financing generated by operating cash flow was A new visible cam rotation hinge with changing € 27.3 mn (19.7% of sales) against € 24.3 mn in the fulcrum, ideal for door panels weighing up to 15 kg previous year. Such cash flow allowed for and dishwasher hinges with an integrated balancing investments in the amount of € 15.5 mn and for the system, were also developed in the year. Process distribution of € 18.3 mn worth of dividends. The improvement was achieved through the net financial position reported for 2006 shows a loss implementation of pre- and final assembling of € 11.4 mn against the € 8.9 mn loss posted as at machines for internal cam hinges for panel doors December 31st 2005. The loss consists of: weighing between 12 and 20 kg and through the medium/long term borrowings in the amount of implementation of an automated lubricating system € 14.9 mn, split between mortgage loans for € 8.3 for cutting and press production lines. mn and leases for € 6.6 mn. The short-term net New snap-in chains were developed featuring less financial position is a positive € 3.5 mn consisting space occupation together with a new rotating chain of € 10.3 mn from cash and cash derivatives and for the northern American market. from short-term borrowings in the amount of € 6.8 Efforts to improve the production processes mn; the latter in turn consists of a € 3.5 mn bank continued throughout the Group and were current account overdraft exposure and of the short- accompanied by development and in-house term component of the aforementioned longer term construction of machinery, tools and dies. loans in the amount of € 3.3 mn. Net equity is in the amount of € 89.8 mn against CORPORATE GOVERNANCE SYSTEM (SEE REPORT) € 90.8 mn in 2005: the reduction stems from the negative balance between profits made and For full discussion of this aspect, reference should be dividends distributed. made to the report on our corporate governance The net debt/equity ratio was 0.13 as opposed to report that will be presented to shareholders at the 0.10 in 2005. next Annual General Meeting called to approve SABAF SpA’s statutory year-end financial statements. The report is included in the Comprehensive Annual Report.
70 ORGANIZATION, OPERATION AND CONTROL DERIVATIVE FINANCIAL INSTRUMENTS MODEL PURSUANT TO LEG. DECREE 231/2001 Commentary to this item is provided in Note 19 to Sabaf S.p.A.’s Board of Directors approved the the consolidated financial statements. Organization, Management and Audit model on August 2nd 2006, pursuant to Legislative Decree no. ATYPICAL OR UNUSUAL TRANSACTIONS 231/2001 and appointed a Supervisory Committee accordingly. The Group did not execute any unusual or atypical transactions. STOCK OPTION INCENTIVE PLAN OF MAY 6TH 2003 THROUGH OPTION GRANTS INTERCOMPANY AND RELATED PARTIES TRANSACTIONS The stock option incentive plan for 28 directors and managers of the parent company vested during Relationships amongst the group companies, 2006; the plan was funded by means of a capital including those with the parent company, are increase excluding option rights as per article 2441, regulated at market conditions, and so are those paragraph 5 of the Italian Civil Code, with a with related parties as defined by the IAS 24 maximum of 666.500 shares issued. Vesting accounting standard. Details of inter-company and conditions were related to the stock price trend in related party transactions are provided in Note 32 to the last quarter of 2005 and to the achievement of the consolidated financial statements. predefined levels of consolidated EBITDA and EBIT as at December 31st 2005. The three goals were not MAJOR EVENTS OCCURRING AFTER YEAR-END achieved completely, which entailed that only 30% AND EXPECTED BUSINESS PROGRESS of stock options vested, for a total number of 199.950 stocks issued. Options were fully exercised No especially noteworthy events took place after and a corresponding capital increase of 199.950 year-end. stocks was implemented, each bought at a price of Directors confirm all objectives announced: we € 14.38 (equalling the average stock price of Sabaf believe that a 15% total sales increase in 2007 can in the month of April 2003), which resulted in a cash be attained, almost half of which shall come from inflow of € 2.0 mn for the Company. price increase and the other half from higher sales No stock option plan is currently in force. volumes. The increase in sales prices should cover a large portion of the rise in raw materials expenses. PERSONAL DATA PROTECTION Furthermore, the shift in production from brass valves to the new light-alloy models entails a With regard to Legislative Decree no. 196 of June temporary expense increase due to the need to 30th 2003, Sabaf Group pursued its activities to duplicate some production services and the comply with legislation in force throughout the 2006 impossibility of guaranteeing full efficiency in the financial year. plants. This explains the expected operating The Official Security Plan (OSP) relating to the year profitability for 2007 of only about 19%. 2006 was drawn up in compliance with the law. The 2007 OSP is expected be ready no later than March 31st 2007.
71 2.2.1 Sabaf and its staff 74 2.2.3 Sabaf and its customers 96 2.2.1.1 Commitments to staff 74 2.2.3.1 Commitments to customers 96 2.2.1.2 Dialogue with staff 75 2.2.3.2 Dialogue with customers 96 2.2.1.3 Hiring policy and staff breakdown 2.2.3.3 Sales analysis 98 and changes 76 2.2.3.4 Development of partnerships 99 2.2.1.4 Training and internal communication 81 2.2.3.5 Information and communication 100 2.2.1.5 Diversities and equal opportunities 84 2.2.3.6 Contractual terms 100 2.2.1.6 Compensation, incentive, 2.2.3.7 Product safety, innovation, and and enhancement systems 85 environmental friendliness 101 2.2.1.7 Working hours and hours 2.2.3.8 The quality system 101 of absence 86 2.2.3.9 Legal disputes 102 2.2.1.8 Occupational health & safety and workplace environment 87 2.2.4 Sabaf and its suppliers 103 2.2.1.9 Labour relations 89 2.2.4.1 Commitments to suppliers 103 2.2.1.10 Social activities and benefits 2.2.4.2 The SA8000 standard 2.2.1.11 Disputes and disciplinary measures 91 and suppliers 103 2.2.4.3 Purchasing analysis 103 2.2.2Sabaf and its shareholders 92 2.2.4.4 Supplier relations and 2.2.2.1 Commitments to shareholders 92 contractual terms 104 2.2.2.2 Dialogue with shareholders 92 2.2.4.5 Legal disputes 104 2.2.2.3 Shareholder base 94 2.2.2.4 Relations with investors 2.2.5 Sabaf and its financiers 105 and financial analysts 94 2.2.5.1 Commitments to financiers 105 2.2.2.5 Shareholder remuneration and Sabaf 2.2.5.2 Banking relations 105 stock market performance 95 2.2.5.3 Legal disputes 105 2.2.2.6 Socially responsible investments 2.2.2.7 Legal disputes 95 2.2.6 Sabaf and its competitors 106 2.2.6.1 Commitments to competitors 106 2.2.6.2 Main Italian and international competitors 106 2.2.6.3 Legal disputes 107 2006 Annual Report 2.2.7 Sabaf and the Public Administration 108 2.2.7.1 Commitments to the Public Administration 108 2.2.7.2 Relations with the Public Administration 108 2.2.7.3 Income taxes and other taxes paid 108 2.2.7.4 Tax disputes 108
2.2.8 Sabaf and the community 109 2.2.8.1 Commitments to the community 109 2.2.8.2 Dialogue with the community 109 2.2 2.2.8.3 Charitable initiatives and donations 109 2.2.8.4 Relations with universities and the student world 109 2.2.8.5 Relations with industry associations 109
2.2.9 Sabaf and the environment 110 2.2.9.1 Commitments to the environment 110 2.2.9.2 Dialogue with environmentalist associations and institutions 110 2.2.9.3 Environmental policy, programme, and objectives 110 2.2.9.4 Product innovation and environmental sustainability 111 2.2.9.5 Environmental impact 113 2.2.9.5.1 Materials used and product recyclability 113 2.2.9.5.2 Waste 114 2.2.9.5.3 Atmospheric emissions 115 2.2.9.6 Environmental investments 117 2.2.9.7 Disputes 117 72 2.2. DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
“Quel pittore che non dubita, poco acquista.”
Leonardo da Vinci 73 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.1 SABAF AND ITS STAFF Annual Report2006 2.2.1.1 tism in hiring of staff. Recruitment shall take place OUR COMMITMENTS according to how closely candidate profiles match TO STAFF company requirements.
To enhance the value of human capital’s contri- THE SA8000 STANDARD bution› to decision-making processes, fostering conti- nuous learning, professional growth, and the sharing Sabaf SpA’s social accountability system complies with of knowledge. the requirements of the SA8000 standard, for which To ensure that the employment relationship is the company obtained certification 2005. The decision based› on the parties’ equal dignity and on respect to certify the system was a consequence of total for employees' legitimate expectations. belief in the importance of the company’s “human To promote, in all countries where the compa- assets”. The intention is to make management, ny› operates, respect for the fundamental human suppliers, employees and outside staff aware of the rights of workers by application of the principles need to assure full observance of the social established in the SA 8000 standard and as regards accountability principles established in the SA8000 child labour, forced labour, on-the-job health and standard. safety, freedom of association and the right to col- lective bargaining, discrimination, disciplinary practi- In implementing SA8000, Sabaf SpA has analysed and ces, working hours, and compensation policies. monitored the main factors of ethical and social risk To value and respect diversity, and to reject all relating to under-age labour, forced labour, health and forms› of discrimination for reasons of gender, sexual safety, freedom of association and the right to orientation, age, nationality, health, political opinions, collective bargaining, discrimination, disciplinary race and religious beliefs in all phases of the procedures, working hours, and compensation. employment relationship. To protect individuals’ physical, cultural and There was constant dialogue during the year between moral› integrity by ensuring a safe and healthy wor- management representatives and workers’ kplace. representatives concerning concrete application of the To base employment relationships on merit and SA8000 standard. skill,› exercising authority with fairness. To avoid all forms of mobbing to the detriment During 2006 the CISE (the Italian entity accredited by of› workers. Social Accountability International for SA8000 To promote dialogue supporting decision- certification and compliance) made 2 supervisory visits making› processes, in keeping with employees' skills to the company. During its checks 4 non-critical non- and responsibilities. conformities emerged. The company has started an To encourage teamwork and the spread of improvement plan to remedy these aspects in creativity,› in order to permit the full expression of accordance with agreed timing. individual potential, consistently with business To adopt a two-way communication system that› fosters dialogue and encourages employees to express their opinions and/or any concerns in an untroubled manner. To provide clear and transparent information on› the duties to be performed and on the position held, and also about the company's performance and market trends. To aid creation of a working atmosphere based on› mutual respect and on clear and transparent communication, via a calm and clear exchange of opinions without the use of offensive language. To avoid all forms of discrimination and favouri- 74 › 2.2.1.2 Possible forms of certification of the training given DIALOGUE ›to employees, above all as regards temporary agency WITH STAFF workers awaiting receipt of their Personal Training, Development & Work Record (an official life-long docu- On March 16th 2007 Sabaf SpA’s management ment in Italy that, in Italian, is called “Libretto invited trade union representatives to take part in a Formativo”) panel discussion in order to share the experience of Flexibility in managing the needs of staff from the 2005 Comprehensive Annual Report and to ›other countries (European and non-European). gather information and suggestions for the 2006 Report. The panel discussion was attended by six As regards the company’s proposal to prepare a trade union representatives. specific report for trade union representatives, The meeting featured a presentation of the 2005 requests were made for greater detail concerning Comprehensive Annual Report, with special specific subjects and for individual operating units. reference to the section concerning staff. At the end of the meeting, the Human Resources Information was discussed in depth concerning (a) Department expressed its willingness to examine the breakdown of staff by company, type of these proposals and assess the desirability of contract, age, and tenure; (b) hiring policies and use supplementing Annual Report contents and/of including of the various types of flexibility contemplated by this additional information in the analytical report that legislation; (c) equal opportunities and cultural will be prepared for trade union representatives. diversity; (d) health and safety; (e) staff training; and (f) labour relations. The trade union representatives expressed substantially positive opinions on the Annual Report’s contents – the result of ongoing co- operation and discussion with the various stakeholder categories. They appreciated the initiatives implemented by Sabaf to improve working conditions and the company’s general commitment to being socially responsible and sustainable over time. During the meeting some suggestions for supplementing the Report were made. In addition, greater depth was proposed and some requests made concerning the following topics: The company’s commitment to contribute to ›employees’ professional growth via a continuous training process and greater involvement of trade union representatives in devising the training plan
75 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 2.2.1.3 HIRING POLICY AND STAFF BREAKD OWN AND CHANGES
As at December 31st 2006 the Sabaf Group had 594 employees, compared with 531 at 2005 year-end (+12%).
BREAKDOWN OF GROUP STAFF BY COMPANY
SABAF DO BRASIL 50
SABAF DO BRASIL 27 SABAF SPA 442 SABAF SPA 484
FARINGOSI-HINGES 2005 62 FARINGOSI-HINGES 2006 60
76 As regards basic types of employment contracts, 531 BREAKDOWN OF SABAF GROUP employees (89.4%) had open-ended (i.e. permanent) contracts, 48 (8.1%) had training or apprenticeship STAFF BY CONTRACT TYPE contracts, and 15 (2.5%) temporary (i.e. fixed-term) contracts. 15 TEMPORARY 48 TRAINING OR APPRENTICESHIP 9 34 TEMPORARY TRAINING OR APPRENTICESHIP 531 PERMANENT
488 PERMANENT 2005 2006
TEMPORARY STAFF 2006 2005 January 136 51 During 2006 Sabaf also hosted 13 young February 130 60 people – university undergraduates or March 116 60 high school students - for internships and April 104 70 May 125 70 work experiences (35 in 2005). More June 159 61 specifically, the students of some high July 165 90 schools in the province of Brescia spent August 153 107 September 134 123 one-week training experiences in Sabaf, October 103 123 during which they were able to deepen November 119 121 their knowledge in the mechanical December 123 132 engineering field. Monthly average 131 89 During 2006 Sabaf Group companies hired 52 ex-temporary workers on a permanent basis (27 in 2005).
77 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 STAFF TURNOVER - 2006
SABAF S.p.A. 31/12/05 Hires Leavers 31/12/06 Managers 6 0 0 6 White-collars and supervisors 108 7 4 111 Blue-collars 328 59 20 367 Total 442 66 24 484
FARINGOSI HINGES s.r.l. 31/12/05 Hires Leavers 31/12/06 Managers 0 1 0 1 White-collars and supervisors 16 0 1 15 Blue-collars 46 3 5 44 Total 62 4 6 60
SABAF DO BRASIL s.r.l. 31/12/05 Hires Leavers 31/12/06 Managers 1 0 0 1 White-collars and supervisors 7 4 3 8 Blue-collars 19 29 7 41 Total 27 33 10 50
GROUP TOTAL 31/12/05 Hires Leavers 31/12/06 Managers 7 1 0 8 White-collars and supervisors 131 11 8 134 Blue-collars 393 91 32 452 Total 531 103 40 594
REASONS FOR LEAVING GROUP - 2006
Reason Managers Supervisors White-collars Blue-collars Total Resignation 0 0 6 23 29 Retirement 0 0 1 3 4 Expiry of contract 0 0 0 3 3 Dismissal 0 0 1 3 4 Total 0 0 8 32 40
78 30,1% STAFF BREAKDOWN BY AGE 31 - 40 years AS AT 31/12/2006
7,9% 29,1% over 50 years 31 - 40 years 2005
17,7% 7,9% 41 - 50 years 44,3% over 50 years less than 30 years 2006 The average age of Group employees – 34 years – reflects a constantly growing company and the desire to hire young workers, giving preference to in-house training and growth rather than 16,2% bringing in outside skills, also in view of the 41 - 50 years 46,8% specific nature of Sabaf’s business model. less than 30 years The minimum age of Group employees is 18 years. STAFF BREAKDOWN BY TENURE AS AT 31/12/2006
11,9% over 20 years 10,1% 13,0% over 20 years 11 - 20 years 14,3% 29,5% 11 - 20 years 6 - 10 years
32% 45,6% 6 - 10 years less than 5 years 2005
43,6% Sabaf is well aware of the fundamental less than 5 years importance of having a stable and qualified workforce that, together with investments in technology, is a key factor for the maintenance 2006 79 of the Group’s competitive advantage. DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 STAFF BREAKDOWN BY FUNCTIONAL AREA
2006 2005 Area Men Women Total Men Women Total Production 266 154 420 232 139 371 Quality 32 21 53 23 23 46 R&D 41 4 45 40 2 42 Logistics 21 1 22 22 1 23 Administration 9 16 25 6 15 21 Sales 8 9 17 7 10 17 Services 2 5 7 2 5 7 Procurement 3 2 5 2 2 4 TOTAL 382 212 594 334 197 531
HIRING POLICY In order to attract the best resources, our hiring policy intends to assure equal opportunities for all candidates, avoiding any type of discrimination.
All new hires receive the Charter of Values and the SA8000 standard, as well as a copy of the national collective labour contract for the industry and a booklet explaining how to read payslips.
In recent years our hiring has targeted higher educational qualifications than in the past, also because of the ongoing increase in manufacturing automation.
STAFF BREAKDOWN BY EDUCATIONAL QUALIFICATIONS – AS AT 31/12/2006
TEDUCATIONAL QUALIFICATION 2006 2005 MEN WOMEN TOTAL MEN WOMEN TOTAL University degree 27 4 31 5.2% 22 4 26 4.9% Higher secondary school diploma 156 67 223 37.6% 140 58 198 37.3% Lower secondary school diploma 192 127 319 53.7% 164 120 284 53.5% Primary school 7 14 21 3.5% 8 15 23 4.3% TOTAL 383 211 594 100.0% 334 197 531 100.0%
80 2.2.1.4 Human Resources Department, having consulted with TRAINING AND the functional managers concerned, devises an annual INTERNAL training plan, based on which specific courses to be COMMUNICATION held during the year are scheduled.
In Sabaf the professional growth of employees is underpinned by a permanent training process. The
2006 2005 MEN WOMEN TOTAL MEN WOMEN TOTAL In-house training for new hires, apprentices, and trainee new hires 6,894 986 7,880 5,231 811 6,042 Quality, safety & environment 734 189 923 401 49 450 Technical drawing & industrial maintenance 635 187 822 73 7 80 Administration & organisation 200 615 815 23 242 265 Other languages 477 230 707 168 206 374 English language 239 386 625 604 99 703 Social accountability 248 34 282 64 14 78 Research & development 229 4 233 215 3 218 New information system (SAP) 153 55 208 415 125 540 Information technology 102 67 169 109 81 190 Quality 16 151 167 0 0 0 Total training hours received 9,911 2,753 12,664 7,303 1,637 8,940 Training hours provided by internal trainers 3,736 251 3,987 3,801 821 4,622 TOTAL TRAINING HOURS 13,647 3,004 16,651 11,104 2,458 13,562
81 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 TRAINING HOURS BY EMPLOYEE CATEGORY
BLUE-COLLARS 7.781
MANAGERS 188
WHITE-COLLARS AND SUPERVISORS 4.695
In 2006 the total cost borne for Group employee ›Reading of the internal/external scenario training amounted to some € 312,000 (vs. about ›The main changes that have taken place in the € 229,000 in 2005). last few years ›The impact of such changes on people’s organisa- INTERNAL COMMUNICATION tional reality and role Based on a “cascade” process, production heads and ›Skills needed and skills available department/shift supervisors are asked to transfer ›Perception of product and process quality, human socially responsible types of behaviour to their resources management processes and systems sphere of operations, with the ultimate objective of ›Key performance indicators involving all employees. ›The gap between what is needed and what actually exists. THE “TAKING VALUES TO HEART” PROJECT During 2006 training & development sessions took ORGANISATIONAL COMMUNICATION PLAN place for technical, department, and production Sabaf implements an Organisational Communication managers and for line teams. This initiative – Plan on an ongoing basis intended to aid internal structured in group meetings and individual communication, circulation of information, and interviews – addressed concrete aspects of analysis of staff needs. company operations with the aim of gathering perceptions and considerations concerning the main With the main aim of reducing the “distance” operating processes. More specifically, the following between employees and employer and of developing topics were addressed: an ongoing dialogue between all company levels, 82 since July 2003 Sabaf has been publishing a Sabaf Magazine regularly publishes employees’ quarterly magazine featuring the main information letters or suggestions. concerning corporate life. Notice boards have been set up in various points of The most important topics addressed in 2006 were: the factory. These are used to display periodical comparison between the use of electricity and gas communications concerning not only organisational for domestic cooking; the operating difficulties and and trade union matters and press releases – but impact of the market’s scarce visibility and major also information on cultural and social initiatives and volatility; the evolution of production towards on the company’s conventions with retailers, etc. aluminium components; and the problems of integration of different cultures in the factory.
83 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 2.2.1.5 family needs. Thus far, all workers’ requests for a DIVERSITIES AND EQUAL reduction in working hours have been met. In 2006 OPPORTUNITIES the Sabaf Group granted a total of 38 part-time contracts (to 5 female white-collars, 27 female blue- Sabaf is permanently committed to assuring equal collars, 3 male blue-collars, and 3 male blue-collar opportunities for female staff, who today account apprentices) accounting for 6.4% of the total (vs. 32 for 35.7% of the workforce. contracts in 2005).
The company – compatibly with organisational and production requirements – is sensitive to its staff’s
STAFF BREAKDOWN BY GENDER - %
2006 2005 BENCHMARK (1) Number % Number % % Men 382 64.3% 334 62.9% 81.5% Women 212 35.7% 197 37.1% 18.5% TOTAL 594 100.0% 531 100.0% 100.0%
Comparison of Sabaf’s percent breakdown of that, in its sector, Sabaf stands out for the high employment by gender with the average for Italian presence of female staff. metalworking and engineering companies shows
GENDER BREAKDOWN BY CONTRACTUAL CATEGORY – NUMBER
Category Gender 2006 2005 BLUE-COLLARS Men 284 236 Women 170 157 WHITE-COLLARS & SUPERVISORS Men 91 92 Women 41 39 MANAGERS Men 7 6 Women 1 1 TOTAL 594 531
NON-EU WORKERS - NUMBER *
2006 2005 BENCHMARK (2) Non-EU workers 28 20 % of total employees 4.71% 3.97% 2.34%
*The figure refers solely to Italian companies and therefore excludes Sabaf do Brasil.
84 19 disabled people work in the Sabaf Group, of which A specific bonus is envisaged for employees hired by four on a part-time basis. For Sabaf annual hiring of virtue of training contracts and apprenticeships. people with disabilities is not merely a question of As has happened since its introduction in 1996, once legal compliance, but above all the desire to aid again in 2006 the variable performance-related their entry and integration in normal manufacturing bonus was paid out to the extent basically indicated processes. An agreement is in place between Sabaf by the agreement. All productivity and quality SpA and the provincial authorities for an targets had in fact substantially been achieved. employment programme envisaging gradual hire of disabled workers. Reference should be made to the Explanatory Notes to consolidated accounts (Section C) for an analysis 2.2.1.6 of payroll costs. COMPENSATION, INCENTIVE, AND Besides economic incentives – i.e. assignment of ENHANCEMENT shares to employees (bonus allocations and stock- SYSTEMS option plans), ad-personam merit increases, guarantees issued by the company for employees in Sabaf SpA employees are hired according to the the case of mortgages and personal loans, sale or rules of the national collective labour contract for rental of apartments at cost price, and company the mechanical engineering industry, supplemented conventions for access to goods and services at by local agreements, which include: special low prices – Sabaf’s incentive system also includes: An extra allowance over minimum pay by A subsidy for the collective transport service › ›from Lumezzane (the company’s previous home employee grade base) to Ospitaletto ((the subsidy covered 50% of ›A productivity bonus by employee grade the cost in 2006) ›A fixed performance-related bonus for all emplo- ›Participation in training activities yee grades ›Concession of part-time working and of periods ›A variable performance-related bonus, the same of unpaid leave of absence. for all employee grades.
RATIO BETWEEN MINIMUM MONTHLY SALARIES ENVISAGED BY NATIONAL COLLECTIVE LABOUR CONTRACTS AND THE MINIMUM SALARY ACCORDED BY GROUP COMPANIES
Minimum salary as per Minimum salary % increase vs. national collective contract accorded collective minimum Italy(*) Euro 1,259 Euro 1,307 +4% Brazil(**) BRL 580 BRL 680 +17%
(*) Gross salary of a blue-collar/Grade 3 white-collar (**) Gross salary of a generic blue-collar
1 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – Employment breakdown by gender (2004), http://www.federmeccanica.it
2 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – 85 Non-EU workers (2004) http://www.federmeccanica.it DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 2.2.1.7 WORKING HOURS AND HOURS OF ABSENCE The ordinary working week is set as being 40 hours for the Italian companies and 44 hours for Sabaf do Brasil, spread over five working days, from Monday to Friday. If there are changes in working hours or activation of shifts at particular times, the company takes care to inform company trade union representatives and the employees involved with the utmost timeliness.
OVERTIME WORKING
2006 2005 BENCHMARK (3) White-collars Blue-collars White-collars Blue-collars White-collars Blue-collars Average monthly number of workers who worked overtime 104 364 105 305 Number of overtime hours 16,209 39,309 14,165 24,224 Annual per- capita 3 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – overtime hours 125 89 109 63 81 69 Per-capita hours of overtime working (2004), http://www.federmeccani- ca.it
Despite numerous hires during 2006, Sabaf do Brasil Brazilian factory since the beginning of 2007 and has made particularly heavy use of overtime working been given the responsibility for identifying (annual per capita average of 205 hours for blue- organisation solutions such as to reduce overtime collars) due to the very big increase in production. working significantly. A new production manager has been in place at the
HOURS OF ABSENCE
2006 2005 BENCHMARK (4) Total annual hours of absence 64,044 70,868
4 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – Hours of absence as % of workable hours 5.9% 6.7% Per-capita hours of absence from work (2004), http://www.federmec- Average per capita hours of absence 112.1 136.8 132.3 canica.it
86 SICK LEAVE HOURS
2006 2005 BENCHMARK (5) Total annual sick leave hours 37,077 37,052 Sick leave hours as % of workable hours 3.4% 3.5% Average per capita sick leave hours 64.9 71.5 69.7
MATERNITY LEAVE HOURS
2006 2005 BENCHMARK (6) Total maternity leave hours 23,936 22,227 Maternity leave hours as % of workable hours 2.2% 2.1% Average per capita maternity leave hours 41.9 42.9 18.3
The high number of maternity leave hours compared the 2000/53/EC Directive concerning restriction of with the sector average reflects our much higher harmful metals present in finished products, such as percentage of female staff. lead, mercury, cadmium, and chromium 6.
2.2.1.8 We have implemented a system for managing OCCUPATIONAL HEALTH & occupational health and safety issues in line with SAFETY AND WORKPLACE the OHSAS 18001 standard. Besides assuring ENVIRONMENT compliance with current laws and regulations The company is totally committed to safeguarding (headed by Italian Legislative Decree 626/1994), the its employees’ health and safety. In production we system is also intended to achieve ongoing use only materials fully meeting the requirements of improvement in working conditions.
NUMBER AND DURATION OF ACCIDENTS
2006 2005 BENCHMARK (7) On-site accidents 19 18 Off-site accidents in transit 3 2 Average absence for on-site accidents (days) 9 11 Average absence for off-site accidents (days) 9 40 5 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – Per-capita hours of absence from work (2004), http://www.federmecca- Total days of absence for accidents 1,607 2,269 nica.it. Average per capita hours of absence for accidents 2.81 4.38 9.3 6 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – Per-capita hours of absence from work (2004), (2004), http://www.federmeccanica.it
7 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – Per-capita hours of absence from work (2004), http://www.federmecca- 87 nica.it DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 ACCIDENT FREQUENCY INDEX Number of accidents (excluding in-transit accidents) per 1,000,000 hours worked
2006 2005 Index 20.47 20.76
ACCIDENT GRAVITY INDEX Number of accidents (excluding in-transit accidents) per 1,000 hours worked
2006 2005 Index 0.19 0.24
The accidents that occurred during 2006 were all In compliance with current law, Group companies minor or very minor. The training effort continued have prepared and implement a health-monitoring together with the effort to heighten awareness of programme for their employees, with medical check- the need to use protection and safety devices. This ups focusing on the specific hazards associated with was done both by specifically urging department their occupational activities. heads to apply tight control in this respect and, In 2006 1,241 medical check-ups were performed (1,119 above all, via an increasingly intensive dialogue in 2005). between the Prevention & Protection Officer and workers’ own Safety Officers. CURRENT EXPENDITURE FOR WORKER SAFETY (Amounts in € ‘000) 2006 2005 Plant, equipment, and materials 65 52 Personal protective equipment (PPE) 81 61 Outside training 2 0 Advisory services 9 18 Medical check-ups (including pre-hire check-ups) 19 17 Software and database 1 1 Totall 177 149
WORKERS' SAFETY INVESTMENTS (Amounts in € ‘000) 2006 2005 Plant, equipment, and materials 83 100 TOTAL 83 100
88 In addition to its major commitment to worker During the year in Sabaf SpA top managers and safety, the company also seeks to ensure trade union representatives met 24 times. There satisfactory operating conditions for its entire staff. were meetings at least once a month, the main In 2006 Sabaf continued action to improve the matters addressed were: workplace environment. Specifically: › Management of temporary agency workers, New forklift trucks were purchased for production with special reference to the large number involved departments, making it possible to reduce manual › Information and dialogue about production handling of loads and therefore worker strain needs, with special reference to the launch of the Major upgrading work was done on the closed-circuit whole range of light alloy valves metal rinsing machines to make them more efficient › Problems concerning foreign workers’ and reduce the frequency of routine maintenance integration operations. › The company/employee split of the cost of collective transport › Definition of the company calendar 2.2.1.9 › News concerning income tax laws and post- LABOUR RELATIONS employment social security.
Three trade unions are represented internally at The hours of participation in trade-union activities Sabaf SpA: FIOM, FIM and UILM. As at December occurring during 2005 were equivalent to 0.39% of 2006, 140 employees were card-carrying members, workable hours. There were no strikes or other i.e. 23.6% of total employees (in 2005 139 employees trade union initiatives specifically against Group were card-carrying members, 27.6% of the total). companies.
PARTICIPATION IN TRADE UNION ACTIVITIES
2006 2005 BENCHMARK (8) UNION MEETINGS Number of hours 1,433 2,730 As % of workable hours 0.14% 0.26% Average per capita hours 2.5 5.3 UNION LEAVE OF ABSENCE Number of hours 1,178 880 As % of workable hours 0.11% 0.08% Average per capita hours 2.1 1.7 STRIKES Number of hours 1,407 9,320 As % of workable hours 0.14% 0.88% Average per capita hours 2.4 18.0 8,1 TOTAL Number of hours 4,018 12,929 As % of workable hours 0.39% 1.22% Average per capita hours 7.0 25.0
8 FEDERMECCANICA, L’industria metalmeccanica in cifre (May 2006) – Per-capita hours of absence from work (2004), http://www.federmecca- 89 nica.it DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006
STRIKE HOURS IN SABAF SPA
STRIKE REASON % HOURS PARTICIPATION January 8 Renewal of national collective labour contract 41.44% TOTAL 2006 STRIKE HOURS IN SABAF SpA 8
STRIKE HOURS IN FARINGOSI HINGES S.R.L.
STRIKE REASON % HOURS PARTICIPATION January 4 Renewal of national collective labour contract 1.54% TOTAL 2006 STRIKE HOURS IN FARINGOSI-HINGES 4
90 2.2.1.10 2.2.1.11 SOCIAL ACTIVITIES LEGAL DISPUTES AND BENEFITS AND DISCIPLINARY MEASURES Sabaf SpA has signed conventions with two banks for the granting of mortgage loans and consumer During 2007 67 disciplinary measures were taken credit facilities at particularly good terms, providing vis-à-vis employees. They were split as follows in surety for employees. As at 31/12/2006 41 terms of types: employees were benefiting from the convention, in ›13 verbal reminders the form of 29 mortgage loans and 12 consumer ›3 written reminders concerning use of personal loans. protection equity ›21 written reprimands Sabaf has allocated 11 apartments in the vicinity of ›26 disciplinary fines the Ospitaletto site for use by employees. A further ›2 disciplinary suspensions 54 residual units are been built in the municipality of ›2 cases of precautionary suspension of salary. Ospitaletto that will be sold to employees on a priority basis. This initiative has very much been Disciplinary measures were mostly due to incorrect appreciated by employees and, as at the end of conduct and failure to observe working hours or February 2007, 25 preliminary contracts had been failure to justify absence (generally due to illness) by signed. the required deadline.
A transport service operates from Lumezzane to As a December 31st 2006 three legal disputes were Ospitaletto, at times linked to individual shifts, and underway with three employees concerning was used by some 100 people. As part of the contestation of discontinuation of the employment initiatives agreed to attenuate the inconvenience of relationship. the company’s transfer from Lumezzane to Ospitaletto, Sabaf guaranteed this service free of charge for employees for the period 2002-2005. Recognising the social value of use of public transport, the company also assured the service in 2006, taking on half the costs necessary for its continuation (about € 87,000). A similar agreement has been made with trade union representatives for 2007.
The company has also signed various conventions with retailers and commercial businesses for the purchase of products and services at special low prices.
91 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.2 SABAF AND ITS SHAREHOLDERS Annual Report2006 2.2.2.1 2.2.2.2 OUR COMMITMENT TO DIALOGUE WITH SHAREHOLDERS SHAREHOLDERS
To enhance the value of shareholders’ inve- In early 2007 Sabaf prepared a questionnaire ›stments by ensuring the company's sustainable targeting 46 financial analysts and the main present growth. and potential investors. The primary aim of this was to understand the financial community’s assessment To announce strategies and policies in a timely, of the choices made by the Group concerning ›thorough, clear and transparent manner, assuring corporate social responsibility and corporate equality of information, particularly as regards mino- governance. Below we present the summary of the rity shareholders. replies received.
To guarantee integrity in running the business. The assessment scale is from 1 (poor/not important) › to 10 (excellent/very important). To comply with Italy's Corporate Governance ›Code (Codice di Autodisciplina) for listed companies.
To adopt best corporate governance practices in ›order to maximize the company's value and reduce business risks.
To give fair consideration to shareholders' diffe- ›rent interests in the company.
To encourage dialogue between shareholders ›and the Board of Directors.
To ensure correctness, transparency and the ›company's best interests in executing transactions with related parties.
To ensure the utmost transparency in relations ›with the independent auditors and with supervisory authorities.
To adopt appropriate procedures for the handling ›of confidential information with special reference to price-sensitive information. Price-sensitive informa- tion is all information about important events or cir- cumstances that is not in the public domain and that might, if disclosed, have a substantial influence on the price of Sabaf shares in the stock market.
92 8.7 9.0 PRESENCE OF EASE OF MAJORITY OF SHAREHOLDER INDEPENDENT PARTICIPATION AT 8.8 DIRECTORS SHAREHOLDERS’ QUALITY OF MEETINGS INFORMATION PROVIDED BY DIRECTORS 9.0 ASSESSMENT OF SABAF PROFESSIONAL GROUP’S CORPORATE CALIBER OF BOARD OF DIRECTORS 8.5 GOVERNANCE SYSTEM RELATED-PARTY TRANSACTIONS AND MANAGEMENT OF CONFLICTS OF INTEREST
8.8 8.4 8.4 COMPENSATION INFORMATION AND EASE OF ACCESS TO POLICIES FOR COMMUNICATION TOOLS INFORMATION DIRECTORS AND TOP MANAGEMENT 7.8 QUALITY OF CHANNELS OF 9.0 COMMUNICATION TIMELINESS AND VIA WEBSITE UPDATEDNESS OF INFORMATION
8.5 OVERALL QUALITY OF CHANNELS OF SABAF GROUP’S COMMUNICATION 9.6 BEHAVIOUR TOWARDS CORRECTNESS ANALYSTS AND INVESTORS OF BEHAVIOUR
9.1 9.3 TRANSPARENCY, COMPLETENESS, MANAGEMENT AVAILABILITY AND CLARITY OF COMMUNICATION FOR MEETINGS WITH INVESTORS 8.4 USABILITY AND 8.4 AVAILABILITY OF CLARITY OF REPORT REPORT
7.1 8.8 USEFULNESS AND COMPLETENESS USABILITY FOR OF INFORMATION DECISION-MAKING PURPOSES
7.8 CAPACITY TO HIGHLIGHT ASSESSMENT OF SIGNIFICANT ANNUAL REPORT (RELEVANT) ASPECTS 8.8 CAPACITY TO INCREASE COMPREHENSIBILITY OF CORPORATE REALITY 93 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 The decision to publish a comprehensive integrated publishes its quarterly results or updates them report was particularly appreciated. It also gives promptly in the event of any changes in projections. In stakeholders more focused on business and financial addition, in order to provide a complete and exhaustive performance the opportunity to gain deeper picture of its situation, Sabaf illustrates its strategies knowledge, in parallel, of all relevant aspects of and plans in its annual reports and in presentations to Group operations. analysts and investors during the course of the year.
The main suggestion emerging from the survey was The brokers who prepare studies and equity research the desirability of analysing the relevant market in documents concerning Sabaf on a continuous basis are greater depth and the potential stemming from currently: Banca Akros, Berenberg, Citigroup, emerging countries, new-product development, and Euromobiliare, ING, and Rasbank. agreements with new customers. Further information on investor relations is provided 2.2.2.3 in the 2006 Corporate Governance Report. SHAREHOLDER BASE 2.2.2.5 As at February 28th 2007, 2,049 shareholders were SHAREHOLDER listed in the shareholders’ register. Of these: REMUNERATION AND › 1,823 owned up to 1,000 shares SABAF STOCK › 137 owned from 1,001 to 5,000 shares PERFORMANCE › 34 owned from 5,001 to 10,000 shares 55 owned over 10,000 shares. Sabaf's dividend policy seeks to ensure sound › remuneration for shareholders in the form of the In terms of geographical location: annual dividend and – compatibly with results 1,987 shareholders, owning 74.1% of capital, were achieved and with investment plans –ongoing › growth. resident in Italy 62 shareholders, owning 25.9% of capital, were › € resident abroad. Year of payment Per-share dividend - 1999 0.23 Institutional investors are very strongly present in 2000 0.28 share capital (and account for approximately 80% of 2001 0.31 the free float). 2002 0.34 2.2.2.4 2003 0.37 RELATIONS WITH 2004 0.40 INVESTORS AND FINANCIAL ANALYSTS 2005 0.48 2006 – Ordinary dividend 0.60 Right from the time when it went public (1998) the 2006 – Extraordinary dividend 1.00 company has considered financial communication to 2007 – Proposed dividend 0.70 be strategically important. Sabaf's financial communications policy is based on the principles of integrity, transparency and continuity, in the belief In 2006, besides distribution of an ordinary dividend that this approach enables investors to assess the of € 0.60 per share (48.7% of Group profit), there company properly. was also payment of an extraordinary dividend of € 1.00 per share. The extraordinary dividend was To this end, every year Sabaf provides the market made possible and appropriate by the Group’s with guidance on its forecasts for the current year. financial position and by strong cash generation in It periodically confirms these forecasts when it 2005 and 2006. 94 MARKET CAPITALISATION Responsabili” (= “Responsible Values”) fund by the During 2006 Sabaf stock hit its maximum official Italian asset manager Etica SGR, passed the analysis price on November 3rd (€ 26.58) and its minimum performed by EIRIS (Ethical Investment Research official price on January 18th (€ 17.61). As at Services, an international UK-based organisation), December 30th the official price was €25.86. based on 50 indicators relating to governance and Average daily trading volume totalled 20,245 shares to social and environmental policies. for an average value of about €470,000 (vs. € 220,000 in 2005). Sabaf expresses its appreciation of recent Italian legislative novelties (Article 117/3 of 2.2.2.6 the Italian Consolidated Finance Act) that establish SOCIALLY RESPONSIBLE precise disclosure and reporting obligations for INVESTMENTS parties promoting products and services qualified as ethical or socially responsible. Sabaf is included in the list of companies in which ethical investment funds that follow the Ethibel 2.2.2.7 evaluation, can invest. Sabaf is also included in the LEGAL DISPUTES Kempen SNS SRI index – the first index for socially- responsible European small caps. There are no legal disputes underway with shareholders. Sabaf is one of the two Italian companies that, on the occasion of the launch of the “Valori
PRICE OF SABAF SHARES DURING 2006
€ 26,58
SABAF
Index Star € 17,61
1.1.2006 2.4.2006 2.7.2006 1.10.2006 31.12.2006
95 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.3 SABAF AND ITS CUSTOMERS Annual Report2006 2.2.3.1 › To listen to customers’ requirements via con- OUR COMMITMENTS TO stant monitoring of customer satisfaction and of any CUSTOMERS complaints › To act with transparency, integrity and fairness. › To inform customers of all risks associated with use of the products and of their environmental › To communicate information on products and impact. services in a clear and transparent manner. › To behave morally, professionally and helpfully 2.2.3.2 in dealings with customers. DIALOGUE WITH CUSTOMERS › To guarantee high standards of quality for the products offered In early 2007 Sabaf prepared a questionnaire targeting its main customers. The primary aim of To assure ongoing technological research in this was to survey the level of customer satisfaction › in commercial and technical dealings. Below we order to offer innovative products. present the summary of the replies received. › To work with customer companies to assure The assessment scale is from 1 (poor/not important) end-users the utmost safety when utilising products to 10 (excellent/very important). › To encourage socially-responsible actions throu- ghout the entire manufacturing chain
1. ASSESSMENT OF SABAF GROUP PRODUCTS
VALVES THERMOSTATS BURNERS HINGES Score Importance Score Importance Score Importance Score Importance
QUALITY/RELIABILITY 8.0 8.0 8.5 9.0 8.2 8.6 8.0 7.0 VALUE FOR MONEY 6.7 7.7 5.5 8.0 6.0 8.6 7.6 8.0 INNOVATIVENESS 7.7 7.3 6.0 8.0 7.4 7.2 6.5 5.0 OVERALL RATING 7.3 7.7 7.0 8.5 6.8 8.0 7.0 6.0 ABILITY OF SABAF PRODUCTS TO REDUCE END-USERS’ ENERGY CONSUMPTION 8.0 8.0 8.0 10.0 7.6 7.8 N.A. N.A. PRODUCTS’ ENVIRONMENTAL PERFORMANCE (E.G. EFFICIENT USE OF PACKAGING MATERIALS, ABSENCE OF ENVIRONMENTALLY HARMFUL MATERIALS IN PRODUCTS, ETC.) 7.5 7.5 7.5 8.5 7.6 7.2 7.0 7.0
96 9.0 9.0 8.6 8.6 8.6 8.0 7.6 7.6
2. ASSESSMENT OF TECHNICAL 6.0 6.0 AND DESIGN ASSISTANCE
Score Importance TIMELINESS PROFESSIONALISM AND USEFULNESS OF B2B COMPLAINT-SOLVING PROMPTNESS OF COMPETENCE SITE(HTTP//WWW.SAB ABILITY SOLUTION OF AFB2B.COM) COMPLAINTS 9.5 8.3 8.3 8.3 8.3 8.0 7.8 7.5 7.5 7.0
3. ASSESSMENT OF SERVICE
Score Importance FLEXIBILITY COMPLIANCE WITH COMPLIANCE WITH PACKAGING CLARITY OF DELIVERY DEADLINES QUANTITIES ORDERED ACCOMPANYING DOCUMENTS
8.8 9.0 8.3 8.0 7.5 6.5 4. ASSESSMENT OF COMMERCIAL ASSISTANCE
Score Importance
8.0 CAPACITY TO INCREASE COMPREHENSIBILITY OF 8.0 TIMELINESS PROFESSIONALISM AND CORRECTNESS IN BUSINESS CORPORATE REALITY CAPACITY TO HIGHLIGHT COMPETENCE DEALINGS (TRANSPARENCY SIGNIFICANT (RELEVANT) 8.0 AND ACCURATE ASPECTS COMPLETENESS ACCOUNTING/ADMINISTRATION) OF INFORMATION 7.0 USEFULNESS AND USABILITY FOR DECISION-MAKING 5. AWARENESS OF SABAF GROUP’S INTEGRATED PURPOSES REPORT AND OF ITS COMMITMENT TO SOCIAL 8.0 8.0 RESPONSIBILITY ACTIVITIES CLARITY OF USABILITY AND REPORT AVAILABILITY OF REPORT 97 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.3.3 SALES ANALYSIS Annual Report2006 COUNTRIES AND CUSTOMERS
NUMBER NUMBER COUNTRIES CUSTOMERS
317 285
57 54
2006 2005
For detailed analysis of revenue breakdown by During 2006 the Sabaf Group issued invoices product family and geographical area, reference (>€ 1,000) to 62 new customers (36 in 2005), for a should be made to the “Directors’ report on total of € 1.8 mn (€ 2.7 mn in 2005), whilst 36 consolidated year-end accounts and performance”. customers active in 2005 did not buy in 2006, for a total of some € 700,000 (vs. 45 in 2005, for a total Consistently with the Group’s commercial policies, of € 1.2 mn). most of the active commercial relationships are well established and of a longstanding nature. In 2006 27 customers provide us with annual sales of over we once again concluded major long-term € 1 mn (24 in 2005). The breakdown by sales class partnership agreements, including those with was as follows: Tecnogas and Nardi, two of the Group’s main customers.
98 CUSTOMER BREAKDOWN BY SALES CLASS
200
168
150
128
100
S
R E
M
O
T S
U
C 50
R E B 40 41 M 47 U
N 27 29 33 22 26 23 16 0 1 1 ‹=1.000 ‹=50.000 ‹=100.000 ‹=500.000 ‹=1.000.000 ‹=10.000.000 ›10.000.000 SALES CLASS
2006 2005 Besides our central unit at the Ospitaletto HQ, our for all product lines from Sabaf, the company seeks commercial network is also based on a delegation to provide (a) top service and the best terms of office in China, stable presences in the USA and purchase, (b) immediate technical and laboratory Mexico, a distributor in Australia, and some 20 assistance, and also (c) priority in the presentation agents. of projects for innovative products, in order to optimise co-ordination of Sabaf/customer product 2.2.3.4 development. DEVELOPMENT OF As a rule, for those product lines for which it is PARTNERSHIPS possible to hedge against the risk of changes in the price of commodities used as raw materials, Sabaf Sabaf shares the benefits generated by higher guarantees the customer fixed prices for the whole volume and productivity increases stemming from calendar year. The exceptions to this are products investments in automation with its customers, using iron/steel - due to the absence of hedging based on a partnership approach intended to assure the best possible market conditions possible. To 99 those customers buying 100% of their requirements DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 instruments – for which prices are renegotiated if In any case, for Sabaf the main medium of commodity prices exceed a maximum variation communication with customers continues to be the threshold. one-to-one meeting, i.e. periodical meetings during Provision of special products, exclusively for a given which all aspects concerning product supply and customer, is always undertaken against conclusion related services are addressed. of a specific supply contract. 2.2.3.6 2.2.3.5 CONTRACTUAL TERMS INFORMATION AND COMMUNICATION General terms of sale are supplemented annually by price agreements, the result of negotiations with There is a systematic presence in trade magazines customers that normally start in October. These of articles and reviews describing the technical negotiations obviously take a variety of parameters characteristics of the Group’s new products. With into account, including: the aim of enhancing Sabaf brand awareness, Sabaf • Volume purchased by the customer by individual has also extended its use of advertising to product line and in total specialised consumer magazines. • Customer’s scheduling ability and the linearity of delivery flows In addition, Sabaf has also initiated co-branding • Customer’s membership of a multinational group initiatives with some customers. Such initiatives for which master agreements or more general supply underline components’ strategic role in a cooking interests exist appliance’s performance. • Punctuality of payments and the customer’s short-, medium-, and long-term solvency • Consideration of the customer’s strategic market positioning and its consistency with Sabaf’s positio- ning.
Based on these general evaluations, proposals for changes in list prices are then considered, taking into account: • Changes occurring in costs in the previous year (headed by raw materials and productivity) New energy saving • Changes projected in product cost for the coming year New high-efficiency series III Sabaf • Customer’s stated budget volume for the coming burners with inclined flames: year • Respect of previous year’s budget. - More than 20% efficiency respect to the European standards*. - Reduced boiling times. - Burner stopping for an easier cleaning.
* efficiency tested on rapid and semi-rapid burners according to the European standard EN 30-2-1
To aid communication with customers and the public, during 2006 Sabaf launched a new Website (www.sabaf.it), in which ample space is dedicated to technical information on products.
100 2.2.3.7 In 2005 we presented Series III featuring a new 2.2.3.8 PRODUCT SAFETY, type of burner. Series III is a range of burners over THE QUALITY SYSTEM INNOVATION, AND 25% more efficient than the levels imposed by ENVIRONMENTAL European regulations and over 15% more efficient Our quality management system, which complies FRIENDLINESS than burners currently on the market. Series III with the ISO 9001:2000 standard (“Vision 2000”), is burners’ technical features, with special reference to integrated with the systems of environmental A primary cornerstone of Sabaf’s product innovation their eco-efficiency, are described in detail in the management and workplace safety, and is intended strategy is the question for superior performance in “Environmental Performance” section. to permit achievement of the following objectives, terms of safety and environmental impact. i.e. to: In 2006 Sabaf started producing long runs of simple Safety has turned out to be a key factor for success valves in light alloy, which will be joined by light a. Increase customers’ satisfaction by understanding in the specific business sector concerned, because alloy safety valves. The technical features of light and responding to their present and future needs Sabaf has succeeded in anticipating demand for alloy valves, with special reference to their eco- products with safety devices in the European market efficiency, are described in detail in the b. Continuously improve processes and products, and to encourage the spread of such products also “Environmental Performance” section. with special attention to environmental protection in emerging countries. Sabaf champions - and has and employee safety also lobbied the various institutions in this respect - the introduction of regulations imposing compulsory c. Involve partners and suppliers in the process of use of products with thermoelectric safety devices constant improvement, encouraging a co-makership also for uncovered burners in Europe, and at least approach for oven burners in emerging countries. d. Enhance the value of human resources
e. Improve business performance.
CURRENT SPENDING FOR QUALITY (Amounts in € ‘000) 2006 2005 Product certification 83.8 54.8 Quality system certification 3.7 11.9 Purchase of measuring instruments & equipment 42.0 53.6 Calibration of measuring instruments & equipment 42.7 9.1 Technical regulations, software, and magazines 7.9 9.4 Trials and tests by independent laboratories 6.1 3.9 Total 187.2 142.7
INVESTMENTS FOR QUALITY (Amounts in € ‘000) 2006 2005 Purchase of measuring instruments and equipment 102.4 241.6 Total 102.4 241.6
101 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 IMPROVEMENT OBJECTIVES Sabaf SpA’s Quality System has been ISO Sabaf’s future commercial objectives envisage continuation of sales growth at more than 10% CAGR 9001 certified since 1993 and in – a feature characterising recent years, whilst maintaining the company’s present high levels of September 2002 it upgraded to meet the profitability. The enhanced value of gas cooking requirements of the ISO 9001:2000 appliances, expansion of the product range offered, with growing added value (special burners, new (“Vision 2000”) standard. Faringosi- hinge models), and growth in size with consequent economies of scale will make this possible. It will do Hinges’ Quality System has been ISO so despite the fact that achievement of these objectives will also require (a) further investments in 9001 certified since 2001 and in 2003 R&D and automation in Italy and (b) investments in was upgraded to meet Vision 2000 commercial, logistics, and manufacturing facilities in those markets potentially very attractive in terms of requirements. size, but with standards that today are not aligned with those of Europe (for example: Brazil, India, and In 2006 IMQ (the accredited Italian China). certification and audit organisation) 2.2.3.9 performed its annual supervisory check LEGAL DISPUTES of integrated quality and environmental There are no legal disputes underway with customers. management systems at Sabaf SpA. Two non-critical non-conformities were found during the visit. The company has launched an improvement plan to remedy these according to the timing agreed with IMQ.
102 2.2.4 SABAF AND ITS SUPPLIERS 2.2.4.1 2.2.4.2 Failure to comply with or accept the principles of OUR COMMITMENTS TO THE SA8000 STANDARD the SA8000 standard leads to discontinuation of the SUPPLIERS AND SUPPLIERS supply relationship. During 2006 we performed 27 on-site audits of suppliers. No critical non- › To act with transparency, correctness, integrity On December 22nd 2005 Sabaf SpA. obtained conformities were found. and contractual fairness. certification of its conformity with the requirements of the SA8000 (Social Accountability 8000) 2.2.4.3 › To treat quality certification, capacity for innova- standard. The company therefore requires its PURCHASING ANALYSIS tion and benefits for the community as key criteria suppliers to respect – in all their activities – the Sabaf aims to aid development of the territory for the selection of suppliers. standard’s principles as the minimum prerequisite for establishment of a long-lasting relationship based where it operates and therefore, in selecting on principles of social responsibility. suppliers, it gives preference to local companies. In To prefer suppliers who respect the environ- › Already since 2003 supply contracts have included 2006 the purchases made in the Lombardy region – ment, take a socially responsible approach to busi- an ethicality clause based on the SA8000 standard. where the Group HQ is located – accounted for ness, and have a good reputation. This clause puts suppliers under obligation to assure some two thirds of the total (vs. 63.4% in 2005). respect of human and social rights. More specifically, Most non-EU supplier sales come from Switzerland › To encourage the sharing of common values and suppliers undertake to avoid using in their and concern the purchase of machinery and report on the development of Sabaf’s strategies. production processes persons below the legal equipment. Among the remaining suppliers based in minimum age in the country concerned, to non-EU countries three are located in China. These › To promote the sharing of knowledge and foster guarantee their workers a safe workplace, to suppliers sold us components for € 1,050,000 in long-term partnerships protect trade-union freedom, to comply with 2006 (€315,000 in 2005). They have all signed the legislation on working hours, and to ensure that clause agreeing to respect SA8000 principles and › To encourage suppliers to adopt good social workers are paid the legal minimum wage. underwent on-site audits by Sabaf SpA officials in responsibility practices 2006. No criticalities were found. › To ensure the impartial selection of suppliers, offering all potential suppliers possessing the neces- sary requisites the chance to compete for Sabaf's GEOGRAPHICAL DISTRIBUTION OF SUPPLIERS* business (Amounts in € ‘000) › To pay suppliers when and as agreed 2006 2005 Sales to Sabaf % Sales to Sabaf % › To reject gifts from suppliers that exceed the normal standards of courtesy and that might influen- Province of Brescia 50,651 49.6 32,017 44.8 ce the objective appraisal of the product or service. Province of Milan 3,449 3.4 4,033 4.1 › To refuse to do business with suppliers that Rest of Lombardy region 15,253 14.9 13,765 14.5 employ child labour and do not respect basic human Rest of Italy 21,800 21.3 16,060 21.5 rights. Rest of EU 7,967 7.8 7,086 9.7 › To require suppliers operating in countries where Non-EU countries 3,049 3.0 1,574 5.4 workers’ rights are not respected to provide appro- Total 102,168 100.0 74,535 100.0 priate guarantees that they comply with the SA8000 * Excluding Sabaf do Brasil standard’s principles in terms of child labour, forced labour, occupational health and safety, freedom of association and the right to collective bargaining, Sabaf do Brasil mainly purchases its production been imported from Europe to assure uniform materials from local suppliers. The main machinery group-wide manufacturing processes, discrimination, disciplinary procedures, working hours, items used (transfer machining and assembly particularly as regards quality and safety. 103 and compensation policies. equipment and burner mould presses) have instead DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 2.2.4.4 process of acquiring new supplier companies that SUPPLIER RELATIONS AND demonstrate that they meet and assure the CONTRACTUAL TERMS qualitative and economic standards sought by Sabaf.
Our relations with suppliers aim for long-term Sabaf requires its suppliers to be capable of partnerships and are based on contractual renewing their technology over time, in order to be correctness, integrity and fairness, and on shared constantly able to offer the best value for money growth strategies. Sabaf guarantees total (price/quality ratio). It gives preference to suppliers impartiality in supplier selection and undertakes to who have obtained or are in the process of obtaining assure rigorous respect of agreed terms of payment certification of their quality systems. (to date, saving rare exceptions, all contracts have been paid as per agreements). In 2006 sales to Sabaf Group by suppliers with certified quality systems accounted for 54.3% of the Each year Sabaf gives a significant boost to the total (vs. 49.3% in 2005).
BREAKDOWN OF PURCHASES BY TYPE 10.9% MACHINERY & EQUIPMENT 31.1% RAW MATERIALS
35.3% SERVICES 22.7% COMPONENTS
For artisan or less structured suppliers, we agree extensively and periodically sends suppliers its “Sabaf very short payment terms (mainly 30 days). Magazine” newsletter. In order to aid sharing with suppliers of the values underlying its business model, and to foster the 2.2.4.5 utmost transparency and reciprocal knowledge, LEGAL DISPUTES
104 Sabaf has distributed its Charter of Values There are no legal disputes underway with suppliers. 2.2.5 SABAF AND ITS FINANCIERS 2.2.5.1 2.2.5.3 OUR COMMITMENTS TO LEGAL DISPUTES FINANCIERS There are no legal disputes underway with financiers. › To communicate the company’s strategies and policies in a timely, complete, clear, and transparent manner, assuring total equality of disclosure › To assure continuity of the Group as a business concern.
2.2.5.2 BANKING RELATIONS
In keeping with its yardstick values of transparency and correctness, Sabaf has always co-operated with the banking industry, providing prompt and complete information required for a comprehensive financial analysis of the business (year-end financial statements, quarterly and mid-year reports, and notification of the more significant transactions).
As in the past, Sabaf rarely made use of short-term bank credit in 2006. Instead, it funded short-term financial commitments with its substantial free cash flow. In 2006 finance expense as a percentage of sales further decreased to 0.57% (0.70% in 2005).
The Group mainly does business with five Italian banks (Banco di Brescia, Intesa Sanpaolo, Unicredit, BNL, and Bipop-Carire) and with three foreign banks (Santander, Fortis, and ITAU). In 2006 it discontinued its relationship with the Royal Bank of Scotland.
The Group has short-term credit facilities of some € 25 million at its disposal. As at December 31st 2006 utilisation amounted to € 3.5 million.
105 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.6 SABAF AND COMPETITORS Annual Report2006 2.2.6.1 enjoys cost leadership in the sector. In this scenario OUR COMMITMENTS TO Sabaf is highly competitive both in the premium part COMPETITORS of the range – where it is able to offer high- performance products on an ongoing basis – and in › To act transparently and correctly the mass market. To assure integrity in management of the busi- › In Italy and Europe Sabaf estimates that it has a ness market share of over 40% in each product segment. › To promote fair competition with competitors, It is the only company providing the full range of gas respecting rights relating to patents and trademarks cooking components, whereas its competitors › To champion social responsibility actions in our produce only part of the product range. sector › To communicate in a timely, complete, clear, Sabaf’s two main competitors in the international and transparent manner. market are Copreci and Burner System International:
2.2.6.2 Copreci is a co-operative based in Spain in the MAIN ITALIAN AND Basque region, is part of the Mondragon Co-operative INTERNATIONAL Corporation and, after Sabaf, is the main valve and COMPETITORS thermostat manufacturer in Europe
Sabaf holds a market leadership position in the Burner Systems International (BSI) is a US company international arena. Its ongoing product innovation that acquired control of the French producer and diversified customer base enable Sabaf to Sourdillon, a longstanding competitor of Sabaf and of defend the quality of its results even in the face of Harper Wyman, the most important manufacturer of downward selling-price pressures. Thanks to its gas cooking components for the North American exclusive manufacturing processes, economies of market. scale, and strong vertical integration, Sabaf also
THE SABAF GROUP’S MAIN ITALIAN AND INTERNATIONAL COMPETITORS
Valves Thermostats Burners Hinges SABAF •••• Burner Systems International (U.S.A.) ••• CMI (Italy) • Copreci (Spain) •• Defendi (Italy) •• Imit (Italy)* •• La Micromeccanica (Italy) • Nuova Star (Italy) • Siral (Italy) • Somipress (Italy) •
(*) At the end of 2006 IMIT discontinued production of valves and thermostats for gas cooking appliances. 106 2005 AND 2004 P&L HIGHLIGHTS OF THE SABAF GROUP’S MAIN ITALIAN AND INTERNATIONAL COMPETITORS
2005 2004 SALES EBIT NET PROFIT SALES EBIT NET PROFIT (LOSS) (LOSS) CMI 22,768 508 166 15,355 209 (39) Copreci(*) 127,578 7,365 4,410 123,048 7,391 5,207 Defendi 28,718 1,092 281 26,277 720 43 La Micromeccanica 10,858 1,166 688 13,502 1,551 703 Nuova Star 22,152 649 188 26,183 1,091 384 SIral 11,127 535 14 11,967 678 16 9 Sabaf reclassification based on companies’ Somipress 20,203 1,033 225 20,332 1,618 681 financial statements. Latest available figures.
(*) Sales of cooking components account for 58% and 52% of the total respectively in 2005 and 2004
Unfortunately no further information is available on competitors due to the difficulty of retrieving data. 2.2.6.3 LEGAL DISPUTES
Two lawsuits initiated by Sabaf SpA are underway following presumed patent infringements by a competitor.
107 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.7 SABAF AND THE PUBLIC ADMINISTRATION Annual Report2006 2.2.7.1 2.2.7.2 OUR COMMITMENTS TO RELATIONS WITH THE THE PUBLIC PUBLIC ADMINISTRATION ADMINISTRATION In line with its policies, Sabaf’s relationships with the › To guarantee total compliance with current public administration and tax authorities are geared laws and regulations. towards the utmost transparency and correctness. › To communicate in a clear, prompt, complete At local level, Sabaf has sought to establish an open and transparent manner. dialogue with the various authorities to create To collaborate with institutions to ensure the harmonious industrial development. For this reason, › Sabaf systematically provides the Ospitaletto town development of safer products in our sector. authorities with copies of the analyses relating to › To share technical expertise with institutions emissions released into the atmosphere by its engaged in studies and research regarding our sec- factories as a result of production. tor and corporate social responsibility › To comply with antitrust legislation and with 2.2.7.3 the regulations of the relevant Authorities. INCOME TAXES AND › To not finance political parties in the countries OTHER TAXES PAID where Sabaf does business. In 2006 the group paid € 11.3 mn in taxes to the State, representing 20.6% of the Value Added produced (vs. € 9.4 mn in 2005, corresponding to 19.5% of Value Added). The tax rate (income tax as a percentage of pre-tax profit) was 40.67% (vs. 39.7% in 2005). Sabaf appreciates legislative measures TAXES aiming to reduce the tax burden of (Amounts in €’000) companies that invest on a continuous 2006 2005 Current income tax 9,954 7,995 basis and/or hire staff. We also point out Deferred income tax 1,052 1,339 that Sabaf has never received Balance of previous FY - (146) government grants or any particular TOTAL INCOME TAX 11,006 9,188 government aid to support its business. OTHER TAXES 343 230 TOTAL TAXES 11,349 9,418
2.2.7.4 FY2006 Sabaf SpA received the related notices of TAX DISPUTES reassessment. It filed an appeal against these with the Tax Commission, deeming the main accusations During 2005 the direct parent company Sabaf SpA made by the tax auditors to be unfounded. The was the subject of an official tax audit by the Italian related effects of this tax dispute on the FY2006 Inland Revenue authority concerning FY2003 income statement are illustrated in the Explanatory (subsequently partly extended also to FY2002) and Notes to individual and consolidated year-end relating to corporate income tax, VAT, and Italian accounts. 108 regional business tax (Italian acronym = IRAP). During 2.2.8 SABAF AND THE COMMUNITY 2.2.8.1 2.2.8.4 OUR COMMITMENTS TO RELATIONS WITH THE COMMUNITY UNIVERSITIES AND THE STUDENT WORLD ›To operate within local communities in a socially responsible manner, i.e. as a "good citizen". Sabaf systematically organises company visits for ›To help improve the quality of life in the communi- groups of students and contributes its testimony of ties where the company does business, through actions CSR best practice during major conferences in various in the social, cultural, educational and sports areas. Italian cities. To encourage the utmost respect for human rights › Since 2002 Sabaf has been collaborating with the in the local communities where the company operates. AIESEC (Associazione Internazionale di Studenti in ›To donate to and sponsor non-profit associations Scienze Economiche e Commerciali – international consistently with the policies established beforehand by association of students in economic and business the Board of Directors. sciences) – the world’s largest undergraduate ›To contribute to young people's education by wor- organisation, which in recent years has been king with schools and universities. particularly active in the study of corporate social ›To promote the wider distribution of products with responsibility. safety systems in order to safeguard public health. Sabaf provided support for creation of a local AIESEC committee at Brescia University and has taken part in 2.2.8.2 many educational programmes for undergraduates and DIALOGUE WITH THE in projects promoting corporate social responsibility. COMMUNITY In 2006 Sabaf offered its collaboration for an The attention that Sabaf dedicates to the community as educational project of Banca Etica targeting high school a whole does not take the form merely of cash students and concerning an in-depth picture of the donations to humanitarian, sporting, and cultural relationship between ethics and finance and ethics and associations present in the area but also, and above all, the economy. A film was made in which Sabaf of constant activity to disseminate good corporate managers and staff talk about working for a socially- business practices. responsible company. 2.2.8.3 2.2.8.5 CHARITY INITIATIVES AND RELATIONS WITH INDUSTRY DONATIONS ASSOCIATIONS
In 2006 donations totalled some € 30,000 (€ 70,000 Sabaf belongs to the Confederazione Italiana della in 2005) and mainly supported local social and Piccola e Media Impresa (CONFAPI) [Italian humanitarian initiatives. confederation of small and medium enterprises], which today represents over 50,000 companies and whose DISTANCE ADOPTIONS institutional purpose is the defence of the interests For several years now Sabaf has suggested to its and enhancement of the value of Italian SMEs. suppliers replacement of conventional Christmas presents with something more useful and meaningful, During 2006 Sabaf took part in the foundation of i.e. donations to the Associazione Volontari per il CECED Italia, the new association that develops and Servizio Internazionale (AVSI – association of volunteers co-ordinates research activities promoted at European for international service), an Italian non-profit NGO level by the CECED (European Committee of Domestic working on international projects to aid development. Equipment Manufacturers) with all the related The donations have been specifically earmarked for scientific, legal, and institutional implications in the long-distance support of 20 children living in various domestic appliance sector. 109 countries in the world. DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
2.2.9 SABAF AND THE ENVIRONMENT Annual Report2006 2.2.9.1 On March 30th 2006, in Milan, Sabaf gathered OUR COMMITMENTS TO together in Milan the world’s foremost experts in THE ENVIRONMENT energy efficiency in the residential sector for a top- level discussion of this topic. “Energy and Carbon › To manage manufacturing activities in a way Saving in Cooking” was the first conference that minimises direct and indirect environmental dedicated to domestic cooking technologies. It impact. featured a comparison between the various types of energy used for cooking in industrial countries (gas To apply a precautionary approach as regards › and electricity) and in developing countries (wood, environmental impact. coal, and kerosene are the fuels used for cooking by › To promote the development and use of eco- over half the global population. The conference efficient technologies and products. proceedings are available in the News section of our › To define specific environmental objectives and site www.sabaf.it. improvement programmes aimed at minimising significant environmental impact. › To train staff so that they are aware of the environmental aspects and impact connected with their jobs and are committed to working in a way that respects the environment, thus helping to achie- ve corporate goals. › To provide the local authority with all informa- tion needed to understand any environmental risks associated with Sabaf's operations. 2.2.9.2 DIALOGUE WITH ENVIRONMENTALIST ASSOCIATIONS AND INSTITUTIONS
The Sabaf Group has long been working to disseminate information on the lower environmental impact generated by the use of gas as opposed to electricity for cooking. The use of combustible gas 2.2.9.3 for the production of heat in fact permits ENVIRONMENTAL POLICY, achievement of much higher yields than those PROGRAMME, AND achievable with electric cooking appliances. In OBJECTIVES addition, throughout the world the cooking market increasingly requires high-power and numerous Sabaf has always dedicated special attention to the cooking points (plates/burners) to cook meals fast. environment, constantly seeking to reduce the An increase in electric hobs would cause an increase impact of its industrial operations. in electricity consumption typically peak at around meal times, further increasing electricity demand The company’s strong awareness of the importance that is already difficult to meet. If this increased of respecting environmental balances is reflected in electricity demand were to be met by constructing various decisions taken over the years - which not new power stations, the cost for users would be only respect legal requirements but also aim to significantly higher. achieve constant progress in the company's environmental performance. Sabaf's attention to environmental friendliness is also 110 demonstrated by some of the innovative solutions SABAF SERIES III BURNERS adopted at the Ospitaletto plant. During its design Series III burners, launched in 2005, stand out for and subsequent construction, Sabaf strove to their yields, much higher than the standard (65% vs. minimise environmental impact and to create a 52%). The greater efficiency of the Sabaf Series III more comfortable workplace environment. burner means lower gas consumption (some 20% less) and faster achievement of the desired cooking The Ospitaletto production site’s environmental temperature. Greater efficiency and lower management system had been certified as consumption also translate into halving of carbon compliant with the ISO 14001 standard since 2003. monoxide emissions and significant reduction of With implementation of the ISO 14001 standard carbon dioxide emissions. Sabaf has also pinpointed the main environmental risks associated with its production, which are LIGHT ALLOY VALVES systematically monitored and managed. Production of valves in aluminium alloy has several advantages over production of brass valves, i.e. 2.2.9.4 energy saving in production, lower lead content of PRODUCT INNOVATION product, a lighter production and a consequent AND ENVIRONMENTAL reduction of consumption for packaging and SUSTAINABILITY transport.
A priority underlying Sabaf’s product innovation strategy is the quest for superior performance in terms not only of environmental impact but also in products’ production and utilisation.
111 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006 ENERGY CONSUMPTION IN PRODUCTION (KWH/PIECE) Brass simple valves Light alloy simple valves % Difference 0.3031 0.2183 -28.0% Brass safety valves for cookers Light alloy safety valves for cookers % Difference 0.4693 0.3016 -35.7% Brass safety valves for hobs Light alloy safety valves for hobs, model without elbow outlet % Difference 0.4677 0.3029 -35.2%
LEAD (PB) CONTENT (G/PIECE) Brass simple valves Light alloy simple valves % Difference 2.24 0.30 -86.4% Brass safety valves for cookers Light alloy safety valves for cookers % Difference 3.91 0.47 -88.1% Brass safety valves for hobs Light alloy safety valves for hobs, model without elbow outlet % Difference 2.74 0.47 -82.9%
TOTAL WEIGHT (G/PIECE) Brass simple valves Light alloy simple valves % Difference 73 31 -57.5% Brass safety valves for cookers Light alloy safety valves for cookers % Difference 159 74 -53.4% Brass safety valves for hobs Light alloy safety valves for hobs, model without elbow outlet % Difference
139 72 -48.1%
112 2.2.9.5 cooking appliances (which are equipped with ENVIRONMENTAL IMPACT electronic ignition devices). As far as valves and thermostats with safety devices are concerned, we 2.2.9.5.1 are now completing adaptation to the directive’s MATERIALS USED AND requirements. PRODUCT RECYCLABILITY In addition, Sabaf products fully meet the Sabaf’s main product lines – valves, thermostats and requirements of the 2000/53/EC (ELV – end-of-life burners for domestic gas cooking appliances – vehicles) directive, i.e. their heavy-metal content feature high energy yields and the optimal use of (lead, mercury, cadmium, and chromium 6) is lower natural resources. As stated, the use of combustible than the limits set by the directive. gas to produce heat in fact permits much higher yields than those achievable with electric cooking In September 2004 Sabaf initiated differentiated appliances. collection of paper/cardboard, glass, cans, and Sabaf products are also easily recyclable, as they plastic. To do this Sabaf has drawn on the services are made almost entirely of brass, aluminium alloys, of Cogeme, a public utilities company that for years copper and steel. has been strongly committed to careful planning of co-ordinated management of the local territory and, Sabaf burners, as well as valves and thermostats in particular, of waste management services, and of without safety devices, fully meet the requirements which the municipality of Ospitaletto has been a of the 2003/95/EC directive (the RoHS Directive), shareholder since 1996. which aims to restrict the use of hazardous In 2006 our differentiated waste collection system substances, such as lead, in the production of permitted recovery of 42,270 kg of paper/cardboard electrical and electronic equipment. This category and of 22,440 kg of plastic packaging materials. includes all household appliances, including gas-
MATERIALS USED 2006 consumption 2005 consumption (metric tons) (metric tons) Brass 4,937 4,373 Aluminium alloys 7,039 5,625 Zamak 81 73 Steel 7,646 7,011
100% of brass and 65% of aluminium alloys used are produced via recovery of scrap metal. 35% of aluminium alloys and 100% of steel is instead produced from the mineral substance.
113 DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006
ELECTRICITY 2006 consumption 2005 consumption (MWh) (MWh) Total 24,279 20,553
NATURAL GAS 2006 consumption 2005 consumption (cubic m,’000) (cubic m,’000) Total 3,193 2,723
Sabaf SpA uses natural gas as its energy source for the die-casting of aluminium and for firing enamelled lids. The increase in natural-gas consumption in fact reflects the increase of in-house production in the pressure die-casting and enamelling departments. Faringosi-Hinges production does not use natural gas as an energy source.
WATER 2006 consumption 2005 consumption (m3) (m3) Total mains water 14,405 13,276 Total well water 24,672 18,506 Total 39,077 31,782
All water used in Group companies’ manufacturing processes is channelled to disposal and therefore there are no industrial water discharges.
2.2.9.5.2 aluminium and steel processing and leftovers from WASTE die-casting of aluminium are directly reutilised in processing. Chips and waste coming from the manufacturing Waste for disposal and recycling is summarised process are identified and collected separately, for below. subsequent recycling or disposal. Chips from brass,
WASTE (metric tons) 2006 2005 Municipal-type waste 130 134 Non-hazardous (for disposal) 3,892 2,510 Non-hazardous (for recycling) 3,635 3,638 Total non-hazardous waste 7,527 6,148 Hazardous (for disposal) 1,181 3,214 Hazardous (for recycling) 71 2 Total hazardous waste 1,252 3,216
114 As part of its environmental programme, Sabaf has defined some environmental performance indicators, selecting those considered to be most meaningful, for which it has set itself specific objectives.
As far as waste is concerned we have calculated the hazardous waste prevalence index, based on the ratio of hazardous waste produced in the year to total waste (H/total).
2006 2005 Origin of Target Actual Target Actual environmental impact
Pollution caused by waste iR_p/np < 45 iR_p/np = 15.4 iR_p/np < 55 iR_p/np = 37.9
The major improvement achieved in the index is the processing of pressed bars and bodies with removal result of start-up of the plant for treatment of of materials, (b) washing of semi-processed products foundry waste, which has drastically reduced and components so obtained, (c) finishing of the bo- production of hazardous waste. Sabaf’s target for dy/male coupling surfaces using diamond machine 2007 is to keep the quantity of hazardous waste tools, and (d) assembly and final testing of the fini- produced in the year at less than 25% of total waste shed product. This process generates an insignificant (hazardous + non-hazardous) produced. amount of oily mists and PERC emissions. 2.2.9.5.3 ›In Faringosi-Hinges the main material used to ATMOSPHERIC EMISSIONS produce hinges is steel. The latter undergoes a Most of the atmospheric emissions released by the series of mechanical processes that do not lead to Sabaf Group derive from activities defined as any significant emission. producing “negligible pollution”. More specifically: ›In Sabaf do Brasil the entire burner process is ›In Sabaf SpA three production processes take performed. Until 2006 blanking and coining of lids place, i.e. was performed exclusively by outside suppliers. 1- Production of burner components (injector-holder Analysis of the internal process has not revealed any casings and flame spreaders) envisages melting and subsequent pressure die-casting of aluminium alloy, significant emissions. sandblasting of pieces, a series of mechanical proces- ses removing material, washing of some compo- The efficiency of purification systems is assured by nents, and assembly and testing. This production pro- their regular maintenance and regular monitoring of cess involves the emission of oily and PERC (perchlo- all emissions, which have so far shown themselves roethylene) mists of a not very significant entity, as to be well within legal limits. well as of dust and carbon dioxide. 2- Production of burner lids, for which steel is used as a raw material and subjected to blanking and coi- The following table summarises the results of ning. The semi-finished lids then undergo washing, analysis of the main emissions at Sabaf SpA’s sand blasting, and application and firing of enamel. factories, compared with the targets set at the All this leads to dust emission. beginning of the year. 3- Production of valves and thermostats, in which the materials mainly used are cast brass bars and bodies (aluminium alloy for new-generation valves) and, to a much lesser extent, steel bars. The production cycle 115 is divided into the following phases: (a) mechanical DIRECTORS’ REPORT ON SOCIAL AND ENVIRONMENTAL PERFORMANCE
Annual Report2006
2006 2005
Origin of impact Target Actual Target Actual
Remain 50% Remain 50% below legal limit below legal limit Unit A: die-casting machinesand therefore iE_E = 12.8and therefore iE_E = 18.3 maintain 10 maintain iE_En < 45 iE_En < 50
Unit A: melting ovens iE_En < 50 iE_E = 17.2 iE_En < 50 iE_E = 26.1 Unit A: sand blasting machines iE_En < 40 iE_E = 7.2 iE_En < 50 iE_E = 11.0 Unit A: transfer machines iE_En < 30 iE_E = 3.0 iE_En < 50 iE_E = 3.0 Unit A: melting oven scorification iE_En < 30 iE_E = 1.3 iE_En < 50 iE_E = 26.3 Unit B: transfer and multispindle machines iE_En < 30 iE_E = 10.0 iE_En < 50 iE_E = 21.8 Unit B: metal cleaning machines iE_En < 80 iE_E = 16.1 iE_En < 80 iE_E = 30.3 Unit B: spark machining iE_En < 40 iE_E = 4.4 iE_En < 50 iE_E = 10.9 Unit B: grinding machines iE_En < 30 iE_E = 13.3 iE_En < 50 iE_E = 8.7 Unit C: sand blasting machines iE_En < 40 iE_E = 14.3 iE_En < 50 iE_E = 8.9 Unit C: enamelling lines iE_En < 100 iE_E =61.0 iE_En < 80 iE_E = 41.7
10 Emission index, given by the ratio between the Monitoring performed during 2005 and 2006 showed compliance of all emissions with legal limits. average emission level recorded and the legal limit.
CO2 (CARBON DIOXIDE) EMISSIONS (*) (metric tonnes) 2006 2005 Use of natural gas 6.245 5.614
Use of electricity 15.174 12.846 Total CO2 emissions 21.419 18.460
(*)Calculated according to the “Instructions for implementation of the European Commission’s decision C(2004)130 of January 29th 2004 that establishes the guidelines for monitoring and notification of greenhouse gases pursuant to Directive 2003/87/EC of the European Parliament and Council” issued by the Italian Environment and Industry Ministries.
The use of natural gas to power the melting ovens The use of a relatively clean fuel such as natural gas leads to the emission of NOX (nitrogen oxides) and in combustion processes enables Sabaf to contribute SOX (sulphur oxides) into the atmosphere but in only negligibly to national emissions of greenhouse insignificant quantities. gases – considering that some 550 million metric tons of CO2 are emitted in Italy each year. 116 There are no emissions of the so-called greenhouse gases CH4 (methane), N2O (nitrogen dioxide), HFCs (hydrofluorocarbons), and SF6 (sulphur hexafluoride). At present in Sabaf no substances harmful for the ozone layer are present, with the exception of the refrigerant fluid (R22) used in air conditioners. 2.2.9.6 ENVIRONMENTAL INVESTMENTS CURRENT ENVIRONMENTAL SPENDING (Amounts in € ‘000) 2006 2005 Plant, equipment & materials 17 4 Advisory services 9 18 Analyses of workplace environment 7 5 Analyses of emissions 15 15 Waste disposal 470 410 Software and database 1 0 TOTAL 519 452
ENVIRONMENTAL INVESTMENTS (Amounts in € ‘000) 2006 2005 Plant, equipment & materials 13 318 TOTAL 13 318
A major part of 2005 environmental investments (some € 300,000) related to the foundry water recycling plant, which started operation at the end of 2005. The plant has permitted significant reduction of quantities of waste, mostly hazardous, requiring disposal. The plant for recycling of the enamelling department’s water, originally scheduled for 2006, will instead be constructed during 2007. 2.2.9.7 LEGAL DISPUTES
There are no legal disputes underway concerning environmental matters. 117 2006 Annual Report 2.3
118 2.3 PROPOSALS FOR IMPROVEMENT
“Studia la scienza, e poi la pratica nata da essa scienza.”
Leonardo da Vinci 119 PROPOSALS FOR IMPROVEMENT
Annual Report2006 CORPORATE GOVERNANCE OCCUPATIONAL HEALTH AND SAFETY With ProGReSS©, Sabaf will continue its At the end of FY2006 Sabaf approved its Corporate During 2007 it is planned to install 14 new cooler Governance Manual and, in early 2007, also systems in production buildings and a new air practical pursuit of excellence approved a number of Application Guidelines. With conditioning system in the canteen to improve the latter the Group intends, already as from 2007, microclimate in the summertime. consistently with its corporate mission. to complete adaptation to the principles and application criteria of the Italian Corporate MAINTENANCE OF ENVIRONMENTAL Governance Code for listed companies. MANAGEMENT SYSTEM COMPLIANT WITH ISO More specifically, for 2007 Sabaf intends 14001 STANDARD INCENTIVE-DRIVEN COMPENSATION During 2007 it is planned to define the purchase of a to achieve the following improvement Sabaf is committee to ensuring that a significant plant for recycling of the enamelling department’s part of the compensation of executive directors and water. This will permit a further significant reduction objectives: top management is incentive-driven and linked to of the production of waste going to disposal. the Group’s financial and social & environmental performance. STAKEHOLDER DIALOGUE We will report on the Group’s stakeholder dialogue TRAINING AND COMMUNICATION initiatives during 2007 in the next Annual Report. Sabaf undertakes to assure maintenance of high qualitative and quantitative standards of training and to continue projects designed to aid internal communication. The aim is to continue increasing interaction with employees to aid a growing sense of involvement.
120 REPORT OF THE AUDITORS ON THE SOCIAL REPORT
121 PROPOSALS FOR IMPROVEMENT
Annual Report2006
122 123 124 125 PROPOSALS FOR IMPROVEMENT
INDEX OF GRI INDICATORS Annual Report2006
126 Code GRI PROFILE INDEX 1. STRATEGY & PROFILE 1.01 Statement about the overall vision and relevance of sustainability 1.1.6 Values, vision, and mission to the organization and its strategy. 1.2 Sustainability Governance 1.02 Description of key impacts, risks, and opportunities. 1.2.2 Integration of social accountability in operating processes 1.2 Sustainability Governance 2.1 Directors’ report on consolidated year-end accounts and performance 2.2.1 SABAF and its staff 2. ORGANIZATIONAL PROFILE 2.01 Name of the organization. 1.1 Corporate Identity 2.02 Primary brands, products, and/or services. T 1.1.2 Business and products 2.03 Operational structure of the organization, including main divisions, 1.1.4 SABAF Group structure operating companies, subsidiaries, and joint ventures. 2.04 Location of organization's headquarters. 1.1 Corporate Identity 2.05 Number of countries where the organization operates, 1.1 Corporate Identity and names of countries with either major operations or that are specifically 2.2.3 SABAF and its customers relevant to the sustainability issues covered in the report. 2.06 Nature of ownership and legal form. 1.1 Corporate Identity 2.07 Markets served (including geographic breakdown, sectors served, 2.2.3 SABAF and its customers and types of customers/beneficiaries). 2.08 Scale of the reporting organization, including: Key performance indicators (KPI) * Number of employees; 2.2.1 SABAF and its staff * Net sales (for private sector organizations) or net revenues (for public sector organizations); * Total capitalization broken down in terms of debt and equity (for private sector organizations); and * Quantity of products or services provided. 2.09 Significant changes during the reporting period regarding size, structure, or ownership. 1.1.4 SABAF Group structure 2.10 Awards received in the reporting period. n.ap.
3. REPORT PARAMETERS Introduction Report profile Introduction 3.01 Reporting period (e.g., fiscal/calendar year) for information provided. Introduction 3.02 Date of most recent previous report (if any). Introduction 3.03 Reporting cycle (annual, biennial, etc.). Introduction
3.04 Contact point for questions regarding the report or its contents. back cover
127 PROPOSALS FOR IMPROVEMENT
INDEX OF GRI INDICATORS Annual Report2006 Code GRI PROFILE INDEX 3. REPORT PARAMETERS Report scope and boundary 3.05 Process for defining report content, including: 1.2.2 Integration of social accountability in * Determining materiality; operating processes * Prioritizing topics within the report; and * Identifying stakeholders the organization expects to use the report. 3.06 Boundary of the report (e.g., countries, divisions, subsidiaries, leased facilities, Introduction joint ventures, suppliers). See GRI Boundary Protocol for further guidance. 3.07 State any specific limitations on the scope or boundary of the report. n.ap. 3.08 Basis for reporting on joint ventures, subsidiaries, leased facilities, 1.1.4 SABAF Group structure outsourced operations, and other entities that can significantly affect comparability from period to period and/or between organizations. 3.09 Data measurement techniques and the bases of calculations, including assumptions Introduction and techniques underlying estimations applied to the compilation of the Indicators and other information in the report. 3.10 Explanation of the effect of any re-statements of information provided in earlier reports, n.ap. and the reasons for such re-statement (e.g.,mergers/acquisitions, change of base years/periods, nature of business, measurement methods). 3.11 Significant changes from previous reporting periods in the scope, boundary, n.ap. or measurement methods applied in the report. GRI content index 3.12 Table identifying the location of the Standard Disclosures in the report. Index of GRI indicators Identify the page numbers or web links where they can be found. Assurance 3.13 Policy and current practice with regard to seeking external assurance for the report. Auditor’s report If not included in the assurance report accompanying the sustainability report, explain the scope and basis of any external assurance provided. Also explain the relationship between the reporting organization and the assurance provider(s). 4. GOVERNANCE, COMMITMENTS, AND ENGAGEMENT Governance 4.01 Governance structure of the organization, including committees under the highest 1.1 Corporate Identity governance body responsible for specific tasks, such as setting strategy or organizational oversight. 1.2.1 Corporate governance report Describe the mandate and composition (including number of independent members and/or non-executive members) of such committees and indicate any direct responsibility for economic, social, and environmental performance. 4.02 Indicate whether the Chair of the highest governance body is also an executive officer (and, if so, 1.2 Sustainability Governance their function within the organization's management and the reasons for this arrangement). 4.03 For organizations that have a unitary board structure, state the number of members 1.2 Sustainability Governance of the highest governance body that are independent and/or non-executive members. State how the organization defines 'independent' and 'non-executive'. 4.04 Mechanisms for shareholders and employees to provide recommendations or direction to the highest 1.2 Sustainability Governance governance body. Include reference to processes regarding the use of shareholder resolutions or other mechanisms for enabling minority shareholders to express opinions to the highest governance body. 128 Code GRI PROFILE INDEX 4. GOVERNANCE, COMMITMENT, ENGAGEMENT Governance 4.05 Linkage between compensation for members of the highest governance body, senior managers, n.av. and executives (including departure arrangements), and the organization's performance (including social and environmental performance). 4.06 Processes in place for the highest governance body to ensure conflicts of interest are avoided. 1.2.1 Corporate governance report 4.07 Process for determining the qualifications and expertise of the members of the highest governance 1.2 Sustainability Governance body for guiding the organization's strategy on economic, environmental, and social topics. 4.08 Internally developed statements of mission or values, codes of conduct, and principles relevant 1.2 Sustainability Governance to economic, environmental, and social performance and the status of their implementation. 2.2.1 SABAF and its staff Explain the degree to which these: * Are applied across the organization in different regions and department/units; and * Relate to internationally agreed standards. 4.09 Procedures of the highest governance body for overseeing the organization's identification 1.2 Sustainability Governance and management of economic, environmental, and social performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct, and principles. 4.10 Processes for evaluating the highest governance body's own performance, particularly 1.2.1 Corporate governance report with respect to economic, environmental, and social performance. Commitments to external initiatives 4.11 Explanation of whether and how the precautionary approach or principle is addressed by the 1.1 Corporate Identity organization. A response to 4.11 could address the organization's approach to risk management in operational planning or the development and introduction of new products. 4.12 Externally developed economic, environmental, and social charters, principles, or other initiatives 1.2 Sustainability Governance to which the organization subscribes or endorses. Differentiate between non-binding, voluntary initiatives and those with which the organization has an obligation to comply. 4.13 Memberships in associations (such as industry associations) and/or national/international 2.2.8 SABAF and the community advocacy organizations in which the organization: * Has positions in governance bodies; * Participates in projects or committees; * Provides substantive funding beyond routine membership dues; or * Views membership as strategic. Stakeholder Engagement 4.14 List of stakeholder groups engaged by the organization. 1.2.2.2 Stakeholder engagement 4.15 Basis for identification and selection of stakeholders with whom to engage. 1.2.2.2 Stakeholder engagement 4.16 Approaches to stakeholder engagement, including frequency of engagement by type and by 1.2.2.2 Stakeholder engagement stakeholder group. 4.17 Key topics and concerns that have been raised through stakeholder engagement, and how 2.2.1 SABAF and its staff the organization has responded to those key topics and concerns, including through its reporting. 2.2.2 SABAF and its shareholders 2.2.3 SABAF and its customers 2.2.9 SABAF and the environment
129 PROPOSALS FOR IMPROVEMENT
INDEX OF GRI INDICATORS Annual Report2006
Code GRI PROFILE INDEX ECONOMIC PERFORMANCE INDICATOR C Disclosure on Management Approach 2.1 Directors’ report on consolidated year-end accounts and performance Economic Performance C EC1 Direct economic value generated and distributed, including revenues, operating costs, employee Key performance indicators (KPI) compensation, donations and other community investments, retained earnings, and payments to capital providers and governments. C EC2 Financial implications and other risks and opportunities for the organization's activities due n.ap. to climate change. C EC3 Coverage of the organization's defined benefit plan obligations. n.ap. C EC4 Significant financial assistance received from government. 2.2.7 SABAF and the Public Administration Market presence A EC5 Range of ratios of standard entry level wage compared to local minimum wage at significant 2.2.1 SABAF and its staff locations of operation. C EC6 Policy, practices, and proportion of spending on locally-based suppliers at significant 2.2.4 Sabaf and its suppliers locations of operation. C EC7 Procedures for local hiring and proportion of senior management hired from n.ap. the local community at significant locations of operation. Indirect economic impacts C EC8 Development and impact of infrastructure investments and services provided primarily 2.2.8 SABAF and the community for public benefit through commercial, in-kind, or pro bono engagement. A EC9 Understanding and describing significant indirect economic impacts, including the extent of impacts. n.ap.
ENVIROMENTAL 2.2.9 SABAF and the environment C Disclosure on Management Approach 2.2.9 SABAF and the environment Materials 2.2.9 SABAF and the environment C EN1 Materials used by weight or volume. 2.2.9 SABAF and the environment C EN2 Percentage of materials used that are recycled input materials. 2.2.9 SABAF and the environment
130 Code GRI PROFILE INDEX ENVIROMENTAL Energy C EN3 Direct energy consumption by primary energy source. 2.2.9 SABAF and the environment C EN4 Indirect energy consumption by primary source. 2.2.9 SABAF and the environment A EN5 Energy saved due to conservation and efficiency improvements. 2.2.9 SABAF and the environment A EN6 Initiatives to provide energy-efficient or renewable energy based products and services, 2.2.9 SABAF and the environment and reductions in energy requirements as a result of these initiatives. A EN7 Initiatives to reduce indirect energy consumption and reductions achieved. 2.2.9 SABAF and the environment Water C EN8 Total water withdrawal by source. 2.2.9 SABAF and the environment A EN9 Water sources significantly affected by withdrawal of water. 2.2.9 SABAF and the environment A EN10 Percentage and total volume of water recycled and reused. 2.2.9 SABAF and the environment Biodiversity C EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas n.ap. and areas of high biodiversity value outside protected areas. C EN12 Description of significant impacts of activities, products, and services on biodiversity n.ap. in protected areas and areas of high biodiversity value outside protected areas. A EN13 Habitats protected or restored. n.ap. A EN14 Strategies, current actions, and future plans for managing impacts on biodiversity. n.ap. A EN15 Number of IUCN Red List species and national conservation list species with habitats n.ap. in areas affected by operations, by level of extinction risk. Emission, effluents, and waste C EN16 Total direct and indirect greenhouse gas emissions by weight. 2.2.9 SABAF and the environment C EN17 Other relevant indirect greenhouse gas emissions by weight. n.ap. A EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved. 2.2.9 SABAF and the environment C EN19 Emissions of ozone-depleting substances by weight. 2.2.9 SABAF and the environment C EN20 NOx, SOx, and other significant air emissions by type and weight. 2.2.9 SABAF and the environment C EN21 Total water discharge by quality and destination. 2.2.9 SABAF and the environment C EN22 Total weight of waste by type and disposal method. 2.2.9 SABAF and the environment C EN23 Total number and volume of significant spills. n.ap. A EN24 Weight of transported, imported, exported, or treated waste deemed hazardous under the terms n.ap. of the Basel Convention Annex I, II, III, and VIII, and percentage of transported waste shipped internationally.
131 PROPOSALS FOR IMPROVEMENT
INDEX OF GRI INDICATORS Annual Report2006 Code GRI PROFILE INDEX ENVIROMENTAL Emission, effluents, and waste A EN25 Identity, size, protected status, and biodiversity value of water bodies and related habitats n.ap. significantly affected by the reporting organization's discharges of water and runoff. Products and services C EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation. 2.2.9 SABAF and the environment C EN27 Percentage of products sold and their packaging materials that are reclaimed by category. n.ap. Compliance C EN28 Monetary value of significant fines and total number of non-monetary sanctions for non-compliance 2.2.9 SABAF and the environment with environmental laws and regulations. Trasport A EN29 Significant environmental impacts of transporting products and other goods and materials used n. av. for the organization's operations, and transporting members of the workforce. Overall A EN30 Total environmental protection expenditures and investments by type. 2.2.9 SABAF and the environment SOCIAL PERFORMANCE INDICATORS EMPLOYMENT C Disclosure on Management Approach 2.2.1 SABAF and its staff C LA1 Total workforce by employment type, employment contract, and region. 2.2.1 SABAF and its staff C LA2 Total number and rate of employee turnover by age group, gender, and region. 2.2.1 SABAF and its staff A LA3 Benefits provided to full-time employees that are not provided to temporary or part-time employees, 2.2.1 SABAF and its staff by major operations. Labor/management relations C LA4 Percentage of employees covered by collective bargaining agreements. 2.2.1 SABAF and its staff C LA5 Minimum notice period(s) regarding significant operational changes, including whether 2.2.1 SABAF and its staff it is specified in collective agreements. Occupational healt and safety A LA6 Percentage of total workforce represented in formal joint management-worker health and safety 2.2.1 SABAF and its staff committees that help monitor and advise on occupational health and safety programs. C LA7 Rates of injury, occupational diseases, lost days, and absenteeism, and number 2.2.1 SABAF and its staff of work-related fatalities by region.
132 Code GRI PROFILE INDEX SOCIAL PERFORMANCE INDICATORS Occupational healt and safety C LA8 Education, training, counseling, prevention, and risk-control programs in place to assist workforce 2.2.1. SABAF and its staff members, their families, or community members regarding serious diseases. A LA9 Health and safety topics covered in formal agreements with trade unions. n.av. Training and education C LA10 Average hours of training per year per employee by employee category. 2.2.1 SABAF and its staff A LA11 Programs for skills management and lifelong learning that support the continued employability n.av. of employees and assist them in managing career endings. A LA12 Percentage of employees receiving regular performance and career development reviews. n.av. Diversity and equal opportunity C LA13 Composition of governance bodies and breakdown of employees per category according to gender, 2.2.1 SABAF and its staff age group, minority group membership, and other indicators of diversity. C LA14 Ratio of basic salary of men to women by employee category. n.ap.
HUMAN RIGHTS C Disclosure on Management Approach 2.2.1 SABAF and its staff 2.2.4.1 Our commitments to suppliers Investment and procurement practices C HR1 Percentage and total number of significant investment agreements that include human rights clauses 2.2.4 Sabaf and its suppliers or that have undergone human rights screening. C HR2 Percentage of significant suppliers and contractors that have undergone screening 2.2.1 SABAF and its staff on human rights and actions taken. A HR3 Total hours of employee training on policies and procedures concerning aspects of human rights 2.2.1 SABAF and its staff that are relevant to operations, including the percentage of employees trained. Non-discrimination C HR4 Total number of incidents of discrimination and actions taken. n.ap.
133 PROPOSALS FOR IMPROVEMENT
INDEX OF GRI INDICATORS Annual Report2006 Code GRI PROFILE INDEX SOCIAL PERFORMANCE INDICATORS Freedom of association and collettive bargaining C HR5 Operations identified in which the right to exercise freedom of association and collective bargaining n.ap. may be at significant risk, and actions taken to support these rights. Child labor C HR6 Operations identified as having significant risk for incidents of child labor, and measures taken 2.2.4 Sabaf and its suppliers to contribute to the elimination of child labor. Forced and compulsory labor C HR7 Operations identified as having significant risk for incidents of forced or compulsory labor, 2.2.4 Sabaf and its suppliers and measures to contribute to the elimination of forced or compulsory labor. Security practices A HR8 Percentage of security personnel trained in the organization's policies or procedures concerning n.ap. aspects of human rights that are relevant to operations. Indigemous rights A HR9 Total number of incidents of violations involving rights of indigenous people and actions taken. n.ap. SOCIETY C Disclosure on Management Approach Disclosure 1.2.2 Integration of social accountability in operating processes Community C SO1 Nature, scope, and effectiveness of any programs and practices that assess and manage the impacts 2.2.8 SABAF and the community of operations on communities, including entering, operating, and exiting. Corruption C SO2 Percentage and total number of business units analyzed for risks related to corruption. 1.2.2 Integration of social accountability in operating processes C SO3 Percentage of employees trained in organization's anti-corruption policies and procedures. n.av. C SO4 Actions taken in response to incidents of corruption. n.ap. Public policy C SO5 Public policy positions and participation in public policy development and lobbying. 2.2.7 SABAF and the Public Administration A SO6 Total value of financial and in-kind contributions to political parties, politicians, 2.2.7 SABAF and the Public Administration and related institutions by country. Anti-competitive behavior A SO7 Total number of legal actions for anti-competitive behavior, anti-trust, and monopoly practices n.ap. and their outcomes. Compliance C SO8 Monetary value of significant fines and total number of non-monetary sanctions for non-compliance 2.2.7 SABAF and the Public Administration with laws and regulations.
134 Code GRI PROFILE INDEX SOCIAL PERFORMANCE INDICATORS PRODUCT RESPONSABILITY C Disclosure on Management Approach 2.2.3 SABAF and its customers Customer healt and safety C PR1 Life cycle stages in which health and safety impacts of products and services are assessed 1.1.7.3 Safety for improvement, and percentage of significant products and services categories subject to such procedures. A PR2 Total number of incidents of non-compliance with regulations and voluntary codes concerning health n.ap. and safety impacts of products and services during their life cycle, by type of outcomes. Product and service labeling C PR3 Type of product and service information required by procedures, and percentage of significant products n.ap. and services subject to such information requirements. A PR4 Total number of incidents of non-compliance with regulations and voluntary codes concerning product n.ap. and service information and labeling, by type of outcomes. A PR5 Practices related to customer satisfaction, including results of surveys measuring customer satisfaction. 2.2.3 SABAF and its customers Marketing communications C PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing communications, n.ap. including advertising, promotion, and sponsorship. A PR7 Total number of incidents of non-compliance with regulations and voluntary codes concerning marketing n.ap. communications, including advertising, promotion, and sponsorship by type of outcomes. Customer privacy A PR8 Total number of substantiated complaints regarding breaches of customer privacy and losses 2.2.3 SABAF and its customers of customer data. Compliance C PR9 Monetary value of significant fines for non-compliance with laws and regulations concerning 2.2.3 SABAF and its customers the provision and use of products and services.
135 PROPOSALS FOR IMPROVEMENT
UN GLOBAL COMPACT PRINCIPLES Annual Report2006
HUMAN RIGHTS Principle 1 Support and respect universally proclaimed human rights within respective spheres of influence “Sabaf and its staff” Principle 2 Ensure that the business is not complicit, even indirectly, in human rights abuses “Sabaf and its staff”, “Sabaf and its suppliers”, SA 8000 LABOUR STANDARDS Principle 3 Uphold workers’ freedom of association and recognise the right to collective bargaining “Sabaf and its staff”, SA 8000 Principle 4 Eliminate all forms of forced and compulsory labour “Sabaf and its staff”, “Sabaf and its suppliers”, SA 8000 Principle 5 Effective elimination of child labour “Sabaf and its staff”, “Sabaf and its suppliers”, SA 8000 Principle 6 Eliminate all forms of discrimination in respect of employment and occupation “Sabaf and its staff”, SA 8000 ENVIRONMENT Principle 7 Support a precautionary approach to environmental challenges “Sabaf and the environment” Principle 8 Undertake initiatives to promote greater environmental responsibility. “Sabaf and its customers”, “Sabaf and the environment” Principle 9 Encourage the development and diffusion of environmentally friendly technologies “Sabaf and its customers”, “Sabaf and the environment” ANTI-CORRUPTION Principle 10 Work against all forms of corruption, including extortion and bribery. “Integration of social accountability in operating processes”
SA8000 SOCIAL ACCOUNTABILITY REQUIREMENTS
CHILD LABOUR FORCED LABOUR HEALTH & SAFETY FREEDOM OF ASSOCIATION AND RIGHT TO COLLECTIVE BARGAINING DISCRIMINATION DISCIPLINARY PROCEDURES WORKING HOURS COMPENSATION
136 MANAGEMENT SYSTEMS
Annual Report2006 CONSOLIDATED 3 ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
138 Consolidated balance sheet Consolidated income statement Statement of changes in consolidated equity Consolidated cash flow statement Explanatory notes to accounts
Independent auditor’s report on consolidated annual accounts Board of Statutory Auditors’ report on consolidated annual accounts
139 Consolidated balance sheet 142 Consolidated income statement 144 Statement of changes in consolidated equity 145 Consolidated cash flow statement 146 Explanatory notes to accounts 147
Independent auditor’s report on consolidated annual accounts 173 Board of Statutory Auditors’ report on consolidated annual accounts 174
Annual Report2006
140 “Guardati dall’ira e fuggi l’aria grieve.”
Leonardo da Vinci 141 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
CONSOLIDATED BALANCE SHEET Annual Report2006 (Amounts in € 000) ASSETS Note 31.12.2006 31.12.2005 NON-CURRENT ASSETS Tangible assets (property, plant, and equipment) 1 80,461 76,830 Intangible assets 2 8,359 7,659 Equity investments 3 192 32 Non-current receivables 4 504 541 Deferred tax assets (prepaid taxes) 18 888 1,152 Total non-current assets 90,404 86,214
CURRENT ASSETS Inventories 5 21,077 15,709 Trade receivables 6 38,804 36,064 Tax receivables 7 1,241 1,533 Other current receivables 399 563 Current financial assets 8 1 2,818 Cash and cash equivalents 9 10,278 12,535 Total current assets 71,800 69,222
TOTAL ASSETS 162,204 155,436
142 (Amounts in € 000) EQUITY AND LIABILITIES Note 31.12.2006 31.12.2005 EQUITY Share capital 10 11,533 11,333 Retained earnings, other reserves 62,154 65,481 Net profit for period 16,078 13,953 Total equity attributable to group parent company 89,765 90,767 Minority interest 0 0 Total equity 89,765 90,767
NON-CURRENT LIABILITIES Loans 12 14,920 18,101 Post-employment benefit obligations and retirement reserves 13 3,939 3,802 Reserves for risks and contingencies 14 1,070 1,478 Deferred income tax 18 9,341 9,602 Total non-current liabilities 29,270 32,983
CURRENT LIABILITIES Loans 12 6,739 3,362 Trade payables 15 29,109 23,177 Tax payables 16 2,775 769 Other liabilities 17 4,546 4,378 Total current liabilities 43,169 31,686
TOTAL LIABILITIES & EQUITY 162,204 155,436
143 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
CONSOLIDATED INCOME STATEMENT Annual Report2006 (Amounts in € 000) CONTINUING OPERATIONS Note 31.12.2006 31.12.2005 OPERATING REVENUES AND INCOME Revenues 21 138,263 121,014 Other operating income 22 1,637 911 Total operating revenues and income 139,900 121,925
OPERATING COSTS Materials 23 (57,794) (46,722) Change in inventories 5,410 (235) Services 24 (24,116) (20,043) Payroll costs 25 (24,087) (21,000) Other operating costs 26 (897) (540) Costs for capitalised in-house work 814 954 Total operating cost (100,670) (87,586) OPERATING PROFIT BEFORE DEPRECIATION & AMORTISATION, CAPITAL GAINS/LOSSES, AND WRITE- DOWNS/WRITE-BACKS OF NON- CURRENT ASSETS (EBITDA) 39,230 34,339 Depreciation and amortization (11,018) (11,006) Capital gains/(losses) on disposal of non-current assets 29 126 Write-downs/write-backs of non-current assets 0 0 OPERATING PROFIT (EBIT) 28,241 23,459 Finance income 443 251 Finance expenses 27 (1,231) (1,104) Foreign-exchange gains/(losses) 28 (369) 535 Profits and losses from equity investments 0 0 PRE-TAX PROFIT 27,084 23,141 Income tax 29 (11,006) (9,188) Minority interests 0 0 NET PROFIT FOR THE YEAR 16,078 13,953 EARNINGS PER SHARE (EPS) 30 Base 1.394 euro 1.231 euro Diluted 1.394 euro 1.228 euro
144 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY
(Amounts in € 000) Share Share Legal Treasury Other Net profit Total Minority Total capital premium reserve shares reserves for period share interest equity reserve holders' equity azioni netto del Gruppo Balance as at January 1st 05 11,333 7,327 2,267 (133) 46,221 12,950 79,965 0 79,965 Allocation of 2004 earnings 7,516 (12,950) (5,434) (5,434) Treasury share movements (84) (84) (84) Change in fair value reserve 1,732 1,732 1,732 Change in stock option reserve 168 168 168 Other Changes 467 467 467 2005 net profit 13,953 13,953 13,953 Balance as at December 31st 05 11,333 7,327 2,267 (217) 56,104 13,953 90,767 0 90,767 Allocation of 2005 earnings 7,161 (13,953) (6,792) (6,792) Capital increase following exercising of stock options 200 2,675 2,875 2,875 Extraordinary dividend (11,533) (11,533) (11,533) Treasury share movements 217 90 307 307 Change in fair value reserve (1,767) (1,767) (1,767) Change in stock option reserve 56 56 56 Other Changes (226) (226) (226) FY2006 net profit 16,078 16,078 16,078 Balance as at December 31st 06 11,533 10,002 2,267 0 49,885 16,078 89,765 0 89,765
145 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
CONSOLIDATED CASH FLOW STATEMENT Annual Report2006 (Amounts in € 000) 31.12.2006 31.12.2005 A. OPENING NET SHORT-TERM FINANCIAL POSITION 9,173 6,408 B. CASH FLOW FROM OPERATIONS Net profit for the year before minority interests 16,078 13.953 Depreciation and amortization 11.018 11.006 Change in deferred tax assets and liabilities 3 2.360 Capital (gains)/losses on asset disposal (29) (126) (Write-up)/write-downs of non-current assets 0 0 Change in post-employment benefit and retirement reserves 137 335 Net change in reserve for risks and contingencies (408) (773) 26.799 26.755 Change in net working capital Inventories (5.368) 137 Trade receivables (2.740) (4.809) Trade payables 5.932 3.886 Other receivables and payables 2.630 (1.683) 454 (2.469) Operating cash flow 27.253 24.286 C. CASH FLOW FROM INVESTMENT ACTIVITIES Investments in non-current assets: Intangible (1,019) (607) Tangible (14,685) (9,523) Financial (160) (25) Proceeds from disposal and retirement of fixed assets 384 1,134 TOTAL (15,480) (9,021)
D. CASH FLOW FROM FINANCING ACTIVITIES New loans (medium-/long-term portion) 0 1,096 Repayment of loans and transfer of current portion of long-term loans to current liabilities (3,181) (7,282) Change in non-current financial receivables 37 (333) Change in current financial assets 2,817 (2,584) TOTAL (327) (9,103)
E. CHANGE IN SHAREHOLDERS’ EQUITY Change in stock option reserve 56 168 Change in fair value reserve (1,767) 1,732 Change in treasury shares 307 (84) Capital increase 2,875 0 Other changes in equity (226) 221 Distribution of dividends (18,325) (5,434) TOTAL (17,080) (3,397)
F. CASH FLOW DURING THE PERIOD (B+C+D+E) (5,634) 2,765 G. CLOSING NET SHORT-TERM FINANCIAL POSITION (A+F) 3,539 9,173
146 EXPLANATORY NOTES ACCOUNTING STANDARDS SCOPE OF CONSOLIDATION CONSOLIDATION POLICIES The scope of consolidation as at December 31st The data used for consolidation have been taken STATEMENT OF COMPLIANCE AND BASIS OF 2006 did not undergo any changes compared with from the income statements and balance sheets PRESENTATION December 31st 2005 and included the direct parent prepared by the directors of individual subsidiary Consolidated year-end accounts for the financial year company Sabaf SpA and the following companies of companies. These figures have been appropriately (FY) 2006 have been prepared in compliance with the which Sabaf possesses control: amended and restated, when necessary, to align International Financial Reporting Standards (IFRSs) Faringosi-Hinges S.r.l. them with international accounting standards and issued by the International Accounting Standards ›Sabaf Immobiliare S.r.l. with uniform group-wide classification policies. Board (IASB) and endorsed by the European Union. ›Sabaf do Brasil L.da. The policies applied for consolidation are as follows: Reference to IFRSs also includes all current ›Control is the power to determine – directly or a) Assets and liabilities, income and costs in International Accounting Standards (IASs). Financial indirectly – the financial and operating policies of an financial statements consolidated on a 100% line-by- statements have been prepared in euro, rounding entity in order to obtain benefits from its activities. line basis, are taken into group financial statements, amounts to the nearest thousand, and are compared Controlled companies (i.e. subsidiaries) are regardless of the entity of the equity interest with full-year financial statements for the previous consolidated as from the date when such control concerned. In addition, the carrying value of equity year, prepared according to the same standards. The starts until the date when it ceases. interests is eliminated against the shareholders’ report consists of the balance sheet, the income equity relating to subsidiary companies. statement, the statement of changes in shareholders’ b) Positive differences arising from elimination of equity, the cash flow statement, and explanatory equity investments against the carrying value of notes. Financial statements have been prepared on a shareholders’ equity as at the date of first-time historical-cost basis except for some revaluations of consolidation are attributed as increases of assets non-current tangible assets undertaken in previous and liabilities when possible and, for the remainder, years. to goodwill. In accordance with the transitional provisions of IFRS 3, the Group has changed FINANCIAL STATEMENTS accounting treatment of goodwill on a prospective The Group has adopted the following formats: basis as from transition date. Therefore, as from current and non-current assets and current and January 1st 2004, the Group has ceased to amortise ›non-current liabilities are stated separately in the goodwill and instead subjects it to impairment balance sheet; testing an income statement expresses costs using a c) Payable/receivable and cost/revenue items ›classification based on the nature of each item; between consolidated companies and profits/losses the cash flow statement presents financial flows arising from intercompany transactions are ›originating from operating assets, using the indirect eliminated method. d) If minority shareholders exist, the portion of Use of these formats permits the most meaningful shareholders’ equity and of net profit for the period representation of the Group’s capital, business, and pertaining to them is posted in specific items of the financial status. consolidated balance sheet and income statement.
147 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 CONVERSION INTO EURO OF FOREIGN- applying current end-of-period exchange rates. CURRENCY INCOME STATEMENTS Income-statement items are converted at average AND BALANCE SHEETS exchange rates for the period. The separate financial statements of each company Foreign exchange differences arising from the belonging to the group are prepared in the currency comparison between opening shareholders’ equity of the primary economic environment in which that converted at current exchange rates and at historical company operates (functional currency). For the exchange rates, together with the difference purposes of consolidated financial statements, each between the net result expressed at average and company’s financial statements are expressed in current exchange rates, are allocated to “Other euro, the Group’s functional currency and the Reserves” in shareholders’ equity. presentation currency for consolidated financial Exchange rates used for conversion into euro of statements. Sabaf do Brasil’s annual report and accounts, Balance-sheet items in accounts expressed in prepared in Brazilian Reals, are shown in the currencies other than the euro are converted following table:
Currency End-of period Average exchange End-of period Average exchange exchange rate 31.12.06 rate 2006 exchange rate 31.12.05 rate 2005 Brazilian real 2.813 2.733 2.743 3.034
RECONCILIATION BETWEEN PARENT COMPANY AND CONSOLIDATED SHAREHOLDERS’ EQUITY AND NET PROFIT FOR THE PERIOD
31.12.2006 31.12.2005 Description Net Equity Net Equity profit profit Net profit and shareholders’ equity of parent company Sabaf S.p.A. 14,241 85,515 12,519 88,128 Shareholders’ equity and net result of consolidated companies 2,323 29,241 2,194 23,942 Elimination of consolidated equity investments’ carrying value 0 (31,546) (233) (27,846) Consolidation difference 0 6,602 0 6,602 Intercompany eliminations: Dividends (500) 0 (500) 0 Elimination of intragroup profits (11) (143) (51) (132) Others 25 96 24 73 Group net profit and shareholders’ equity 16,078 89,765 13,953 90,767
148 SEGMENT INFORMATION method and are posted among assets at the the write-down amount. If it is not possible to A segment is a distinctly identifiable part of a group purchase value, less depreciation. Depreciation of estimate recoverable value individually, the Group that supplies a combination of related products and such assets is reflected in consolidated financial estimates the recoverable value of the cash- services (business segment) or supplies products and statements applying the same policy followed for generating unit (CGU) to which the asset belongs. services in a given economic area (geographical owned tangible assets. Set against booking such The recoverable amount is the higher between the segment). The Sabaf Group substantially operates in assets, the amounts payable to the financial lessor net selling price and value in use. In measuring value just one business segment – components for are posted among short- and medium-/long-term in use, estimated future cash flows are discounted household cooking appliances – and produces payables; in addition, finance charges pertaining to to their present value using a pre-tax rate that primarily in just one geographical area – Italy. the period are charged to the income statement. reflects fair market valuations of the present cost of Consequently, the segment information envisaged by money and specific asset risk. IAS 14 is not provided. GOODWILL If the recoverable amount of an asset (or CGU) is Goodwill is the difference between the purchase estimated to be lower than its carrying value, the ACCOUNTING POLICIES price and fair value of investee companies’ asset’s carrying value is reduced to the lower The accounting standards and policies applied for identifiable assets and liabilities on the date of recoverable amount, posting impairment of value in preparation of consolidated financial statements as at acquisition. the income statement. December 31st 2006 are shown below: As regards acquisitions completed prior to the date When there is no longer any reason for a write- of IFRS adoption, Sabaf has availed itself of the down to be maintained, the carrying value of the TANGIBLE ASSETS (PROPERTY, PLANT, AND option provided by IFRS 1 of not applying IFRS 3 – asset (or CGU) is increased to the new value EQUIPMENT) concerning business combinations – to acquisitions stemming from estimate of its recoverable amount – These assets are posted at purchase or construction that took place prior to transition date. but not beyond the net carrying value that the asset cost. Cost includes directly attributable accessory Consequently, goodwill arising in relation to past would have had if it had not been written down for costs. Such costs also include revaluations acquisitions has not been recalculated and has been impairment of value. Reversal of impairment loss is undertaken in the past based on specific monetary posted in accordance with Italian GAAPs, net of recognised as income in the income statement. revaluation regulations or pursuant to company amortisation posted up to December 31st 2003 and mergers. Depreciation is calculated according to rates of any losses caused by a permanent reduction in INVESTMENT PROPERTIES deemed appropriate to spread the carrying value of value. As allowed by IAS 40, non-operating buildings and tangible assets over their useful working life. After the transition date, goodwill – as an intangible constructions owned for the purpose of earning Estimated useful working life, in years, is as follows: asset with an indefinite useful life – is not amortised rental income are measured at cost net of but subjected annually – or more frequently depreciation and losses due to cumulative whenever there are signs that the asset may have impairment of value. The depreciation criterion Buildings 33 suffered impairment of value – to impairment applied is the asset’s estimated useful life, which is Lightweight constructions 10 testing to check for any reductions in value. established as being 33 years. Generic plant 10 Specific plant and machinery 6 – 10 OTHER INTANGIBLE ASSETS EQUITY INVESTMENTS AND NON-CURRENT Equipment 4 – 10 As established by IAS 38, other intangible assets RECEIVABLES Furniture 8 acquired or internally produced are recognised as Equity investments in non-subsidiary and non- Electronic machines 5 assets when it is probable that use of the asset will associated companies are measured according to Motor vehicles and other means of transport 4 – 5 generate future economic benefits and when asset cost, reduced for impairment of value. The original cost can be measured reliably. value is written back in subsequent years if the Such assets are measured at purchase or production reasons for write-down cease to exist. Ordinary maintenance costs are expensed in the year cost and - if the assets concerned have a finite Non-current financial assets consisting of receivables they are incurred; costs increasing the assets’ value useful life - are amortised on a straight-line basis are recognised at their presumed realisable value. or useful working life are capitalised and depreciated over their useful life. according to the residual possibility of utilisation of INVENTORIES the assets to which they refer. IMPAIRMENT OF ASSET VALUE Inventories are measured at the lower out of Land is not depreciated. At each balance-sheet date, the Group reviews the purchase or production cost – determined according LEASED ASSETS carrying value of its tangible and intangible assets to to the weighted average cost formula – and the see whether there are signs of impairment of the corresponding fair value consisting of replacement Non-current assets acquired via finance lease value of these assets. If such signs exist, the contracts are accounted for using the financial 149 recoverable value is estimated in order to determine CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 cost for purchased materials and of the presumed and supplementary company collective labour realisable value for finished and semiprocessed contracts. This liability is subject to revaluation via products – calculated taking into account any application of indices fixed by current regulations. conversion costs and direct selling costs yet to be Employee severance indemnities are calculated on incurred. Inventory cost includes accessory costs an actuarial basis in accordance with the and the portion of direct and indirect manufacturing requirements of IAS 19, using the projected unit- costs that can be reasonably assigned to inventory credit method. As at balance-sheet date, the amount items. Obsolete or slow-moving stocks are written accruing must be revalued for the period of the down according to their possibility of use or projected future duration of the future employment realisation. Inventory write-downs are eliminated in relationship. Lastly, in order to make a reasonable subsequent years if the reasons for such write- estimate of the benefits already accruing to each downs cease to exist. employee against his/her tenure, the present value of the amount is calculated using a method based RECEIVABLES on various financial and demographical parameters. Receivables are recognised at their presumed The portion of actuarial gains and losses that realisable value. The face value is adjusted to a exceeds 10% of the present value of the obligation is lower realisable value via specific provisioning posted in the income statement (“corridor method”). directly reducing the item based on in-depth analysis of individual positions. SHARE-BASED PAYMENTS As established by IFRS 2, the total amount of the fair CURRENT FINANCIAL ASSETS value of stock options as at grant date is recognised Financial assets held for trading are measured at fair in the income statement as cost. Changes in fair value, allocating profit and loss effects to finance value after the grant date do not affect initial income or expense. measurement. Costs for remuneration, corresponding to the options’ fair value, are RESERVES FOR RISKS AND CONTINGENCIES recognised among payroll costs (among costs for Reserves for risks and contingencies are provisioned services for options granted to directors) at a to cover losses and debts, the existence of which is straight-line rate for the interval of time between certain or probable, but whose amount or date of grant date and vesting date, directly offset in occurrence cannot be determined at the end of the shareholders’ equity. In the present report we accounting period. Provisions are recognised in the provide detailed information on the stock option plan balance sheet only when a legal or constructive in place. obligation exists determining the use of resources with an impact on profit and loss to meet that PAYABLES obligation and it is possible to estimate the amount Payables are recognised at their face value. The reliably. If the impact is major, provisions are portion of interest included in face value and not yet calculated by discounting estimated future cash payable at the end of the accounting period is flows at an estimated pre-tax discount rate such as deferred to future periods. to reflect fair market valuations of the present cost of money and specific risks associated with the LOANS liability. Loans are initially recognised at cost, net of related costs of acquisition. This value is subsequently RESERVE FOR POST-EMPLOYMENT BENEFIT adjusted to allow for any difference between initial OBLIGATIONS cost and repayment value over the loan’s duration The reserve for post-employment benefit obligations using the effective interest-rate method. relates to the Italian employee severance indemnity Loans are classified among current liabilities unless system. The reserve is provisioned to cover the the Group has the unconditional right to defer entire liability accruing vis-à-vis employees in discharge of a liability by at least 12 months after compliance with current legislation and with national the date of reference.
150 hedges that do not lead to recognition of assets or POLICY FOR CONVERSION OF FOREIGN- liabilities, the amounts that were directly recognised FINANCE INCOME CURRENCY ITEMS in equity are included in the income statement in Finance income includes interest receivable on funds Receivables and payables originally expressed in the same period when the contractual commitment invested, positive foreign exchange differences and foreign currencies are converted into euro at the or planned transaction hedged impacts profit and income from financial instruments, when not offset exchange rates in force on the date of the loss – for example, when a planned sale actually as part of hedging transactions. Interest receivable is transactions originating them. Foreign exchange takes place. recognised in the income statement when it differences realised upon collection of receivables For effective hedges of exposure to changes in fair accrues, considering effective yield. and payment of payables in foreign currency are value, the item hedged is adjusted for the changes posted in the income statement. Income and costs in fair value attributable to the risk hedged and FINANCE EXPENSES relating to foreign-currency transactions are recognised in the income statement. Gains and Financial expense includes interest payable on converted at the rate in force on transaction date. losses stemming from the derivative’s valuation are financial debt calculated using the effective interest At year-end, assets and liabilities expressed in foreign also posted in the income statement. method and bank expenses. currencies, with the exception of non-current items, Changes in the fair value of derivatives not are posted at the spot exchange rate in force at designated as hedging instruments are recognised in INCOME TAXES FOR THE YEAR year-end and related foreign exchange gains and the income statement in the period when they Income taxes include all taxes calculated on the losses are posted in the income statement. If occur. Group’s taxable income. Income taxes are directly conversion generates a net gain, this value Hedge accounting is discontinued when the hedging recognised in the income statement, with the constitutes a non-distributable reserve until it is instrument expires, is sold or is exercised, or when it exception of those concerning items directly debited effectively realised. no longer qualifies as a hedge. At this time, the or credited to shareholders’ equity, in which case the cumulative gains or losses of the hedging instrument tax effect is recognised directly in shareholders’ DERIVATIVE INSTRUMENTS AND HEDGE recognised in equity are kept in the latter until the equity. Other taxes not relating to income, such as ACCOUNTING planned transaction actually takes place. If the property taxes, are included among operating The Group’s business is exposed to financial risks transaction hedged is not expected to take place, expenses. Deferred taxes are provisioned according relating to changes in exchange rates, commodity cumulative gains or losses recognised directly in to the global liability provisioning method. They are prices, and interest rates. The Group uses derivative equity are transferred to the period’s income calculated on all temporary differences emerging instruments (mainly forward contracts on currencies statement. between the taxable base of an asset and liability and commodity options) to hedge risks stemming Embedded derivatives included in other financial and book value in the balance sheet considered, from changes in foreign currencies relating to instruments or contracts are treated as separate with the exception of goodwill not deductible for tax irrevocable commitments or to future transactions derivatives when their risks and characteristics are purposes and of differences stemming from planned. not strictly related to those of their host contracts investments in subsidiaries for which cancellation is The Group does not use derivatives for trading and the latter are not measured at fair value with not envisaged in the foreseeable future. Deferred purposes. posting of related gains and losses in the income tax assets on unused tax losses and tax credits Derivatives are initially recognised at cost and are statement. carried forward are recognised to the extent that it then fair valued on subsequent closing dates. is probable that future taxable income will be Changes in the fair value of derivatives designated REVENUE RECOGNITION available against which they can be recovered. and recognised as effective for hedging future cash Revenues are posted net of return sales, discounts, Current and deferred tax assets and liabilities are flows relating to the Group’s contractual allowances and bonuses, as well as of the taxes offset when income taxes are levied by the same commitments and planned transactions are directly associated with sale of goods and rendering tax authority and when there is a legal right to recognised directly in shareholders' equity, whilst the of services. settle on a net basis. Deferred tax assets and ineffective portion is immediately posted in the Sales revenues are recognised when the company liabilities are measured using the tax rates that are income statement. If the contractual commitments or has transferred the significant risks and rewards expected to be applicable, according to the planned transactions materialise in the recognition of associated with ownership of the goods and the respective regulations of the countries where the assets or liabilities, when such assets or liabilities are amount of revenue can be reliably measured. Group operates, in the years when temporary recognised, the gains or losses on the derivative that Revenues of a financial nature are posted on an differences will be realised or settled. were directly recognised in equity are factored into accrual-accounting basis. the initial valuation of the cost of acquisition or carrying value of the asset or liability. For cash-flow 151 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 these estimates. Estimates are used to measure DIVIDENDS tangible and intangible assets subjected to Dividends are posted on an accrual basis when the impairment testing, as described earlier, as well as right to receive them materialises, i.e. when for recognition of credit risks, inventory shareholders approve dividend distribution. obsolescence, depreciation and amortisation, asset write-downs, employee benefits, taxes, and other TREASURY SHARES provisions and reserves. Estimates and assumptions Treasury shares are booked in a specific reserve as are regularly reviewed and the effects of each a reduction of shareholders’ equity. The carrying change immediately reflected in the income value of treasury shares and revenues from any statement. subsequent sales are recognised in the form of changes in shareholders’ equity. NEW ACCOUNTING STANDARDS No accounting standards or interpretations have EARNINGS PER SHARE (EPS) been issued or reviewed, effective January 1st 2006, Basic EPS is calculated by dividing the profit or loss that have had a substantial effect on the Group’s attributable to the direct parent company’s financial statements. shareholders by the weighted average number of ordinary shares outstanding during the period. 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 dilutive effects.
USE OF ESTIMATES Preparation of financial statements and of related notes to apply IFRS requires management to make estimates and assumptions that affect the entity of balance sheet assets and liabilities and disclosures concerning potential assets and liabilities as at balance-sheet date. Actual results could differ from
152 COMMENTS ON SIGNIFICANT BALANCE SHEET ITEMS 1. TANGIBLE ASSETS (PROPERTY, PLANT, AND EQUIPMENT)
Property Plant & Other Assets under Total equipment assets construction Expense As at January 1st 2005 37,667 98,224 17,322 10,728 163,941 Increases 6,781 5,892 1,572 3,742 17,987 Disposals (726) (1,590) (77) - (2,393) Reclassifications - - - (8,464) (8,464) Foreign exchange differences - 208 116 2 326 As at December 31st 2005 43,722 102,734 18,933 6,008 171,397 Increases 961 7,637 1,404 5,741 15,743 Disposals (147) (99) (41) - (287) Reclassifications - - - (1,057) (1,057) Foreign exchange differences (26) (82) (21) (20) (149) As at December 31st 2006 44,510 110,190 20,275 10,672 185,647 Accumulated depreciation As at January 1st 2005 5,591 66,264 13,328 - 85,183 Depreciations in the year 1,060 7,831 1,852 - 10,743 Write offs for disposals (34) (1,308) (58) - (1,400) Foreign exchange differences - 25 16 - 41 As at December 31st 2005 6,617 72,812 15,138 - 94,567 Depreciations in the year 1,146 7,857 1,774 - 10,777 Write offs for disposals (15) (94) (27) - (136) Foreign exchange differences - (15) (7) - (22) As at December 31st 2006 7,748 80,560 16,878 - 105,186 Book value As at December 31st 2006 36,762 29,630 3,397 10,672 80,461 As at December 31st 2005 37,105 29,922 3,795 6,008 76,830 The net carrying value of Property was as follows
31,12,2006 31,12,2005 Change Land 6,305 5,404 901 Industrial buildings 29,269 29,779 (510) Residential buildings 1,188 1,922 (734) Total 36,762 37,105 (343)
The carrying value of property includes an amount Machinery for the production of simple, safe light- of € 11,711,000 (€ 12,026,000 in 2005) relating to alloy valves for cooking appliances and hobs were leased industrial buildings and land. acquired or built in-house during the financial year. Investments for integrating burner production lines in Brazil continued throughout the year; 24,000 sqm of land were also purchased for the purpose of building a new plant. 153 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 2. INTANGIBLE ASSETS
Goodwill Patents and Development Other intangible Total know-how costs assets Expense Balance as at January 1st 2005 9,008 1,709 328 427 11,472 Increases - 51 485 71 607 Foreign exchange differences - - - 15 15 As at December 31st 2005 9,008 1,760 813 513 12,094 Increases - 104 444 471 1,019 Foreign exchange differences - - - (3) (3) As at December 31st 2006 9,008 1,864 1,257 981 13,110 Depreciation Balance as at January 1st 2005 2,406 1,462 16 259 4,143 Share 2005 - 143 81 57 281 Foreign exchange differences - - - 11 11 As at December 31st 2005 2,406 1,605 97 327 4,435 Share 2006 - 156 103 58 317 Foreign exchange differences - - - (1) (1) As at December 31st 2006 2,406 1,761 200 384 4,751 VNet carrying amount As at December 31st 2006 6,602 103 1,057 597 8,359 As at December 31st 2005 6,602 155 716 186 7,659
Goodwill booked in the balance sheet mainly stems expectations. Group management has adopted a from acquisition of Faringosi Hinges S.r.l. and is gross benchmark interest rate of 9%, which reflects allocated to the “Hinges” CGU (cash generating unit). current market valuations of the cost of money and The Group verifies the recoverability of goodwill at the specific risk associated with the sector. least once a year or more frequently, if there seems As at December 31st 2005 and December 31st 2006, to be an impairment of value. The CGU’s recoverable the value in use of the cash generating units, value is verified by determining value in use. The calculated based on the above assumptions, was assumptions used for calculating value in use regard much higher than the carrying value of the assets the growth rate, expected changes in selling prices allocated to the units. and cost trends during the period used for calculation, and the benchmark interest rate. The Other intangible assets have a finite useful life and rates of growth adopted are based on future market are amortised based on this lifetime. The useful life expectations and on the Group’s expansion of projects for which development costs are prospects in the sector. The Group is preparing capitalized is estimated to be 10 years. operating cash flow forecasts deriving from the most recent budget approved by the Board of Directors for the coming five years and extrapolates the cash flow for the next five years based on a medium- to long-term sector growth rate of 2%. Changes in selling prices and in direct costs are based on past experience and future market 154 3. EQUITY INVESTMENTS
31.12.2006 31.12.2005 Change Sabaf Mexico S.A. de c.v. 160 - 160 Other shareholdings 32 32 - Total 192 32 160
Sabaf Mexico S.A. de c.v., a company 100% owned by Sabaf S.p.A. was incorporated in 2006. The company has not started operations as yet, hence it shall not be consolidated.
4. NON-CURRENT RECEIVABLES
31.12.2006 31.12.2005 Change Tax receivables 393 431 (38) Guarantee deposits 46 54 (8) Others 65 56 9 Total 504 541 (37)
5. INVENTORIES
31.12.2006 31.12.2005 Change Raw materials 7,235 5,845 1,390 Semiprocessed goods 9,859 7,900 1,959 Finished products 4,698 2,524 2,174 Inventory write-down provision (715) (560) (155) Total 21,077 15,709 5,368
The increase in inventories stems from higher finished products (respectively € 197 thousand, volumes as compared to the previous financial year. € 233 thousand and € 130 thousand at 2005 year- Furthermore, there was a need to stock up on end) It should be noted that the € 5,410,000 inventories as light-alloy valves production was increase in inventories booked in the 2006 income launched on a large scale during the year. The statement includes € 42 thousand pertaining to inventory write-down reserve refers to € 197 differences between the average and current thousand for raw materials, € 333 thousand for exchange rate of the Sabaf do Brasil subsidiary. semiprocessed goods and € 185 thousand for
155 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 6. TRADE RECEIVABLES The geographical breakdown of trade receivables was as follows:
31.12.2006 31.12.2005 Change Italy 23,522 23,388 134 Western Europe 3,360 3,985 (625) Eastern Europe and Turkey 5,373 4,947 426 Asia 2,178 2,058 120 Latin America 1,541 1,252 289 Africa 1,834 526 1,308 North America & Mexico 1,328 887 441 Oceania 263 285 (22) Gross total 39,399 37,328 2,071 Provision for doubtful accounts (595) (1,264) 669 Net total 38,804 36,064 2,740
The growth in trade receivables as compared to December 31st 2006, i.e. 1.317. The reduction in the December 31st 2005, was primarily due to the sales doubtful account provision results from lower credit increase in the last quarter of the year as against risks stemming from the non-recourse sale of loans the same quarter of 2005. As at December 31st totalling € 17,105,000 posted to the balance sheet 2006, trade receivables included balances of USD as at December 31st 2006 (€ 5,222,000 as at 3.9 mn, posted at the euro/USD exchange rate as at December 31st 2005).
7. TAX RECEIVABLES
31.12.2006 31.12.2005 Change Tax receivables for VAT 782 801 (19) Other tax receivables 439 145 294 Due from Giuseppe Saleri SpA for corporate income tax (IRES) 20 522 (502) Tax receivables for Italian regional business tax (IRAP) - 65 (65) Total 1,241 1,533 (292)
156 8. CURRENT FINANCIAL ASSETS
31.12.2006 31.12.2005 Change Cash-flow hedges for commodities - 2,817 (2,817) Available-for-sale (AFS) financial assets 1 1 - Total 1 2,818 (2,817)
The transactions in derivative financial instruments During the financial year, 199,950 new shares were are described in Note 19 issued and purchased by directors and managers of the parent company against the exercise of a 9. CASH AND CASH EQUIVALENTS corresponding number of options granted in 2003 Cash and cash equivalents, which amounted to under a stock option incentive plan (Note no. 33). € 10,278,000 as at December 31st 2006 (vs. Subscription price was € 14.38. € 12,535,000 as at December 31st 2005) consisted almost exclusively of bank current account balances. 11. TREASURY SHARES Cash and cash equivalents as at December 31st 2006, include current account balances in the As at December 31st 2006, the parent company amount of USD 3,665,000 due to payments of trade does not hold treasury shares (they were in the receivables and to the settlement of financial amount of 14,889 as at December 31st 2005). derivatives at the euro/dollar exchange rate of 1.317. During FY2006, Sabaf SpA acquired 38,826 own shares at an average per-share price of € 22.205 10. SHARE CAPITAL and sold 53,715 shares at an average price of Parent company share capital is made up of € 21.759 11,533,450 shares worth € 1.00 each.
12. LOANS
31.12.2006 31.12.2005 Current Non-current Current Non-current Real estate finance leases 1,377 6,663 1,430 8,040 Property mortgages 667 7,652 699 8,292 Unsecured loans 1,171 605 1,139 1,769 Bank overdrafts and short-term and long-term borrowings 3,524 - 94 - Total 6,739 14,920 3,362 18,101
All loans in place are denominated in euro, at a the year. Property mortgages are secured by floating rate linked to the Euribor with spreads of mortgages on Group properties and finance lease between 0.60% and 1.05%. A short-term € 8 mn payables are guaranteed to the lessor through rights credit line was granted in 2006, with drawings in on leased assets. The fair value of loans the amount of € 3.5 mn as at December 31st 2006. approximates carrying value. 157 No new medium/long term claims were requested in CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 13. POST-EMPLOYMENT BENEFIT OBLIGATIONS AND RETIREMENT RESERVES
31.12.2006 31.12.2005 Post-employment benefit reserve Retirement reserves Post-employment benefit reserve Retirement reserves Liabilities as at January 1st 3,748 54 3,420 47 Social security costs 614 8 559 7 Finance expenses 155 - 154 - Amounts paid out (640) - (385) - Liabilities as at December 31st 3,877 62 3,748 54
The assessment of the Employee severance indemnity reserve, made in compliance with IAS 19, is based on the following assumptions: FINANCIAL ASSUMPTIONS
2007 2006 Discount rate 4,50% 4,40% Compensation increases 3,00% 3,03% Inflation 2,00% 2,00%
DEMOGRAPHIC ASSUMPTIONS
2007 2006 TMortality rate RG 48 mortality tables RG 48 mortality tables for men, decreased by for men, decreased by five years for women five years for women Disability rate Same as mortality rates Same as mortality rates Staff turnover 6% per year 6% per year on all ages lon all ages Advance payouts Between 3% and 1% Between 3% and 1% per year, variable based per year, variable based on age/tenure on age/tenure Effective retirement age 57 on average for 57 on average for men and women men and women Retirement age 65 years for men and 65 years for men and 60 for women 60 for women
158 14. RESERVES FOR RISKS AND CONTINGENCIES
31.12.2005 Provisions Utilisation 31.12.2006 Reserve for agents’ indemnities 562 36 (33) 565 Reserve for product liability 500 - (500) 0 Reserve for product warranties 271 - (198) 73 Reserve for INAIL (state occupational safety & insurance agency) risks 120 38 - 158 Reserve for tax risks 0 250 - 250 Others 25 - (1) 24 Total 1,478 324 (732) 1,070
The reserve for agents’ indemnities covers amounts company that reclassified the type of production payable to agents if the Group terminates the agency activity for several employees in the burner relationship. production division compared with the classification The product liability reserve, which was set up to face originally assigned provisionally by the agency. up to risks stemming from any damages caused by During 2006, the reserve for tax risks was posted our products, was entirely released in the financial with a provision of € 250 thousand which represents year as all reasons for keeping it on the face of the an estimate of the potential liabilities pursuant to balance sheet were no longer applicable. notices of audit received in the period pursuant to a The product liability reserve covers all expenses for fiscal audit of the group parent company related to product services to be provided while products are the 2002 and 2003 tax periods. under guarantee and it was utilized during the year The provisions booked in risk reserves, which against returns from prior year sales. represent an estimate of future payments made The reserve for INAIL risks was provisioned to cover based on past experience, were not discounted to possible recalculation of contributions paid from 2002 present value because the effect was considered to 2005 following an official audit of the group parent immaterial.
15. TRADE PAYABLES The geographical breakdown of trade payables was as follows:
31.12.2006 31.12.2005 Chenge Italy 25,595 20,632 4,963 Western Europe 2,550 2,294 256 Eastern Europe and Turkey 583 45 538 Asia 53 53 - Latin America 308 145 163 North America & Mexico 20 8 12 Total 29,109 23,177 5,932
The growth in trade payables against December 31st same quarter of 2005. The amount of trade 2005, is primarily due to the rise in raw materials payables in currencies other than the euro was 159 prices in the last quarter of 2006 as against the insignificant. CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 16. TAX PAYABLES
31.12.2006 31.12.2005 Change Payable to tax authorities for personal 800 658 142 Payable to Giuseppe Saleri SapA for income taxes 1,573 37 1,536 Other tax payables 402 74 328 Total 2,775 769 2,006
The amount payable to Giuseppe Saleri SapA referred to the balance for income taxes transferred to the parent company as part of the domestic tax consolidation scheme.
17. OTHER CURRENT PAYABLES
31.12.2006 31.12.2005 Change Due to employees 2,205 2,050 155 Due to pension agencies 1,328 1,266 62 Due to agents 356 383 (27) Customer down payments 238 126 112 Other current payables 419 553 (134) Total 4,546 4,378 168
18, DEFERRED TAX ASSETS AND LIABILITIES
31.12.2006 31.12.2005 Deferred income tax 9,341 9,602 Deferred tax assets (prepaid taxes) (888) (1,152) Net position 8,453 8,450
160 Below are the key items of deferred tax liabilities and assets and their movements during the year in question and previous years.
Depreciation Provisions Deferred Fair value of Other Total and leasing and value development derivatives disclosures adjustments costs Balance as at January 1st 2005 6,870 (1,280) 116 21 363 6,090 Debit to the income statement 491 390 181 - 270 1,332 Credit to shareholders’ equity - - - 1,028 - 1,028 As at January 1st 2006 7,361 (890) 297 1,049 633 8,450 Debit to the income statement 294 507 165 - 86 1,052 Debit to shareholders’ equity - - - (1,049) - (1,049) As at December 31st 2006 7,655 (383) 462 0 719 8,453
At year-end the Group had unused tax losses Derivatives on commodities totalling € 8,710,000 (€ 10,546,000 in 2005) No financial derivatives contracts were open at the accumulated by the subsidiaries. Due to the balance sheet date. difficulty of predicting future taxable amounts for The total amount of € 8,625,000 (€ 445 thousand these companies, no deferred tax assets were in 2005) was booked in the FY2006 income booked against the amount of these previous losses. statement as a reduction of purchase costs against contracts that ended during the financial year. 19. DERIVATIVE FINANCIAL INSTRUMENTS As part of its operations, the Sabaf Group is exposed Derivatives on currency to market risks. Specifically, the Group has to As at December 31st 2006 and December 31st 2005, manage: Sabaf had no derivatives on currencies. the risk of changes in commodity prices, A € 163 thousand amount was posted to the 2006 ›the exchange-rate risk, profit or loss account as a result of revenue ›the interest-rate risk. increases stemming from positions in currency ›It is part of the Sabaf Group’s policies to hedge derivatives opened and closed within the financial exposure to changes in prices and in exchange and year (a € 196 thousand reduction in revenues in interest rates via derivative financial instruments. 2005). Hedging is done using forward contracts, options or combinations of these instruments. Generally Derivatives on interest rates speaking, the maximum duration covered by such In FYs 2005 and 2006, the Group did not use hedging does not exceed 18 months. The Group does interest-rate derivatives. not set up speculative transactions. When the derivates used for hedging of exposure meet the necessary requisites, they are posted as hedges applying hedge accounting procedures.
161 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 20. NET FINANCIAL POSITION 2006, the Company's net financial position is as Pursuant to Consob Communication of July 28th follows:
31.12.2006 31.12.2005 A. Cash 13 10 B. Positive balances of non-binding bank current accounts 10,265 12,518 C. Other liquidities 0 7 D. Cash (A+B+C) 10,278 12,535 E. Current bank overdrafts 3,524 36 F. Current portion of the non-current debt 3,215 3,326 G. Other current payables 0 0 H. Current financial debt (E+F+G) 6,739 3,362 I. Current net financial debt (3,539) (9,173) J. Non-current bank payables 8,257 8,040 K. Non-current financial debts 6,663 10,061 L. Non-current financial debt (J+K) 14,920 18,101 M. Net financial debt 11,381 8,928
COMMENTS ON KEY INCOME STATEMENT ITEMS
21. REVENUES Reference should be made to the Directors’ Report for comments on the change in revenues and for an Sales revenues totalled € 138,263,000 in 2006, up analysis of revenue breakdown by product category by € 17,249,000 (+14.3%) compared to 2005. and geographical area.
22. OTHER OPERATING INCOME
31.12.2006 31.12.2005 Change Use of accruals for risks and contingencies 1,122 304 818 Dedicated equipment 236 215 21 Rental income 117 126 (9) Contingent income 57 44 13 Royalties - 150 (150) Other operating income 105 72 33 Total 1,637 911 726 162 The “Use of accruals for risks and contingencies” loan loss reserve in the amount of € 580 thousand, line item refers to the product liability reserve in the following the non-recourse sale of loans described in amount of € 500 thousand since, as mentioned detail in Note 6. before, all reasons for keeping it on the face of the balance sheet were no longer applicable, and to the
23. MATERIALS
31.12.2006 31.12.2005 Change Raw materials and purchased components 54,080 44,003 10,077 Consumables 3,714 2,719 995 Total 57,794 46,722 11,072
The brass and aluminium alloy actual procurement effected by means of commodity derivatives which expenses including all hedging expenses were 30% were successful in reducing raw materials and 3% higher than 2005 respectively. Such procurement expenses by € 8,625,000. Steel increases were remarkably lower than market price acquisition expenses were 6% lower as compared to increases (+120% for brass and +45% rise in 2005. Costs for all other components did not aluminium prices) as a result of hedging transactions change significantly during the year.
24. COSTS FOR SERVICES
31.12.2006 31.12.2005 Change Outsourced processing 8,146 6,757 1,389 Natural gas and power 3,665 2,741 924 Maintenance 3,138 2,249 889 Transportation 1,325 1,162 163 Commissions 1,193 1,198 (5) Advisory services 1,037 868 169 Directors’ remuneration 965 859 106 Use of temporary agency workers 533 445 88 Travel expenses and allowances 396 326 70 Canteen 362 357 5 Insurance 298 278 20 Other payroll costs 3,058 2,803 255 Total 24,116 20,043 4,073
163 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 The rise in service expenses stems from the Group’s to successfully meet its needs. The increase in increased operations as compared to the previous energy expenses is a result of higher market year. Outsourced processing expenses were higher methane and power prices against prior year (+26% as a consequence of an increased utilization of and +12% respectively). external service providers for all those operations where the Group does not own an internal structure
25. PAYROLL COSTS
31.12.2006 31.12.2005 Change Salaries and wages 14,770 13,278 1,492 Social security costs 4,731 4,493 238 Temporary agency workers 3,775 2,480 1,295 Retirement allowance and other costs 811 749 62 Total 24,087 21,000 3,087
Average group headcount in 2006 totalled 580 2005 (382 blue-collars, 130 white-collars and employees (440 blue-collars, 132 white-collars and supervisors, and 6 managers). Average temporary supervisors, and 8 managers) as opposed to 518 in staff number was 131 in 2006 (89 in 2005).
26. OTHER OPERATING COSTS
31.12.2006 31.12.2005 Change Other administration expenses 573 485 88 Provisions for risks 288 23 265 Other provisions 36 32 4 Total 897 540 357
The other administration expenses line item miscellaneous association expenses. The provision primarily consists of non deductible tax amounts for for risks line item is composed of a € 250,000 € 100 thousand due to payments of penalties and accrual against tax suits (see Note no. 14) and interests on recoups effected during the 2003 accruals in the amount of € 38 thousand for INAIL financial statements tax audit (see Note no. 29), to contributions. I.C.I. tax on premises for € 140 thousand and to
164 27. FINANCE EXPENSES
31.12.2006 31.12.2005 Change Interest paid to banks 459 523 (64) Interest paid on finance lease contracts 323 151 172 Banking expenses 212 150 62 Other finance expense 237 280 (43) Total 1.231 1.104 127
28. FOREIGN-EXCHANGE GAINS/(LOSSES)
In 2006 the Group reported net foreign exchange losses in the amount of € 369 thousand, primarily due to the US dollar depreciation against the euro (net profits of € 535 thousand in 2005).
29. INCOME TAX
31.12.2006 31.12.2005 Change Current income tax 9,954 7,995 1,970 Deferred income tax 1,052 1,339 (287) Balance of previous FY - (146) 146 Total 11,006 9,188 1,829
Current domestic income taxes include IRES tax in the amount of € 7,915,000 and IRAP taxes totalling € 2,039,000 (€ 6,265,000 and € 1,683,000 respectively in 2005). Taxes for the Brazilian subsidiary, amounting to € 41 thousand in 2006 (€ 47 thousand in 2005), were calculated according to current Brazilian tax rates.
165 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 TAX STATUS findings predominantly groundless and has filed an During 2005 the direct parent company Sabaf SpA appeal, it nevertheless provisioned a prudent was the subject of an official tax audit by the Italian allocation as at December 31st 2006 of €250 Inland Revenue authority concerning FY2003 thousand to cover potential liabilities arising from the (subsequently partly extended also to FY2002) and aforementioned audit. relating to corporate income tax, VAT, and Italian regional business tax (Italian acronym = IRAP). During Reconciliation between the tax burden booked in 2006 Sabaf S.p.A. received the official tax audit year-end financial statements and the theoretical tax notice; the Company paid penalties in the amount of burden calculated according to the statutory tax € 100 thousand, posted in the 2006 consolidated rates currently in force in Italy is shown in the profit or loss account to the “Other administration following table: expenses” line item. While the Group considers the
31.12.2006 31.12.2005 Theoretical income tax 8,937 7,637 Tax effect of permanent differences 294 259 Taxes provisioned and not payable - (129) Tax effect arising from different foreign tax rates (27) (45) Taxes relating to previous years (12) - Deferred taxes not provisioned (108) (132) Use of tax losses (246) (202) Other differences 12 2 Current and deferred income tax booked in year-end accounts excluding IRAP (regional business tax) 8,850 7,390 IRAP (current and deferred) 2,156 1,798 Total 11,006 9,188
Theoretical taxes were calculated applying the current corporate income tax (IRES) rate, i.e. 33%, to the pre-tax result. For the purposes of reconciliation, IRAP (regional business tax) is not considered because its taxable base is different to that of pre- tax profit and inclusion of the tax would generate distortionary effects. Deferred taxation not provisioned and use of tax losses represent tax effects not recognised for subsidiaries for which the Group is unable to predict future taxable results.
166 30. EARNINGS PER SHARE (EPS)
Basic and diluted EPS are calculated based on the following data:
Earnings
(€‘000) 2006 2005 Net profit for the year 16,078 13,953
Number of shares
(000) 2006 2005 Weighted average number of ordinary shares for calculating basic EPS 11,333.5 11,333.5 Dilution effect arising from potential ordinary shares - 32.5 Weighted average number of ordinary shares for calculating diluted EPS 11,533.45 11,366.0 The dilutive effect is related to the stock option plan in place and described in Note 33
31. DIVIDENDS
On May 25th 2006, shareholders were paid a dividend of € 0.60 per share (total dividends of € 6,792,000); in 2005, the dividend was € 0.48 per share (total dividends were € 5,434,000). Furthermore, on November 6th 2006, following a shareholders meeting resolution of October 25th 2006, a one-time dividend of € 1.00 per share was paid to shareholders (for a total of € 11,533,000 worth of dividends paid). As regards the current year, directors have proposed payment of a dividend of € 0.70. This dividend is subject to shareholders' approval at the Annual General Meeting and has not been included in liabilities in these financial statements. The dividend proposed for 2007 is payable to all holders of shares as at May 21st 2007 and is scheduled for payment as from May 24th 2007. The estimated total dividend payable is € 8,073,000.
167 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 32. RELATED-PARTY TRANSACTIONS statements and are highlighted in these notes. The The transactions between SABAF S.p.A. and its table that follows illustrates the impact of all subsidiaries, which are the related parties of Sabaf transactions between the Group and other related S.p.A., were eliminated in the consolidated financial parties on the balance sheet and profit or accounts.
Impact of related parties transactions on balance sheet accounts Total 2006 Parent Other related Total related % of B/S company parties parties accounts Tangible assets (property, plant, and equipment) 80,461 26 26 0.03% Intangible assets 8,359 52 52 0.62% Tax payables 2,712 1,420 1.420 52.36% Total 2005 Parent Other related Total related % of B/S company parties parties accounts Tax receivables 1,370 516 516 33.66% Trade payables 23,177 34 34 0.15% Impact of related parties transactions on profit or loss accounts Total 2006 Parent Other related Total related % of B/S company parties parties accounts Other operating income 1,637 15 15 0.92% Materials (57,794) (1) (1) 0.00% Services (24,116) (5) (5) 0.02% Total 2005 Parent Other related Total related % of B/S company parties parties accounts Other operating income 911 15 15 1.65% Materials (46,722) (44) (44) 0.09%
Transactions with the ultimate parent company, Remuneration paid to directors, statutory Giuseppe Saleri SapA, consist of: auditors and general managers administration services provided by Sabaf S.p.A. Remuneration paid to members of Sabaf SpA’s Board to› parent company; of Directors and Board of Auditors for company Transactions as part of the domestic tax conso- offices held in the direct parent company and in lidation› scheme, which generated payables and other consolidated companies is shown below: receivables shown in the tables. Transactions are regulated by specific contracts whose conditions are in line with market conditions.
Relationships with other related parties refer to acquisition of prints and other development expenses paid to Stylmeccanica s.a.s. a company in which Mr. Flavio Pasotti, current CEO of Sabaf S.p.A., 168 can exercise a significant influence. 31.12.2006 31.12.2005 Directors’ remuneration 740 595 Directors’ salaries 144 119 Non-monetary benefits to directors - 4 Remuneration for statutory auditors 54 49 Total 938 767
33. SHARE-BASED PAYMENTS 34. NON-RECURRING SIGNIFICANT EVENTS On May 6th 2003, Sabaf S.p.A.’s shareholders AND TRANSACTIONS meeting resolved upon a capital increase stemming Pursuant to Consob Communication of July 28th from a stock option plan implemented for some 2006, the Group declares that no significant non- directors and managers of Sabaf. The stock option recurring events were effected throughout 2006. plan in place has the following characteristics: Number of options assigned: 666,500; 35. IRREGULAR AND/OR UNUSUAL ›Vesting period: 1,076 days, from May 6th 2003 TRANSACTIONS ›to April 15th 2006; Pursuant to Consob Communication of July 28th Strike price: € 14.38 per share 2006, the Group declares that no irregular and/or ›Fair value of options on grant date: € 2.479. unusual transactions as defined by the Consob ›Fair value of the options has been determined using communication itself were put in place during 2006. the Black & Scholes formula, commonly used in financial practice to calculate the price of this type 36. COMMITMENTS of financial instrument Guarantees issued The Sabaf Group has issued sureties to guarantee Based on the Group’s economic results with respect consumer and mortgage loans granted by Banco di to exercise terms and condition provided for in the Brescia to Group employees for a total of plan (attainment of predefined goals in terms of € 3,746,000 (€ 3,136,000 as at December 31st EBITDA and EBIT), a total number of 199,950 options 2005). vested in the period, causing subscription of a corresponding number of shares by all people involved. The remaining 466,550 options expired without being exercised.
As at December 31st 2006 no stock option plan is in place.
Accounting according to IFRS 2 has led to booking of payroll and service costs of € 56 thousand in the FY2006 income statement (€ 168 thousand in FY2005).
169 CONSOLIDATED ANNUAL ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 37. CONSOLIDATION AREA AND SIGNIFICANT EQUITY INVESTMENTS COMPANIES CONSOLIDATED ON A 100% LINE-BY-LINE BASIS
Company name Registered Share Shareholders % location capital Ownership Faringosi-Hinges S.r.l. Ospitaletto (BS) EUR 90,000 Sabaf S.p.A. 100%
Sabaf Immobiliare s.r.l. Ospitaletto (BS) EUR 25,000 Sabaf S.p.A. 100%
Sabaf do Brasil Ltda San Paolo (Brazil) BRL 22,252,275 Sabaf S.p.A. 100% Av. Sierra Branca, 420
UNCONSOLIDATED COMPANIES
Company name Registered Share Shareholders % location capital Ownership Sabaf Mexico S.A. de C.V. San Luis Potosi MXN 1,118,000 Sabaf S.p.A. 100% (Mexico)
OTHER SIGNIFICANT EQUITY INVESTMENTS: NONE
170 38. GENERAL DETAILS OF PARENT COMPANY
Registered and administrative headquarters: Via dei Carpini, 1 25035 Ospitaletto (Brescia)
Contacts: Tel: +39 030 - 6843001 Fax: +39 030 – 6848249 E-mail: [email protected] Website: http://www.sabaf.it
Tax details: Brescia REA 347512 Tax code: 03244470179 VAT number: 01786910982
171 Annual Report2006
172
BOARD OF STATUTORY AUDITORS’ REPORT ON CONSOLIDATED FINAN- CIAL STATEMENTS FOR THE YEAR ENDING ON DECEMBER 31st 2006 Annual Report2006 To the Shareholders,
We have perused the consolidated annual financial statements of Sabaf SpA as at December 31st 2006 and the report accompanying them. The consolidated annual financial statements – reflecting Italian Legislative Decree 38 of February 28th 2005, which implements Article 35 of Italian Law 306 of October 31st 2003 – have been prepared in compliance with IFRSs. To the best of our knowledge and as far as we are responsible, we have verified and are able to attest that: • The accounting data used for consolidation are those taken from year-end financial statements as at December 31st 2005 prepared by the individual companies’ Boards of Directors • The consolidation area includes the following companies, as well as, of course, the direct parent company: • Faringosi Hinges Srl – Italy • SABAF Immobiliare Srl – Italy • SABAF do Brasil Ltda – Brazil. These companies are directly controlled by the direct parent company, which owns 100% of their share capital. Conversely, the new 100% owned investee company, Sabaf Mexico SA, based in Mexico, has not been consolidated. The consolidation policies indicated in the explanatory notes to accounts – with which we agree and that comply with Articles 31, 32, and 33 of Italian Legislative Decree 127/1991, which transposes EU directives concerning company matters relating to consolidated financial statements – involved: - Conversion into euro of non-EU investee companies’ balance sheets at the current exchange rate as at year- end date, whilst for income statements the year’s average exchange rate was applied - Elimination of the carrying value of investments in subsidiaries, with recognition of related equity in consolidated financial statements - Elimination of payables and receivables between consolidated companies, as well as of significant transactions between Group companies - Elimination of profits and losses arising from infragroup transactions. Dividends coming from Group companies were also eliminated. Positive differences produced by elision of equity investments against book equity as on the date of first-time consolidation are allocated to the higher value attributable to assets and liabilities and, for the remainder, to goodwill, which, as from 2004 is no longer amortised, in accordance with IFRSs. The accounting policies used for items in consolidated accounts and indicated in the explanatory notes to accounts are those compliant with IFRSs, as was already the case of the previous FY’s consolidated accounts. We feel able to give our consent to the accounting policies adopted in application of the legal regulations mentioned at the beginning of this report. We also officially note the detailed and exhaustive report with which the Board of Directors illustrates performance of the Group as a whole, the corporate governance activity applied, and the most significant data of each consolidated company, as well as sales by geographical area and product line, permitting perception of the effective status both of individual companies and of the Group. We also note that financially reported data are detailed and duly discussed and are such as to meet legal needs and the reader’s need for full knowledge. [We also note] that consolidated financial statements have been audited by the independent auditor AGN Serca Snc, as per the assignment awarded to the latter by the Shareholders’ Meeting. The independent auditors confirm the correctness of financial statements, which are clear and represents the balance sheet, financial position, and consolidated economic result achieved in a true and fair manner.
174 The summary data of consolidated financial statements are as follows: (in €’000)
Non-current assets € 90,404 Current assets € 71,800 Total assets € 162,204 Non-current liabilities € 29,270 Current liabilities € 43,169 Total liabilities € 72,439 Total equity € 89,765
The year’s profit of € 16,078 (again in ‘000), totally pertaining to the direct parent company, also goes to form equity. This figure is confirmed by the income statement, which is summarised in the following data: Total operating revenue and income € 139,900 Operating costs (materials, services, personnel, and others) € (100,670) EBITDA € 39,230 Depreciation & amortisation € (11,018) Capital gains € 29 EBIT € 28,241 Finance income (expense) € (1,157) Pre-tax profit € 27,084 Income tax € (11,006) Net profit for the year € 16,078 Considering the above, we give our consent to the consolidated financial statements of Sabaf SpA, as prepared by the Board of Directors.
Ospitaletto, April 5th 2007.
The Board of Statutory Auditors
(Italo Lucchini) (Eugenio Ballerio) (Giovannimaria Seccamani Mazzoli)
175 Annual Report2006 STATUTORY 4 ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
176 Directors report on operations Balance sheet Income statement Statement of changes in shareholders’ equity Cash flow statement Explanatory notes Auditor’s report Report of the Board of statutory auditors
177 Directors report on operations • The home appliances market 180 • Business and financial status 181 • Research & development work 184 • Equity Interests Held by Members of the Board, by Statutory Auditors, by Managing Directors and by Key Managers 184 • Direct offices held by directors in other relevant companies 185 • The Social report 185 • Corporate governance system (see report) 186 • Organisation, Operating and Control Model pursuant to Leg. Decree 231/2001 186 • Stock option incentive plan of May 6th 2003 through option grants 186 • Personal data protection 186 • Derivatives financial instruments 186 • Atypical or unusual transactions 186 • Intercompany and related parties transactions 186 • Major events occurring after year-end and expected business progress 187 • Proposal for allocation of the year’s earnings 187 Balance sheet 188 Income statement 190 Statement of changes in shareholders’ equity 191 Cash flow statement 192 Explanatory notes 193 Independent auditor’s report on individual annual accounts 217 Board of Statutory Auditors’ report 218
Annual Report2006
178 DIRECTORS REPORT ON OPERATIONS
“Li monti son fatti dalli corsi de’ fiumi, li monti son disfatti dalli corsi dei fiumi.”
Leonardo da Vinci 179 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
THE HOME APPLIANCES MARKET Annual Report2006 THE COOKING APPLIANCES MARKET UPSWING DROVE THE HOME APPLIANCES MARKET INCREASE IN 2006: DATA PROVIDED BY PROMETEIA-ANIE INDICATE A 2.4% INCREASE IN HOUSEHOLD DEMAND AT CONSTANT PRICES AS COMPARED TO A 1.9% DECREASE IN 2005.
180 BUSINESS AND FINANCIAL STATUS The market experienced a positive growth throughout 2006. Sales revenues were € 122.3 mn (€ 107.6 mn in 2005), EBITDA was € 32.9 mn (€ 29.2 mn in prior year), EBIT was € 24.1 mn (€ 20.4 mn in prior year) and net profits were € 14.2 mn (€ 12.5 mn as at December 31st 2005).
(Amounts in €‘000) 2006 2005 Change Change 2006/2005 % Sales revenues 122,317 107,644 14,673 13.6 EBITDA 32,928 29,245 3,683 12.6 EBIT 24,069 20,417 3,652 17.9 Pre-tax profit 24,219 20,833 3,386 16.3 Net profit 14,241 12,519 1,722 13.8
181 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 Sales performance by product line was as detailed below:
SALES BY PRODUCT LINE (€ ‘000) 2006 2005 Change Change 2006/2005 % Simple valves 12,134 8,719 3,415 39.2 Valves with safety devices 25,683 24,698 985 4.0 Thermostats 15,367 14,504 863 6.0 Total valves and thermostats 53,184 47,921 5,263 11.0 Burners 54,281 47,947 6,334 13.2 Accessories and other revenues 14,852 11,776 3,076 26.1 TOTAL 122,317 107,644 14,673 13.6
The growth in 2006 was spread out over all product lines. The simple valves product line reported the strongest increase (also due to improved sales in the light-alloy gas dispensers business). The burners product line also reported a significant increase after the slight downturn in 2005.
The geographical breakdown of revenues was as follows:
SALES BY GEOGRAPHICAL AREA (Amounts in € ‘000) 2006 % 2005 % Change % Italy 64,363 52.6 57,306 53.2 12.3 Western Europe 12,702 10.4 12,470 11.6 1.9 Eastern Europe and Turkey 22,795 18.6 21,733 20.2 4.9 Asia 9,230 7.6 7,949 7.4 16.1 Latin America 4,573 3.7 2,882 2.7 58.7 Africa 5,640 4.6 2,899 2.7 94.6 North America & Mexico 2,149 1.8 1,086 1.0 97.9 Oceania 865 0.7 1,319 1.2 -34.4
182 Total 122,317 100.0 107,644 100.0 13.6 The most remarkable progress in sales was reported With regard to operating margins, EBITDA stood at about € 215 thousand (from a € 227 thousand gain for those extra-European regions where the 26.9% of total sales down from 27.2% reported in in prior year). company’s market shares are the lowest and where prior year, EBIT grew by 0.7% to reach 19.7% from Finance expense as a percentage of sales decreased it made a commitment to foster growth. Italy’s still 19.0% in prior year due to lower depreciation further, amounting to 0.11% (0.29% in 2005). holding substantial market shares due to the expenses, EBT went from 19.4% to 19.8% while net We also highlight more than € 500 thousand in liveliness of Italian manufacturers who managed to profits were stable at 11.6% as the tax rate applied dividends collected from the subsidiary Faringosi- be competitive by virtue of a wide range of was 41.2% from 39.9%. Hinges Srl. products, of their specialization in “built-in” products and the strength of their brands. Western Europe In FY2006, the cost of commodities (brass and Operating cash flow (net profits plus amortisation reports a slight improvement while Eastern aluminium alloys) increased sharply, the negative and depreciation) increased from € 21.7 mn to € European trend is twofold: while the Poland region impact of which was limited by hedging strategies 23.1 mn, equivalent to 18.9% of sales (20.2% in reported a very sharp downturn (home appliance implemented using financial derivatives. 2005). manufacturers turned to less structured Group Materials and services procurement expenses competitors offering low quality-low cost products), increased while labour costs remained unchanged. CAPITAL AND FINANCIAL STATUS Turkey’s sales boosted as a result of the strong dynamism of local manufacturers, both for domestic The dollar depreciation occurred during the year Reclassification based on financial criteria is sales and for export sales. (dollar sales are in the amount of approximately 10% reported as follows: of total sales) caused a foreign exchange loss of The hedging strategies implemented by means of commodity derivatives stabilized customer prices (Amounts in € ‘000) throughout 2006 as compared to 2005. 31/12/2006 31/12/2005 Non-current assets 75,574 69,962 Current assets 53,690 46,654 Current liabilities (32,655) (24,208) Net working capital 21,035 22,446 Current financial assets 0 2,817 Provisions for liabilities & charges and post-employment benefits (12,796) (13,573) Net capital employed 83,813 81,652 Net short-term financial position 2,393 8,475 Net medium/long-term debt (691) (1,999) Net financial position 1,702 6,476 Equity 85,515 88,128 Cash flows during the year are summarised in the following table:: (Amounts in € ‘000) 2006 2005 Opening net short-term debt (cash) 8,475 6,868 Operating cash flow 24,093 19,044 Cash flow from investment activities (14,843) (7,857) Cash flow from financing activities 1,522 (5,962) Change in net shareholders' equity (16,854) (3,618) Cash flow for the period 6,082 1,607 Closing net short-term debt (cash) 2,393 8,475 183 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 In FY2006 Sabaf SpA. invested about € 14.8 mn in RESEARCH & DEVELOPMENT WORK property, machinery, plant and equipment. The most The new light-alloy fixed gas tap developed in 2006, important items refer to the purchase or in-house derived from the multi-gas tap platform, is a result construction of machinery for use in production of of the company's primary feature which consists in light alloy valves. the organic designing of products and production Total net working capital amounted to € 21 mn processes. against € 22.4 mn in the previous FY: it accounted Prototype development of dual type light-alloy gas for 17.2% of sales, compared to 20.9% of 2005. On taps, which derive from the valve gas tap for light- the assets side, the increase in inventories was alloy hobs, also started during the year. remarkable (owing to increased volumes and the A study on the new aluminium thermostat was launch of new products) while the growth in trade started in the financial year. receivables was weaker. On the liabilities side, trade As to the burners product line, research also started payables suffered a strong increase (due to the rise to develop a new burner bearing an entrainment air in raw materials procurement expenses) along with system from below the surfaces, specifically tax payables. designed for the top market and another study is Current financial assets are no longer reported on being conducted to develop a new dual burner for the face of the balance sheet; the amounts reported the Chinese market. for the financial year ended December 31st 2005, New snap-in chains were developed featuring less were related to the net fair value of hedging space occupation together with a new rotating chain commodity derivatives. for the northern American market. Self-financing generated by operating cash flow was Efforts to improve the production processes € 24.1 mn (19.7% of sales) against € 19 mn in the continued and were accompanied by development previous year. Such cash flow allowed for and in-house construction of machinery, tools and investments in the amount of € 14.8 mn and for the dies. distribution of € 18.3 mn worth of dividends. The net financial position reported for 2006 shows a EQUITY INTERESTS HELD BY MEMBERS OF THE cash inflow of € 1.7 mn against the € 6.5 mn BOARD, BY STATUTORY AUDITORS, BY posted as at December 31st 2005. The cash inflow MANAGING DIRECTORS AND BY KEY MANAGERS stems from: medium/long term borrowings in the Pursuant to article 79 of Consob’s Issuers amount of € 691 thousand, split between mortgage Regulations, following is a list of Sabaf's equity loans and residential leases. The short-term net interests held by directors, statutory auditors and by financial position is a positive € 2.4 mn consisting key managers; it must be noted that the managing of € 7.2 mn from cash and cash equivalents and director position was never established in Sabaf: from short-term borrowings in the amount of € 4.8 mn; the latter in turn consists of a € 3.5 mn bank current account overdraft exposure and of the short- term component of the aforementioned longer term loans in the amount of € 1.3 mn. Net equity is in the amount of € 85.5 mn against € 88.1 mn in 2005: the reduction stems from the negative balance between profits made and dividends distributed.
184 Full name Type of Shares owned Shares Shares Shares owned ownership As at January acquired sold as at December 1st 2006 31st 06 Giuseppe Saleri Indirectly through the subsidiary, Giuseppe Saleri SapA 6,190,531 15,718 - 6,206,249 Angelo Bettinzoli Directly 27,000 45,000 50,000 22,000 Gianbattista Saleri Directly 20,000 9,542 20,000 9,542 Alberto Bartoli Directly 5,500 16,500 5,500 16,500 Leonardo Cossu Directly - 7,250 7,250 - Franco Carlo Papa Directly - 6,000 6,000 - Managers with strategic responsibilities (*) Directly 12,080 48,928 19,968 41,040
(*) includes 5 managers
DIRECT OFFICES HELD BY DIRECTORS IN OTHER THE SOCIAL REPORT RELEVANT COMPANIES Since 2005 Sabaf also reports its sustainable Below we disclose the offices held by Sabaf economic, social and environmental performances. directors as directors or statutory auditors of other The Annual Report includes contents which were listed companies, in financial, banking and/or presented in the consolidated and in the social insurance companies, and/or in large companies: financial statements, also with a view to meet Giuseppe Saleri is Chairman of Giuseppe Saleri shareholders' requests to issue the social financial ›SapA, the financial Company that controls Sabaf SpA; statements together with the consolidated financial Angelo Bettinzoli is a non-executive independent statements. This is not just a choice as regards ›director of Gefran SpA; communication but also the result of a strategic Leonardo Cossu is a director of Leonessa reflection. Our intention is in fact to highlight how ›Fiduciaria Srl, President of the Board of Statutory social responsibility is integrated into our corporate Auditors of Guido Berlucchi & C. SpA, and a standing and business policies. It is only as a result of that statutory auditor of Banca Valori SpA, Bossini SpA, “virtuous circle” combining business growth with Brawo SpA, Finber SpA, and Infracom Italia SpA environmental and social sustainability that enduring Franco Carlo Papa is an independent director of growth of the Sabaf Group over time can be ›DMT S.p.A., a director of IGI SGR S.p.A., Chairman of assured. The Report is one of the very first the Board of Statutory Auditors of Gecofin S.p.A. and international documents to show financial and Metalwork S.p.A. and auditor in charge for Arnoldo sustainability information as one. The document Mondadori Editore S.p.A. preparation process strictly complies with the Salvatore Bragantini is the Chairman of APEI international generally accepted principles for ›SGR S.p.A and of PROMAC S.p.A., Vice Chairman of preparing both sustainability and financial reporting. IW Bank S.p.A., a director of Unicredit Banca Mobiliare S.p.A., of Interpump Group S.p.A. and of the G. Marconi Airport in Bologna S.p.A. and a member of the Supervisory Board di KME (in Germany).
185 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 CORPORATE GOVERNANCE SYSTEM (SEE PERSONAL DATA PROTECTION REPORT) With regard to Legislative Decree no. 196 of June For full discussion of this aspect, reference should be 30th 2003, Sabaf Group pursued its activities to made to the report on our corporate governance comply with legislation in force throughout the 2006 report that will be presented to shareholders at the financial year. next Annual General Meeting called to approve The Official Security Plan (OSP) relating to the year SABAF SpA’s statutory year-end financial 2006 was drawn up in compliance with the law. The statements. The report is included in statutory 2007 OSP is expected be ready no later than March annual report dossier as well as in the specific 31st 2007. section on the topic in the Comprehensive Annual Similar activities were performed for the subsidiaries Report. Sabaf Immobiliare Srl and Faringosi-Hinges Srl.
ORGANIZATION, OPERATION AND CONTROL DERIVATIVE FINANCIAL INSTRUMENTS MODEL PURSUANT TO LEG. DECREE 231/2001 Commentary to this item is provided in Note 19 to Sabaf S.p.A.’s Board of Directors approved the the financial statements. Organization, Management and Audit model on August 2nd 2006, pursuant to Legislative Decree ATYPICAL OR UNUSUAL TRANSACTIONS no. 231/2001 and appointed a Supervisory The company did not execute any unusual or Committee accordingly. atypical transactions.
STOCK OPTION INCENTIVE PLAN OF MAY 6TH INTERCOMPANY AND RELATED PARTIES 2003 THROUGH OPTION GRANTS TRANSACTIONS The stock option incentive plan for 28 directors and Relationships between the company and its managers of the parent company vested during subsidiaries, including those with the parent 2006; the plan was funded by means of a capital company, are regulated at market conditions, and so increase excluding option rights as per article 2441, are those with related parties as defined by the IAS paragraph 5 of the Italian Civil Code, with a 24 accounting standard. Details of inter-company maximum of 666,500 shares issued. Vesting and related party transactions are provided in Note conditions were related to the stock price trend in 32 to the financial statements. the last quarter of 2005 and to the achievement of predefined levels of consolidated EBITDA and EBIT as at December 31st 2005. The three goals were not achieved completely, which entailed that only 30% of stock options vested, for a total number of 199,950 stocks issued. Options were fully exercised and a corresponding capital increase of 199,950 stocks was implemented, each bought at a price of € 14.38 (equalling the average stock price of Sabaf in the month of April 2003), which resulted in a cash inflow of € 2.0 mn for the Company. No stock option plan is currently in force.
186 MAJOR EVENTS OCCURRING AFTER YEAR-END PROPOSAL FOR ALLOCATION OF THE YEAR'S AND EXPECTED BUSINESS PROGRESS EARNINGS No especially noteworthy events took place after In thanking our employees, the Board of Statutory year-end. Auditors, the independent auditors, and supervisory We believe we will increase sales revenues through authorities for their active co-operation, we ask you sales price increase and higher sales volumes. The to approve the financial statements for the year increase in sales prices should cover a large portion that ended on December 31st 2006 with the of the rise in raw materials expenses. Furthermore, proposal to allocate the year’s earning of € the shift in production from brass valves to the new 14,241,149 as follows: light-alloy models entails a temporary expense • € 39,990 to the Legal Reserves – the amount increase due to the need to duplicate some will bring reserves to 20% of share capital; production services and the impossibility of • To shareholders, a dividend of € 0.70 per share, guaranteeing full efficiency in the plants. For these payable as from May 24th 2007. reasons we expect a slight decrease in operating • The remainder to the Extraordinary Reserve. profits Ospitaletto, March 23rd 2007 The Board of Directors
187 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
BALANCE SHEET Annual Report2006 (Amounts in € ‘000) Note 31.12.2006 31.12.2005 Assets NON-CURRENT ASSETS Tangible assets (property, plant, and equipment) 1 41,341 39,835 Intangible assets 2 1,754 1,136 Equity investments 3 31,738 27,878 Non-current receivables 4 46 59 Deferred tax assets (prepaid taxes) 18 695 1,054 Total non-current assets 75,574 69,962
CURRENT ASSETS Inventories 5 17,998 13,327 Trade receivables 6 34,799 31,707 Tax receivables 7 748 1,370 Other current receivables 145 250 Current financial assets 8 0 2,817 Cash and cash equivalents 9 7,231 9,853 Total current assets 60,921 59,324
TOTAL ASSETS 136,495 129,286
188 (Amounts in € ‘000) Note 31.12.2006 31.12.2005 EQUITY AND LIABILITIES EQUITY Share capital 10 11,533 11,333 Retained earnings, other reserves 59,741 64,276 Net profit for period 14,241 12,519 Total equity 85,515 88,128
NON-CURRENT LIABILITIES Loans 12 691 1,999 Post-employment benefit obligations and retirement reserves 13 3,447 3,350 Reserves for risks and contingencies 14 977 1,368 Deferred income tax 18 8,372 8,855 Total non-current liabilities 13,487 15,572
CURRENT LIABILITIES Loans 12 4,838 1,378 Trade payables 15 26,354 20,033 Tax payables 16 2,476 592 Other liabilities 17 3,825 3,583 Total current liabilities 37,493 25,586 TOTAL LIABILITIES & EQUITY 136,495 129,286
189 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
INCOME STATEMENT Annual Report2006 (Amounts in € ‘000) CONTINUING OPERATIONS Note 2006 2005 OPERATING REVENUES AND INCOME Revenues 21 122,317 107,644 Other operating income 22 1,384 688 Total operating revenues and income 123,701 108,332
OPERATING COSTS Materials 23 (49,679) (39,581) Change in inventories 4,671 (955) Services 24 (24,220) (20,321) - from related parties 32 (2,972) (2,703) Payroll costs 25 (21,641) (18,902) Other operating costs 26 (707) (268) Costs for capitalised in-house work 803 940 Total operating cost (90,773) (79,087) OPERATING PROFIT BEFORE DEPRECIATION & AMORTISATION, CAPITAL GAINS/LOSSES, AND WRITE-DOWNS/WRITE-BACKS OF NON-CURRENT ASSETS (EBITDA) 32,928 29,245 Depreciation and amortization (8,866) (9,179) Capital gains/(losses) on disposal of non-current assets 7 119 Write-downs/write-backs of non-current assets 0 232 OPERATING PROFIT (EBIT) 24,069 20,417 Finance income 327 185 Finance expenses 27 (462) (496) Foreign-exchange gains/(losses) 28 (215) 227 Profits and losses from equity investments 29 500 500 PRE-TAX PROFIT 24,219 20,833 Income tax 30 (9,978) (8,314) NET PROFIT FOR THE YEAR 14,241 12,519
190 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in € ‘000) Share Share Legal Treasury Other Net profit Total capital premium reserve shares riserves for period Equity reserve Balance as at December 31st 2004 11,333 7,327 2,267 (133) 46,106 12,326 79,226 Allocation of 2004 earnings 6,892 (12,326) (5,434) Treasury share movements (84) (84) Change in fair value reserve 1,733 1,733 Change in stock option reserve 168 168 2005 net profit 12,519 12,519
Balance as at December 31st 2005 11,333 7,327 2,267 (217) 54,899 12,519 88,128 Allocation of 2005 earnings 5,727 (12,519) (6,792) Capital increase following exercise of stock options 200 2,675 2,875 Extraordinary dividend (11,533) (11,533) Treasury share movements 217 90 307 Change in fair value reserve (1,767) (1,767) Change in stock option reserve 56 56 2006 net profit 14,241 14,241
Balance as at December 31st 2006 11,533 10,002 2,267 0 47,472 14,241 85,515
191 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
CASH FLOW STATEMENT Annual Report2006 (Amounts in € ‘000) 2006 2005 A. OPENING NET SHORT-TERM FINANCIAL POSITION 8,475 6,868 B. CASH FLOW FROM OPERATIONS Net profit for period 14,241 12,519 Depreciation and amortization 8,866 9,179 Change in deferred tax assets and liabilities (124) 2,216 Capital (gains)/losses on asset disposal (7) (119) Net change in post-employment benefit reserve 97 268 Net change in reserve for risks and contingencies (391) (770) 22,682 23,061 Change in net working capital Inventories (4,671) 955 Trade receivables (3,092) (3,050) Trade payables 6,321 3,247 Other receivables and payables 2,853 (5,169) 1,411 (4,017) Operating cash flow 24,093 19,044 C. CASH FLOW FROM INVESTMENT ACTIVITIES Investments in non-current assets: Intangible (975) (609) Tangible (10,029) (4,933) Financial (3,860) (3,183) Proceeds from disposal and retirement of fixed assets 21 868 TOTAL (14,843) (7,857) D. CASH FLOW FROM FINANCING ACTIVITIES New loans (medium-/long-term portion) 0 0 Repayment of loans and transfer of current portion of long-term loans to current liabilities (1,308) (3,424) Change in non-current financial receivables 13 46 Change in current financial assets 2,817 (2,584) TOTAL 1,522 (5,962)
E. CHANGE IN SHAREHOLDERS’ EQUITY Capital increase for exercise of stock options 2,875 0 Change in stock option reserve 56 168 Change in fair value reserve (1,767) 1,732 Change in treasury shares 307 (84) Distribution of dividends (18,325) (5,434) TOTAL (16,854) (3,618) F. CASH FLOW DURING THE PERIOD (B+C+D+E) (6,082) 1,607 G. CLOSING NET SHORT-TERM FINANCIAL POSITION (A+F) 2,393 8,475 192 EXPLANATORY NOTES
ACCOUNTING STANDARDS ACCOUNTING POLICIES it is probable that use of the asset will generate The accounting standards and policies applied for future economic benefits and when asset cost can STATEMENT OF COMPLIANCE AND BASIS OF preparation of the financial statements as at be measured reliably. PRESENTATION December 31st 2006 are shown below: Such assets are measured at purchase or production Sabaf S.p.A. Consolidated year-end accounts for the cost and - if the assets concerned have a finite financial year (FY) 2006 have been prepared in TANGIBLE ASSETS (PROPERTY, PLANT, AND useful life - are amortised on a straight-line basis compliance with the International Financial Reporting EQUIPMENT) over their useful life. Standards (IFRSs) issued by the International These assets are posted at purchase or construction Accounting Standards Board (IASB) and endorsed by cost. Cost includes directly attributable accessory IMPAIRMENT OF ASSET VALUE the European Union. Reference to IFRSs also includes costs. Such costs also include revaluations At each balance-sheet date, Sabaf SpA reviews the all current International Accounting Standards (IASs). undertaken in the past based on specific monetary carrying value of its tangible and intangible assets Financial statements have been prepared in euro, revaluation regulations or pursuant to company to see whether there are signs of impairment of the rounding amounts to the nearest thousand, and are mergers. Depreciation is calculated according to value of these assets. If such signs exist, the compared with full-year financial statements for the rates deemed appropriate to spread the carrying recoverable value is estimated in order to determine previous year, prepared according to the same value of tangible assets over their useful working the write-down amount. If it is not possible to standards. The report consists of the balance sheet, life. Estimated useful working life, in years, is as estimate recoverable value individually, the Group the income statement, the statement of changes in follows: estimates the recoverable value of the cash- shareholders’ equity, the cash flow statement, and generating unit (CGU) to which the asset belongs. explanatory notes. Financial statements have been Buildings 33 The recoverable amount is the higher between the prepared on a historical-cost basis except for some Lightweight constructions 10 net selling price and value in use. In measuring revaluations of non-current tangible assets Generic plant 10 value in use, estimated future cash flows are undertaken in previous years. Specific plant and machinery 6 – 10 discounted to their present value using a pre-tax Equipment 4 rate that reflects fair market valuations of the Furniture 8 present cost of money and specific asset risk. FINANCIAL STATEMENTS Electronic machines 5 If the recoverable amount of an asset (or CGU) is The Company has adopted the following policies: Motor vehicles and other means of transport 5 estimated to be lower than its carrying value, the current and non-current assets and current and asset’s carrying value is reduced to the lower ›non-current liabilities are stated separately in the Ordinary maintenance costs are expensed in the recoverable amount, posting impairment of value in balance sheet; year they are incurred; costs increasing the assets’ the income statement. an income statement expresses costs using a value or useful working life are capitalised and When there is no longer any reason for a write- ›classification based on the nature of each item; depreciated according to the residual possibility of down to be maintained, the carrying value of the the cash flow statement presents financial flows utilisation of the assets to which they refer. asset (or CGU) is increased to the new value ›originating from operating assets, using the indirect Land is not depreciated. stemming from estimate of its recoverable amount method. – but not beyond the net carrying value that the The policies make it possible to represent the LEASED ASSETS asset would have had if it had not been written meaning of the economic and financial situation of Non-current assets acquired via finance lease down for impairment of value. Reversal of the Company. contracts are accounted for using the financial impairment loss is recognised as income in the method and are posted among assets at the income statement. SEGMENT INFORMATION purchase value, less depreciation. Depreciation of A segment is a distinctly identifiable part of a group such assets is reflected in the financial statements EQUITY INVESTMENTS AND NON-CURRENT that supplies a combination of related products and applying the same policy followed for owned RECEIVABLES services (business segment) or supplies products and tangible assets. Set against booking such assets, the Equity investments not classified as held for sale are services in a given economic area (geographical amounts payable to the financial lessor are posted measured according to cost, reduced for impairment segment). Sabaf SpA substantially operates in just among short- and medium-/long-term payables; in of value. The original value is written back in one business segment – components for household addition, finance charges pertaining to the period are subsequent years if the reasons for write-down cooking appliances – and in just one geographical charged to the income statement. cease to exist. area – Italy. Consequently, the segment information Non-current financial assets consisting of envisaged by IAS 14 is not provided. INTANGIBLE ASSETS receivables are recognised at their presumed Intangible assets acquired or internally produced are realisable value. 193 recognised as assets, as established by IAS 38, when STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 RESERVE FOR POST-EMPLOYMENT BENEFIT adjusted to allow for any difference between initial INVENTORIES OBLIGATIONS cost and repayment value over the loan’s duration Inventories are measured at the lower out of The reserve is provisioned to cover the entire using the effective interest-rate method. purchase or production cost – determined according liability accruing vis-à-vis employees in compliance Loans are classified among current liabilities unless to the weighted average cost formula - and the with current legislation and with national and the company has the unconditional right to defer corresponding fair value consisting of replacement supplementary company collective labour contracts. discharge of a liability by at least 12 months after the cost for purchased materials and of the presumed This liability is subject to revaluation via application date of reference. realisable value for finished and semiprocessed of indices fixed by current regulations. Employee products - calculated taking into account any severance indemnities are calculated on an POLICY FOR CONVERSION OF FOREIGN- conversion costs and direct selling costs yet to be actuarial basis in accordance with the requirements CURRENCY ITEMS incurred. Inventory cost includes accessory costs of IAS 19, using the projected unit-credit method. As Receivables and payables originally expressed in and the portion of direct and indirect manufacturing at balance-sheet date, the amount accruing must be foreign currencies are converted into euro at the costs that can be reasonably assigned to inventory revalued for the period of the projected future exchange rates in force on the date of the items. Obsolete or slow-moving stocks are written duration of the future employment relationship. transactions originating them. Foreign exchange down according to their possibility of use or Lastly, in order to make a reasonable estimate of differences realised upon collection of receivables realisation. Inventory write-downs are eliminated in the benefits already accruing to each employee and payment of payables in foreign currency are subsequent years if the reasons for such write- against his/her tenure, the present value of the posted in the income statement. Income and costs downs cease to exist. amount is calculated using a method based on relating to foreign-currency transactions are various financial and demographical parameters. converted at the rate in force on transaction date. RECEIVABLES The portion of actuarial gains and losses that At year-end, assets and liabilities expressed in Receivables are recognised at their presumed exceeds 10% of the present value of the obligation foreign currencies, with the exception of non-current realisable value. The face value is adjusted to a is posted in the income statement (“corridor items, are posted at the spot exchange rate in force lower realisable value via specific provisioning method”). at year-end and related foreign exchange gains and directly reducing the item based on in-depth analysis losses are posted in the income statement. If of individual positions. SHARE-BASED PAYMENTS conversion generates a net gain, this value As established by IFRS 2, the total amount of the constitutes a non-distributable reserve until it is CURRENT FINANCIAL ASSETS fair value of stock options as at grant date is effectively realised. Financial assets held for trading are measured at fair recognised in the income statement as cost. value, allocating profit and loss effects to finance Changes in fair value after the grant date do not DERIVATIVE INSTRUMENTS AND HEDGE income or expense. affect initial measurement. Costs for remuneration, ACCOUNTING corresponding to the options’ fair value, are The company’s business is exposed to financial risks RESERVES FOR RISKS AND CONTINGENCIES recognised among payroll costs (among costs for relating to changes in exchange rates, commodity Reserves for risks and contingencies are provisioned services for options granted to directors) at a prices, and interest rates. The Group uses derivative to cover losses and debts, the existence of which is straight-line rate for the interval of time between instruments (mainly forward contracts on currencies certain or probable, but whose amount or date of grant date and vesting date, directly offset in and commodity options) to hedge risks stemming occurrence cannot be determined at the end of the shareholders’ equity. These notes provide all detail from changes in foreign currencies relating to accounting period. Provisions are recognised in the information about the stock option plan completed irrevocable commitments or to future transactions balance sheet only when a legal or constructive during the 2006 financial year. planned. obligation exists determining the use of resources The company does not use derivatives for trading with an impact on profit and loss to meet that PAYABLES purposes. obligation and it is possible to estimate the amount Payables are recognised at their face value. The Derivatives are initially recognised at cost and are reliably. If the impact is major, provisions are portion of interest included in face value and not then fair valued on subsequent closing dates. calculated by discounting estimated future cash yet payable at the end of the accounting period is Changes in the fair value of derivatives designated flows at an estimated pre-tax discount rate such as deferred to future periods. and recognised as effective for hedging future cash to reflect fair market valuations of the present cost flows relating to the Group’s contractual of money and specific risks associated with the LOANS commitments and planned transactions are liability. Loans are initially recognised at cost, net of related recognised directly in shareholders' equity, whilst the costs of acquisition. This value is subsequently ineffective portion is immediately posted in the
194 income statement. If the contractual commitments Sales revenues are recognised when the company DIVIDENDS or planned transactions materialise in the has transferred the significant risks and rewards Dividends are posted on an accrual basis when the recognition of assets or liabilities, when such assets associated with ownership of the goods and the right to receive them materialises, i.e. when or liabilities are recognised, the gains or losses on amount of revenue can be reliably measured. shareholders approve dividend distribution. the derivative that were directly recognised in Revenues of a financial nature are posted on an equity are factored into the initial valuation of the accrual-accounting basis. TREASURY SHARES cost of acquisition or carrying value of the asset or Treasury shares are booked in a specific reserve as liability. For cash-flow hedges that do not lead to FINANCE INCOME a reduction of shareholders’ equity. The carrying recognition of assets or liabilities, the amounts that Finance income includes interest receivable on funds value of treasury shares and revenues from any were directly recognised in equity are included in invested, positive foreign exchange differences and subsequent sales are recognised in the form of the income statement in the same period when the income from financial instruments, when not offset changes in shareholders’ equity. contractual commitment or planned transaction as part of hedging transactions. Interest receivable is hedged impacts profit and loss – for example, when recognised in the income statement when it USE OF ESTIMATES a planned sale actually takes place. accrues, considering effective yield. Preparation of financial statements and of related For effective hedges of exposure to changes in fair notes to apply IFRS requires the Directors to make value, the item hedged is adjusted for the changes FINANCE EXPENSES estimates and assumptions that affect the entity of in fair value attributable to the risk hedged and Financial expense includes interest payable on balance sheet assets and liabilities and disclosures recognised in the income statement. Gains and financial debt calculated using the effective interest concerning potential assets and liabilities as at losses stemming from the derivative’s valuation are method and bank expenses. balance-sheet date. Actual results could differ from also posted in the income statement. these estimates. Estimates are used to measure Changes in the fair value of derivatives not INCOME TAXES FOR THE YEAR tangible and intangible assets subjected to designated as hedging instruments are recognised in Income taxes include all taxes calculated on the impairment testing, as described earlier, as well as the income statement in the period when they Company's taxable income. Income taxes are for recognition of credit risks, inventory occur. directly recognised in the income statement, with obsolescence, depreciation and amortisation, asset Hedge accounting is discontinued when the hedging the exception of those concerning items directly write-downs, employee benefits, taxes, and other instrument expires, is sold or is exercised, or when it debited or credited to shareholders’ equity, in which provisions and reserves. Estimates and assumptions no longer qualifies as a hedge. At this time, the case the tax effect is recognised directly in are regularly reviewed and the effects of each cumulative gains or losses of the hedging instrument shareholders’ equity. Other taxes not relating to change immediately reflected in the income recognised in equity are kept in the latter until the income, such as property taxes, are included among statement. planned transaction actually takes place. If the operating expenses. Deferred taxes are provisioned transaction hedged is not expected to take place, according to the global liability provisioning method. NEW ACCOUNTING STANDARDS cumulative gains or losses recognised directly in They are calculated on all temporary differences No accounting standards or interpretations have equity are transferred to the period’s income emerging between the taxable base of an asset and been issued or reviewed, effective January 1st 2006, statement. liability and the carrying value in the balance sheet that have had a substantial effect on the company’s Embedded derivatives included in other financial considered. Deferred tax assets on unused tax financial statements. instruments or contracts are treated as separate losses and tax credits carried forward are derivatives when their risks and characteristics are recognised to the extent that it is probable that not strictly related to those of their host contracts future taxable income will be available against which and the latter are not measured at fair value with they can be recovered. Current and deferred tax posting of related gains and losses in the income assets and liabilities are offset when income taxes statement. are levied by the same tax authority and when there is a legal right to settle on a net basis. Deferred tax REVENUE RECOGNITION assets and liabilities are measured using the tax Revenues are posted net of return sales, discounts, rates that are expected to be applicable in the years allowances and bonuses, as well as of the taxes when interim differences will be realised or settled. directly associated with sale of goods and rendering of services.
195 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
COMMENTS ON SIGNIFICANT BALANCE SHEET ITEMS Annual Report2006 1. TANGIBLE ASSETS (PROPERTY, PLANT, AND EQUIPMENT)
Property Plant & Other Assets under Total equipment assets construction Expense As at January 1st 2005 12,370 92,466 14,751 3,372 122,959 Increases 159 4,118 1,087 2,471 7,835 Disposals (10) (2,495) (15) - (2,520) Reclassifications - - - (2,902) (2,902) As at December 31st 2005 12,519 94,089 15,823 2,941 125,372 Increases 20 6,414 1,146 3,493 11,073 Disposals - (89) (38) - (127) Reclassifications - - - (1,044) (1,044) As at December 31st 2006 12,539 100,414 16,931 5,390 135,274 Accumulated depreciation As at January 1st 2005 3,655 63,367 11,470 - 78,492 Depreciations in the year 329 6,923 1,604 - 8,856 Write offs for disposals - (1,798) (13) - (1,811) As at December 31st 2005 3,984 68,492 13,061 - 85,537 Depreciations in the year 336 6,755 1,418 - 8,509 Write offs for disposals - (89) (24) - (113) As at December 31st 2006 4,320 75,158 14,455 - 93,933 Book value As at December 31st 2006 8,219 25,256 2,476 5,390 41,341 As at December 31st 2005 8,535 25,597 2,762 2,941 39,835
The net carrying value of Property was as follows
31.12.2006 31.12.2005 Change Land 1,291 1,291 - Industrial buildings 6,928 7,244 (316) TOTAL 8,219 8,535 (316)
The carrying value of property includes an amount of € 855 thousand (€ 887 thousand in 2005) relating to industrial property held under financial leasing agreements.
Key investments in the year consisted of purchase and realization of machinery for production of simple light-alloy valves for cookers and hobs.
196 2. INTANGIBLE ASSETS
Patents, Development Other intangible Total know-how and software costs assets Expense Balance as at January 1st2005 1,709 328 620 2,657 Increases 51 485 73 609 As at January 1st2006 1,760 813 693 3,266 Increases 80 444 451 975 As at December 31st2006 1,840 1,257 1,144 4,241 Depreciation Balance as at January 1st2005 1,462 16 329 1,807 Share 2005 143 81 99 323 As at January 1st2006 1,605 97 428 2,130 Share 2006 152 103 102 357 As at December 31st2006 1,757 200 530 2,487 Net carrying amount As at December 31st2006 83 1,057 614 1,754 As at December 31st2005 155 716 265 1,136
Intangible assets have a definite useful life and are amortised based on this lifetime. The useful life of projects for which development costs are capitalized is estimated to be 10 years.
197 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 3. EQUITY INVESTMENTS
31.12.2006 31.12.2005 Change In subsidiary companies 31,706 27,846 3,860 Other shareholdings 32 32 - TOTAL 31,738 27,878 3,860
Changes in equity investments in subsidiaries are shown in the following schedule:
Sabaf Immobiliare Faringosi Sabaf do Sabaf Mexico Totale s.r.l. Hinges s.r.l. Brasil Ltda. S.A. de C.V. Historical cost As at January 1st2005 13,475 10,329 1,293 - 25,097 Capital increases - - 3,158 - 3,158 As at January 1st2006 13,475 10,329 4,451 - 28,255 Capital increases - - 3,700 160 3,860 As at December 31st2006 13,475 10,329 8,151 160 32,115 Doubtful debt provision As at January 1st2005 - - 642 - 642 Write-downs (write-backs) - - (233) - (233) As at January 1st2006 - - 409 - 409 Write-downs (write-backs) - - - - - As at December 31st2006 - - 409 - 409 Net carrying amount As at December 31st2006 13,475 10,329 7,742 160 31,706 As at December 31st2005 13,475 10,329 4,042 - 27,846
Equity interest in Sabaf do Brasil increased its fair value by € 3.7 mn during 2006 as a result of share capital increase against investment plans deemed necessary to complete burners production at the subsidiary's plant and to build a new sizeable plant to accommodate expected production growth; all production shall eventually be moved to this site by spring 2007. Sabaf Mexico S.A. de c.v., a company 100% owned by Sabaf S.p.A. was incorporated in 2006. The company has not started operations as yet.
198 4. NON-CURRENT RECEIVABLES 31.12.2006 31.12.2005 Change Guarantee deposits 44 44 - Advance tax paid on employee severance indemnity reserve - 13 (13) Others 2 2 - TOTAL 46 59 (13)
5. INVENTORIES 31.12.2006 31.12.2005 Change Raw materials 6,026 4,739 1,287 Semiprocessed goods 9,015 7,065 1,950 Finished products 3,592 2,003 1,589 Inventory write-down provision (635) (480) (155) TOTAL 17,998 13,327 4,671
The increase in inventories stems from higher down reserve refers to € 180 thousand for raw volumes as compared to the previous financial year. materials, € 300 thousand for semiprocessed goods Moreover, the need to stock up on inventories rose and €155 thousand for finished products as light-alloy valves production was launched on a (respectively € 180 thousand, € 200 thousand and large scale during the year. The inventory write- € 100 thousand at 2005 year-end) 6. TRADE RECEIVABLES The geographical breakdown of trade receivables was as follows: 31.12.2006 31.12.2005 Change Italy 21,719 21,496 223 Western Europe 2,987 3,530 (543) Eastern Europe and Turkey 5,036 3,968 1,068 Asia 2,170 2,054 116 Latin America 849 653 196 Africa 1,834 489 1,345 North America & Mexico 449 331 118 Oceania 263 285 (22) Gross total 35,307 32,806 2,501 Provision for doubtful accounts (508) (1,099) 591 NET TOTAL 34,799 31,707 3,092
The growth in trade receivables as compared to 2.7 mn, posted at the euro/USD exchange rate as at December 31st 2005, was primarily due to the sales December 31st 2006, i.e. 1.317. The reduction in the increase in the last quarter of the year as against doubtful account provision results from lower credit the same quarter of 2005. As at December 31st risks stemming from the non-recourse sale of loans199 2006, trade receivables included balances of USD totalling € 16,666,000 posted in the balance sheet STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 7. TAX RECEIVABLES 31.12.2006 31.12.2005 Change Tax receivables for VAT 748 801 (53) Tax receivables for Italian regional business tax (IRAP) - 53 (53) Due from Giuseppe Saleri SpA for corporate income tax (IRES) - 516 (516) TOTAL 748 1.370 (622)
8. CURRENT FINANCIAL ASSETS 31.12.2006 31.12.2005 Change Cash-flow hedges for commodities - 2,817 (2,817) TOTAL 0 2,817 (2,817)
The transactions in derivative financial instruments is made up of 11,533,450 shares worth € 1.00 each. are described in Note 19 During the financial year, 199,950 new shares were issued and purchased by directors and managers of 9. CASH AND CASH EQUIVALENTS the company against the exercise of a corresponding Cash and cash equivalents, which amounted to € number of options granted in 2003 under a stock 7,231,000 as at December 31st 2006 (vs. € option incentive plan (Note no. 37). Subscription price 9,853,000 as at December 31st 2005) consisted was € 14.38. almost exclusively of bank current account balances. Cash and cash equivalents as at December 31st 11. TREASURY SHARES 2006, include current account balances in the As at December 31st 2006, the company does not amount of USD 3,111,000 due to payments of trade hold treasury shares (they were in the amount of receivables and to the settlement of financial 14,889 as at December 31st 2005). derivatives at the euro/dollar exchange rate of 1.317. During FY2006, Sabaf SpA acquired 38,826 own shares at an average per-share price of €22.205 and 10. SHARE CAPITAL sold 53,715 shares at an average price of € 21.759 Company’s share capital as at December 31st 2006,
12. LOANS
31.12.2006 31.12.2005 Current Non-current Current Non-current Real estate finance leases 144 86 145 230 Unsecured loans 1,170 605 1,139 1,769 Bank overdrafts and short-term and long-term borrowings 3,524 - 94 - TOTAL 4,838 691 1,378 1,999
200 All loans in place are denominated in euro, at a No new medium/long term claims were requested in floating rate linked to the Euribor with spreads of the year. Finance lease payments are guaranteed to between 0.60% and 1.05%. A short-term € 8 mn the lessor through rights on leased assets. The fair credit line was granted in 2006, with drawings in value of loans approximates carrying value. the amount of € 3.5 mn as at December 31st 2006.
13. POST-EMPLOYMENT BENEFIT RESERVE
31.12.2006 31.12.2005 Liabilities as at January 1st 3,350 3,082 Social security costs 550 500 Finance expenses 139 138 Amounts paid out (592) (370) Liabilities as at December 31st 3,447 3,350
The assessment of the Employee severance is based on the following assumptions: indemnity reserve, made in compliance with IAS 19,
FINANCIAL ASSUMPTIONS
Year 2007 Year 2006 Discount rate 4.50% 4.40% Compensation increases 3.00% 3.03% Inflation 2.00% 2.00%
DEMOGRAPHIC ASSUMPTIONS
2007 2006 Mortality rate RG 48 mortality tables for men, RG 48 mortality tables for men, decreased by five years for women decreased by five years for women Disability rate Same as mortality rates Same as mortality rates Staff turnover 6% per year on all ages 6% per year on all ages Advance payouts Between 3% and 1% per year, Between 3% and 1% per year, variable based on age/tenure variable based on age/tenure Effective retirement age 57 on average for men 57 on average for men and women and women Retirement age 65 years for men and 60 for women 65 years for men and 60 for women 201 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 14. RESERVES FOR RISKS AND CONTINGENCIES
31.12.2005 Provisions Utilisation 31.12.2006 Reserve for agents’ indemnities 476 36 (16) 496 Reserve for product liability 500 - (500) - Reserve for product warranties 272 - (199) 73 Reserve for INAIL (state occupational safety & insurance agency) risks 120 38 - 158 Reserve for tax risks 0 250 - 250 TOTAL 1,368 324 (715) 977
The reserve for agents’ indemnities covers amounts production activity for several employees in the payable to agents if the company terminates the burner production division compared with the agency relationship. classification originally assigned provisionally by the The product liability reserve, which was set up to agency. face up to risks stemming from any damages During the 2006, the reserve for tax risks was caused by our products, was entirely released in the posted with a provision of €250 thousand which financial year as all reasons for keeping it on the represents an estimate of the potential liabilities face of the balance sheet were no longer applicable. pursuant to notices of audit received in the period The product liability reserve covers all expenses for pursuant to a fiscal audit related to the 2002 and product services to be provided while products are 2003 tax periods. under guarantee and it was utilized during the year The provisions booked in risk reserves, which against returns from prior year sales. represent an estimate of future payments made The reserve for INAIL risks was provisioned to cover based on past experience, were not discounted to possible recalculation of contributions paid from present value because the effect was considered 2002 to 2005 following an official audit of the immaterial. group parent company that reclassified the type of 15. TRADE PAYABLES The geographical breakdown of trade payables was as follows: 31.12.2006 31.12.2005 Change Italy 23,244 17,727 5,517 Western Europe 2,464 2,209 255 Eastern Europe and Turkey 579 42 537 Asia 53 53 0 North America & Mexico 12 2 10 Latin America 2 - 2 TOTAL 26,354 20,033 6,321
The growth in trade payables against December 31st same quarter of 2005. The amount of trade 2005, is primarily due to the rise in raw materials payables in currencies other than the euro was prices in the last quarter of 2006 as against the insignificant. 202 16. TAX PAYABLES
31.12.2006 31.12.2005 Change Payable to Giuseppe Saleri SapA for income taxes 1,420 - 1,420 Tax receivables for Italian regional business tax (IRAP) 322 - 322 Payable to tax authorities for personal income tax 734 592 142 TOTAL 2,476 592 1,884
The amount payable to Giuseppe Saleri SapA as at December 31st 2006 referred to the balance for FY2006 income taxes transferred to the parent company as part of the domestic tax consolidation scheme. 17. OTHER CURRENT PAYABLES
31.12.2006 31.12.2005 Change Due to Sabaf Immobiliare for Group VAT - 55 (55) Due to employees 2,070 1,864 206 Due to pension agencies 1,211 1,156 55 Due to agents 356 383 (27) Customer down payments 103 60 43 Other current payables 85 65 20 TOTAL 3,825 3,583 242
18. DEFERRED TAX ASSETS AND LIABILITIES
31.12.2006 31.12.2005 Deferred tax assets and liabilities 8,372 8,855 Deferred tax assets (prepaid taxes) (695) (1,054) Net position 7,677 7,801
203 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 Below are the key items of deferred tax liabilities and assets and their movements during the year in question and previous years:
Depreciation Provisions Deferred Fair value Other Total and leasing and value development of disclosures adjustments costs derivatives As at January 1st 2005 6,350 (1,228) 116 21 326 5,585 To profit or loss 363 372 181 - 272 1,188 To equity - - - 1,028 - 1,028 As at January 1st 2006 6,713 (856) 297 1,049 598 7,801 To profit or loss 174 495 165 - 91 925 To equity - - - (1,049) - (1,049) As at December 31st 2006 6,887 (361) 462 0 689 7,677
19. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives on currency As part of its operations, Sabaf is exposed to market As at December 31st 2006 and December 31st 2005, risks. Specifically, the company has to manage: Sabaf had no derivatives on currencies. the risk of changes in commodity prices, A € 89 thousand amount was posted to the 2006 ›the exchange-rate risk, profit or loss account as a result of revenue ›the interest-rate risk. increases stemming from positions in currency ›It is part of Sabaf’s policies to hedge exposure to derivatives opened and closed within the financial changes in prices and in exchange and interest rates year (a € 196 thousand reduction in revenues in via derivative financial instruments. Hedging is done 2005). using forward contracts, options or combinations of these instruments. Generally speaking, the maximum Derivatives on interest rates duration covered by such hedging does not exceed In FYs 2005 and 2006, the Company did not use 18 months. The company does not set up speculative interest-rate derivatives. transactions. When the derivates used for hedging of exposure meet the necessary requisites, they are posted as hedges applying hedge accounting procedures.
Derivatives on commodities No financial derivatives contracts were open as at the balance sheet date. The total amount of € 8,625,000 (€ 445 thousand in 2005) was booked in the FY2006 income statement as a reduction of purchase costs against contracts that ended during the financial year.
204 20. NET FINANCIAL POSITION
Pursuant to Consob Communication of July 28th 2006, the Company's net financial position is as follows:
31.12.2006 31.12.2005 Change A. Cash 11 14 (3) B. Positive balances of non-binding bank current accounts 7,220 9,839 (2,619) C. Other liquidities 0 0 0 D. Cash (A+B+C) 7,231 9,853 (2,622) E. Current bank overdrafts 3,524 36 3,488 F. Current portion of the non-current debt 1,314 1,342 (28) G. Other current payables 0 0 0 H. Current financial debt (E+F+G) 4,838 1,378 3,460 I. Current net financial debt (2,393) (8,475) 6,082 J. Non-current bank payables 605 1,769 (1,164) K. Non-current financial debts 86 230 (144) L. Non-current financial debt (J+K) 691 1,999 (1,308) M. Net financial debt (1,702) (6,476) 4,774
205 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
COMMENTS ON KEY INCOME STATEMENT ITEMS Annual Report2006 21. REVENUES Sales revenues totalled € 122,317,000 in 2006, up by € 14,673,000 (+13.6%) compared to 2005. Reference should be made to the Directors’ Report for comments on the change in revenues and for an analysis of revenue breakdown by product category and geographical area.
22. OTHER OPERATING INCOME
31.12.2006 31.12.2005 Change Use of accruals for risks and contingencies 1,106 276 830 Royalties - 150 (150) Rental income 117 128 (11) Contingent income 56 44 12 Others 105 90 15 TOTAL 1,384 688 696
The “Use of accruals for risks and contingencies” balance sheet were no longer applicable, and to the line item refers to the product liability reserve in the loan loss reserve in the amount of € 580 thousand, amount of € 500 thousand since, as mentioned following the non-recourse sale of loans described in before, all reasons for keeping it on the face of the detail in Note 6.
23. PURCHASES
31.12.2006 31.12.2005 Change Raw materials and purchased components 46,231 37,118 9,113 Consumables 3,448 2,463 985 TOTAL 49,679 39,581 10,098
IThe brass and aluminium alloy actual procurement means of commodity derivatives which were succes- expenses including all hedging expenses were 30% sful in reducing raw materials procurement expenses and 3% higher than 2005 respectively. Such increa- by € 8,625,000. Steel acquisition expenses were 6% ses were remarkably lower than market price increa- lower as compared to 2005. Costs for all other com- ses (+120% for brass and +45% rise in aluminium pri- ponents did not change significantly during the year. ces) as a result of hedging transactions effected by
206 24. COSTS FOR SERVICES
31.12.2006 31.12.2005 Change Outsourced processing 7,389 5,973 1,416 Natural gas and power 3,368 2,572 796 Property rental 3,005 2,594 411 Maintenance 2,785 2,069 716 Transport and export costs 1,079 996 83 Commissions 1,032 1,049 (17) Advisory services 843 617 226 Directors’ remuneration 714 556 158 Use of temporary agency workers 526 434 92 Waste disposal 472 412 60 Travel expenses and allowances 339 304 35 Canteen 316 309 7 Insurance 234 220 14 Other payroll costs 2,118 2,216 (98) TOTAL 24,220 20,321 3,899
The rise in service expenses stems from the internal structure to successfully meet its needs. The Company’s increased operations as compared to the increase in energy expenses is a result of higher previous year. Outsourced processing expenses market methane and power prices against prior year were higher as a consequence of an increased (+26% and +12% respectively). utilization of external service providers for all those operations where the Company does not own an
25. PAYROLL COSTS
31.12.2006 31.12.2005 Change Salaries and wages 13,036 11,718 1,318 Social security costs 4,170 3,996 174 Temporary agency workers 3,741 2,421 1,320 Share-based payments 38 115 (77) Retirement allowance and other costs 656 652 4 TOTAL 21,641 18,902 2,739
207 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 The Company's average number of staff in 2006 collar workers, 110 white collars and 5 managers). was 470 (355 blue collar workers, 109 white collars The average number of temporary staff was 129 in and 6 managers) against 439 in 2005 (324 blue 2006 (87 in 2005).
26. OTHER OPERATING COSTS
31.12.2006 31.12.2005 Change Other provisions 36 32 4 Provisions for risks 288 - 288 Other administration expenses 383 236 147 TOTAL 707 268 439
The provision for risks line item is composed of a € € 100 thousand due to payments of penalties and 250 thousand accrual against tax suits and accruals interests on recoups effected during the 2003 tax in the amount of € 38 thousand for INAIL audit, to I.C.I. tax on premises for € 73 thousand contributions. and to miscellaneous association expenses. The other administration expenses line item primarily consists of non deductible tax amounts for
27. FINANCE EXPENSES
31.12.2006 31.12.2005 Change Interest paid to banks 116 182 (66) Interest paid on finance lease contracts 12 14 (2) Banking expenses 160 101 59 Other finance expense 174 199 (25) TOTAL 462 496 (34)
28. FOREIGN-EXCHANGE GAINS/(LOSSES) In 2006 the Company reported net foreign exchange losses in the amount of € 215 thousand (net profits of € 227 thousand in 2005), primarily due to the US dollar depreciation against the euro.
208 29. PROFITS AND LOSSES FROM EQUITY INVESTMENTS
31.12.2006 31.12.2005 Change Dividends Faringosi Hinges 500 500 - TOTAL 500 500 0
Profits refer to dividends paid out by Faringosi Hinges Srl pertaining to the 2005 financial year.
30. INCOME TAX
31.12.2006 31.12.2005 Change Current income tax 9,052 7,272 1,780 Deferred income tax 926 1,188 (262) Balance of previous FY - (146) 146 TOTAL 9,978 8,314 1,664
Current domestic income taxes include IRES tax in Reconciliation between the tax burden booked in the amount of € 7,233,000 and IRAP taxes totalling year-end financial statements and the theoretical tax € 1,819,000 (€ 5,776,000 and € 1,496,000 burden calculated according to the statutory tax respectively in 2005). rates currently in force in Italy is shown in the following table:
31.12.2006 31.12.2005 Theoretical income tax 7,992 6,875 Tax effect of permanent differences 90 (16) Taxes provisioned and not payable - (129) Taxes relating to previous years - - Deferred taxes not provisioned 8 10 Current and deferred income tax booked in year-end accounts excluding IRAP (regional business tax) 8,090 6,740 IRAP (current and deferred) 1,888 1,574 TOTAL 9,978 8,314
Theoretical taxes were calculated applying the TAX STATUS current corporate income tax (IRES) rate, i.e. 33%, to During 2005 Sabaf SpA was the subject of an official the pre-tax result. For the purposes of reconciliation, tax audit by the Italian Inland Revenue authority IRAP (regional business tax) is not considered concerning FY2003 (subsequently partly extended because its taxable base is different to that of pre- also to FY2002) and relating to corporate income tax profit and inclusion of the tax would generate tax, VAT, and Italian regional business tax. During distortionary effects. 2006 Sabaf S.p.A. received the official tax audit STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 31. DIVIDENDS worth of dividends paid). notice; the Company paid penalties in the amount of As regards the current year, directors have € 100 thousand, posted in the 2006 profit or loss On May 25th 2006, shareholders were paid a proposed payment of a dividend of € 0.70. This account to the “Other administration expenses” line dividend of € 0.60 per share (total dividends of € dividend is subject to shareholders' approval at the item. While the Company considers the findings 6,792,000); in 2005, the dividend was € 0.48 per Annual General Meeting and has not been included predominantly groundless and has filed an appeal, it share (total dividends were € 5,434,000). in liabilities in these financial statements. nevertheless provisioned a prudent allocation as at Furthermore, on November 6th 2006, following a The dividend proposed for 2007 is payable to all December 31st 2006 of €250 thousand to cover shareholders meeting resolution of October 25th holders of shares as at May 21st 2007 and is potential liabilities arising from the aforementioned 2006, a one-time dividend of € 1.00 per share was scheduled for payment as from May 24th 2007. The audit. paid to shareholders (for a total of € 11,533,000 estimated total dividend payable is € 8,073,000. 32. RELATED-PARTY TRANSACTIONS Impact of related parties transactions on balance sheet accounts Total 2006 Subsidiaries Parent Other related Total related % of P/L company parties parties accounts Tangible assets (property, plant, and equipment) 41,341 26 26 0.06% Intangible assets 1,754 52 52 2.96% Trade receivables 34,799 81 81 0.23% Trade payables 26,354 46 46 0.17% Tax payables 2,476 1,420 1,420 57.35% Total 2005 Subsidiaries Parent Other related Total related % of P/L company parties parties accounts Trade receivables 31.707 119 119 0.38% Tax receivables 1.370 516 516 37.66% Trade payables 20.033 8 34 42 0.21% Tax payables 592 0 0.00% Other current payables 3.583 55 55 1.54% Impact of related parties transactions on profit or loss accounts Total 2006 Subsidiaries Parent Other related Total related % of P/L company parties parties accounts Revenues 122,317 258 258 0.21% Other operating income 1,384 24 15 39 2.82% Materials (49,679) (150) (1) (151) 0.30% Services (24,220) (2,967) (5) (2,972) 12.27% Other operating costs (707) (5) (5) 0.71% Profits and losses from equity investments 500 500 500 100.00% Total 2005 Subsidiaries Parent Other related Total related % of P/L company parties parties accounts Revenues 107,644 267 267 0.25% Other operating income 688 86 15 101 14.68% Materials (39,581) (60) (44) (104) 0.26% Services (20,321) (2,703) (2,703) 13.30% Finance income 185 13 13 7.03% Profits and losses from 210 equity investments 500 500 500 100.00% Transactions with the subsidiaries consist mainly of: 35. COMMITMENTS business relationships with Sabaf do Brazil e Guarantees issued ›Faringosi Hinges pertaining to purchases and sales of Sabaf S.p.A. Sabaf S.p.A. provided guarantees finished products or intermediate products; against mortgage loans to subsidiaries; residual debt rents for premises from Sabaf Immobiliare; is in the amount of € 8,320,000 as at December › Loans and collection of dividends as part of 31st 2006 (€ 8,990,000 as at December 31st 2005). ›the centralised cash management scheme; Sabaf S.p.A. has also issued sureties to guarantee Group VAT settlement. consumer and mortgage loans granted by Banco di › Brescia to its employees for a total of € 3,746,000 Transactions with the ultimate parent company, (€ 3,136,000 as at December 31st 2005). Giuseppe Saleri SapA, consist of: Administrative services; › Transactions as part of the domestic tax conso- ›lidation scheme, which generated payables and receivables shown in the tables.
Relationships with other related parties refer to acquisition of prints and other development expenses paid to Stylmeccanica s.a.s. a company in which Mr. Flavio Pasotti, current CEO of Sabaf S.p.A., can exercise a significant influence.
The transactions are regulated by specific contracts whose conditions are in line with market conditions.
33. NON-RECURRING SIGNIFICANT EVENTS AND TRANSACTIONS
Pursuant to Consob Communication of July 28th 2006, the Company declares that no significant non- recurring events were effected throughout 2006.
34. IRREGULAR AND/OR UNUSUAL TRANSACTIONS
Pursuant to Consob Communication of July 28th 2006, the Company declares that no irregular and/or unusual transactions as defined by the Consob communication itself were put in place during 2006.
211 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 36. REMUNERATION PAID TO DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGERS
Remuneration paid to members of Sabaf SpA’s Board of Directors and Board of Auditors, in any form, also by subsidiaries, is indicated by name as follows:
FULL NAME OFFICE TERM OFFICE EMOLUMENTS NON-MONETARY BONUSES OTHERS HELD OF END FOR BENEFITS AND OTHER REMUNERATION OFFICE DATE OFFICE INCENTIVES Saleri Giuseppe Chairman 01.01.06-31.12.06 30.04.09 80 8 Saleri Gianbattista Deputy-Chairman 01.01.06-31.12.06 30.04.09 70 Saleri Ettore Deputy-Chairman 28.04.06-31.12.06 30.04.09 70 6 Bettinzoli Angelo CEO 01.01.06-31.12.06 30.04.09 340 20 Bartoli Alberto Director 01.01.06-31.12.06 30.04.09 16 154 Cossu Leonardo Director 01.01.06-31.12.06 30.04.09 24 Papa Franco Carlo Director 01.01.06-31.12.06 30.04.09 24 Ghedini Raffaele Director 01.01.06-31.12.06 30.04.09 16 Pasotti Flavio Director 01.01.06-31.12.06 30.04.09 16 Bragantini Salvatore Director 28.04.06-31.12.06 30.04.09 24 Giua Alberto Federico Director 28.04.06-31.12.06 30.04.09 16
Nobolo Alberto President of the Board of Statutory 01.01.06-28.04.06 28.04.06 7 Cisotto Angelo Statutory auditor 01.01.06-28.04.06 28.04.06 5 Ghisoni Sergio Mario Statutory auditor 01.01.06-28.04.06 28.04.06 5 Lucchini Italo President of the Board of Statutory 28.04.06-31.12.06 30.04.09 14 Ballerio Eugenio Statutory auditor 28.04.06-31.12.06 30.04.09 9 Seccamani Mazzoli Giovannimaria Statutory auditor 28.04.06-31.12.06 30.04.09 9
Managers with strategic responsibilities 524
37. SHARE-BASED PAYMENTS Vesting period: 1,076 days, from May 6th 2003 ›to April 15th 2006; On May 6th 2003, Sabaf S.p.A.’s shareholders Strike price: € 14.38 per share; meeting resolved upon a capital increase stemming ›Fair value of options on grant date: € 2.479. from a stock option plan implemented for some ›Fair value of the options has been determined using directors and managers of Sabaf. The stock option the Black & Scholes formula, commonly used in plan in place has the following characteristics: financial practice to calculate the price of this type of ›Number of options assigned: 666,500; financial instrument 212 Based on the Group’s economic results with respect As at December 31st 2006 no stock option plan is in to exercise terms and condition provided for in the place. plan (attainment of predefined goals in terms of EBITDA and EBIT), a total number of 199,950 options Accounting according to IFRS 2 has led to booking of vested in the period, causing subscription of a payroll and service costs of € 56 thousand in the corresponding number of shares by all people FY2006 income statement (€ 168 thousand in involved. The remaining 466,550 options expired FY2005). without being exercised. Detail of stock options granted to directors and, as an aggregate, to key managers is provided in the table that follows. STOCK OPTIONS ASSIGNED TO DIRECTORS AND MANAGERS WITH STRATEGIC RESPONSIBILITIES
Options held at Options assigned Options exercised Options matured Options held the start of the year during the year during the year during the year at year-end Full name Office Number Average Average Number Average Average Number Average Average Number Number Average Average held of options strike maturity of options strike maturity of options strike market of options of options strike maturity price price price price upon price exercise Bettinzoli Chief Executive Angelo Officer 150,000 14.38 01/07/06 •• •45,000 14.38 22.07 105,000 •• • Bartoli Alberto Director 55,000 14.38 01/07/06 •• •16,500 14.38 22.07 38,500 •• • Borgonovi Elio Director 20,000 14.38 01/07/06 •• •6,000 14.38 22.07 14,000 •• • Cossu Leonardo Director 20,000 14.38 01/07/06 •• •6,000 14.38 22.07 14,000 •• • Papa Franco Carlo Director 20,000 14.38 01/07/06 •• •6,000 14.38 22.38 14,000 •• • Managers with strategic responsibilities 160,000 14.38 01/07/06 •• •48,000 14.38 22.07 112,000 •• •
LIST OF SHAREHOLDINGS IN SUBSIDIARIES AND OTHER SIGNIFICANT EQUITY INVESTMENTS SUBSIDIARY COMPANIES
Company name Registered Share capital Shareholders % Shareholders' equity FY2006 location as at 31/12/06 Ownership as at 31/12/06 net profit Faringosi-Hinges S.r.l. Ospitaletto (BS) EUR 90,000 Sabaf S.p.A. 100% EUR 5,277,134 EUR 1,217,930 Sabaf Immobiliare S.r.l. Ospitaletto (BS) EUR 25,000 Sabaf S.p.A. 100% EUR 14,632,124 EUR 137,042 Sabaf do Brasil Ltda. San Paolo (Brazil) BRL 22,252,275 Sabaf S.p.A. 100% BRL 20,719,358 BRL 457,270 Sabaf Mexico S.A. de C.V. San Luis Potosi (Mexico) MXN 1,118,000 Sabaf S.p.A. 100% MXN 438,489 MXN -679,511
OTHER SIGNIFICANT EQUITY INVESTMENTS: NONE 213 STATUTORY ANNUAL REPORT & ACCOUNTS AS AT DECEMBER 31ST 2006
Annual Report2006 ORIGIN, POSSIBILITY OF USE, AND AVAILABILITY OF RESERVES
Reason Amount Possibility Quota Amount subject of use available to taxation of the company in the event of distribution Capital reserves: Share premium reserve 10,002 A, B, C Revaluation reserve ex Italian Law 413/1991 42 A, B, C 42 42 Revaluation reserve ex Italian Law 342/2000 1,592 A, B, C 1,592 1,592
Retained earnings: Legal reserve 2,267 B
Extraordinary reserve Quota not distributed to shareholders - Accounting for development costs in compliance with IAS 38 663 A, B 663 Amount subject to taxation of the company in the event of distribution - From accelerated depreciation 9,366 A, B, C 9,366 9,366 - From write-downs of receivables 185 A, B, C 185 185 - From accounting for inventory in compliance with IAS 2 402 A, B, C 402 402 - From accounting for finance leases in compliance with IAS 17 2,027 A, B, C 1,974 1,974 - From accounting for employee severance indemnity in compliance IAS 19 419 A, B, C 419 419 Non-taxable quota that can be distributed 32,776 A, B, C 32,776
TOTAL 59,741 47,419 13,980
Key: A: for capital increases B: for coverage of losses C: for distribution to shareholders
214 STATEMENT OF REVALUATIONS OF ASSETS STILL HELD AS AT DECEMBER 31ST 2006 (Amounts in € ‘000) Gross Cumulative Net value depreciation value Land and Buildings Law 72/1983 137 (122) 15 Merger 1989 516 (279) 237 Law 413/1991 47 (24) 23 Merger 1994 1,483 (552) 931 Law 342/2000 2,870 (1,421) 1,449 5,053 (2,398) 2,655 Plant & equipment Law 576/1975 205 (205) 0 Law 72/1983 2,302 (2,302) 0 Merger 1989 6,253 (6,253) 0 Merger 1994 7,281 (7,281) 0 16,041 (16,041) 0 Industrial and commercial equipment Law 72/1983 161 (161) 0 Other assets Law 72/1983 50 (50) 0 TOTAL 21,305 (18,650) 2,655
GENERAL INFORMATION
Sabaf SpA is a company incorporated according to Italian law.
Registered and administrative headquarters: Via dei Carpini, 1 25035 Ospitaletto (Brescia)
Contacts: Tel: +39 030 - 6843001 Fax: +39 030 – 6848249 E-mail: [email protected] Website: http://www.sabaf.it
Tax details: Brescia REA 347512 Tax code:03244470179 VAT no. 01786910982
215 Annual Report2006
216
BOARD OF STATUTORY AUDITORS’ REPORT ON FINANCIAL STATEMENTS FOR THE YEAR ENDING ON DECEMBER 31ST 2006 Annual Report2006 To the Shareholders Sabaf SpA is a company listed on the Italian Bourse. Consequently, by virtue of Italian Legislative Decree no. 58 of February 24th 1998 and of the current Articles of Association, all controls concerning accounting and financial reporting are attributed to the independent auditor. The Board of Statutory Auditors’ report has therefore been prepared reflecting the requirements indicated above as well as those of CONSOB (Italian securities & exchange commission) communications relating to listed companies. We have also overseen the overall approach applied to year-end financial statements and their general legal compliance as regards formation and structure, giving our consent to recognition among intangible assets of research and development costs of € 444,000 gross. The financial statements relating to the financial year (FY) ending on December 31st 2006 show a net profit of € 14,241,149 after expensing current, deferred and advance income tax totalling € 9,977.569. Having specified this, we inform you of what follows: We recall the fact that Sabaf SpA has accepted the Italian Corporate Governance Code drawn up by the Italian Corporate Governance Committee for Listed Companies. The Code expresses and regulates some important aspects of operation of the Board of Directors and of its members. [Sabaf has accordingly] appointed an Internal Control & Audit Committee and also a Compensation Committee. The Board of Directors’ membership is balanced, including an adequate number of “independent” directors, some of whom take part in the Internal Control & Audit and Compensation Committees. The Board of Statutory Auditors was properly informed of the most important business transactions undertaken by Sabaf SpA’s Board of Directors in the past financial year, view news and data reported during meetings of the Board of Directors – which the Board of Statutory Auditors always attended – as well as on occasion of direct meetings with the Chief Financial Officer and Investor Relator. The Board of Statutory Auditors has not found evidence of any atypical and/or unusual transactions undertaken either with third parties, related parties or on an infragroup basis. Ordinary related-party and infragroup transactions are indicated in the Report on Operations as per Article 2301/2 of the Italian Civil Code and in the Explanatory Notes to Accounts also as regards their characteristics and economic effects. We recall the fact that Giuseppe Saleri SapA, the ultimate parent company of Sabaf does not performance any activity of direction and co-ordination vis-à-vis Sabaf. Conversely, Sabaf SpA, in its capacity as direct parent company, has performed activities of direction and co-ordination vis-à-vis its subsidiaries. Specifically, in determining infragroup transfer prices, the Company has stipulated specific agreements with the subsidiaries, based on criteria that appear correct and such as to respect each company’s economic needs and autonomy. The independent auditor AGN Serca Snc has completed its report on the individual year-end financial statements pursuant to Article 156 of Italian Legislative Decree 58/1998. The Board of Statutory Auditors herewith formally notes that the said report, dated March 30th 2007, did not contain any qualifying elements or reiteration of disclosure. The Board of Statutory Auditors did not receive any complaints during the financial year under Article 2408 of the Italian Civil Code. The Board of Directors did not receive any statements of complaint. The independent auditor AGN Serca received the auditing assignment as defined by Article 154 of Italian Legislative Decree 58/1998, for which the contractual fee was paid. AGN Serca thus received € 24,200 for auditing of individual annual financial statements and € 4,000 for consolidated annual financial statements, € 5,900 per periodical checks, € 7,700 for the midyear interim audit and report, and € 11,500 per quarterly auditing, for a total of € 53,500, with this all being besides out-of-pocket expenses and VAT. During 2006 the Board of Statutory Auditors’ activity involved 6 meetings of the Board of Statutory Auditors, of which 4 after appointment of the undersigned statutory auditors on April 24th 2006 and 2 previously. In addition, the Board of Statutory Auditors attended Ordinary Shareholder Meetings in the past financial year and was always present at the 8 meetings of the Board of Directors. In addition, it attended 3 of the 3 meetings of the Internal Control & Audit Committee, as well as a meeting of the Compensation Committee. In performing its mandate, the Board of Statutory Auditors gained knowledge of, and oversaw, for matters for which it is responsibility, observance of principles of proper management, via direct observation, gathering of information from the heads of the administrative function and from managers of specific functional areas, as well as via meetings with 218 the officially appointed independent auditor, with the latter having the purpose of reciprocal exchange of relevant data and information. From its activity the Board of Statutory Auditors received confirmation of observance of principles of proper management. The Board of Statutory Auditors gained knowledge of and oversaw the adequacy of the Company’s organisational structure, also in relation to the programme of ongoing harmonisation with other Group companies. The Board of Statutory Auditors assessed and oversaw the adequacy of the internal control system, gathering information via meetings with the person responsible. The adequacy of the administrative and accounting system was assessed, with special reference to the latter’s reliability and ability to represent operating events correctly. This was done by obtaining information from the heads of the respective functions, review of company documents, and analysis of the results of the work done by the independent auditor. During meetings held with the independent auditors, no relevant aspects emerged under Aticle 150, paragraph 2, of Italian Legislative Decree 58/1998. Because of what has been described above, the Board of Statutory Auditors is able to attest that, during its oversight and control activities, no significant facts emerged such as to require reporting or mention in this report. The Board of Statutory Auditors notes that, in execution of the stock option plan approved by the Extraordinary Shareholders’ Meeting on May 6th 2003, 199,950 shares were subscribed, with the share premium envisaged. Share capital therefore increase to € 11,533,450. At year-end Sabaf did not hold any treasury shares, contrary to the situation as at December 31st 2005. Treasury shares existing at the end of 2005, together with the 38,826 shares acquired during 2006, were sold during the year. The individual financial statements as at December 31st 2006 are governed by EC regulation 1606/2002 concerning application of international accounting and financial reporting standards (IASs/IFRSs), as was already the case in the previous financial statements. We officially note that the Company has approved the Organisational, Operating & Control Model and set up the Supervisory Committee envisaged by Italian Legislative Decree 231/2001, also making use of outside staff members. The Security Policy Document – required under Italian Legislative Decree 196/2003 – was updated for 2006 to reflect new regulatory requirements. With reference to the regulation concerning privileged information, better known as the market abuse regulation, the Company has set up the instruments required, in accordance with Article 115/2 of Italian Legislative Decree 58/1998, which requires a register to be kept of persons having access to privileged information. The Company has adopted an Internal Dealing Regulation, for the purposes indicated in Article 114, paragraph VII, of Italian Legislative Decree 58/1998. Sabaf has also prepared a “comprehensive annual report”, containing social and environmental performance, as well as economic performance. The Board of Statutory Auditors expresses a positive opinion on this supplementing of the traditional individual annual report & accounts, in the perspective of Company operations based on observance of sustainable growth. Following the work done, the Board of Statutory Auditors, having ascertained respect of principles of proper management and observance of the law and Articles of Association, expresses an opinion in favour of approval of individual annual financial statements accompanied by the Report on Operations. We recall the fact that, during 2006, Sabaf decided to pay an extraordinary dividend of € 1.00 per share, withdrawing resources from the extraordinary reserve. Considering 2006 net profit of € 14,241,149, after having allocated € 39,990 to top up the legal reserve, which thereby reaches the legal limit, the Board of Directors proposes allocating € 8,073,415 as dividend, corresponding to € 0.70 per share, and allocating the remainder to the extraordinary reserve. The Board of Statutory Auditors, having taken note of this proposal, judges it to be compatible with the results achieved, with balance-sheet and financial status, and with the prospects of the Company and Group. Ospitaletto, April 5th 2007 The Board of Statutory Auditors (Italo Lucchini) (Eugenio Ballerio) 219 (Giovannimaria Seccamani Mazzoli) Printed on environmentally-friendly paper
220 TAND&M
This edition is also available on the website www.sabaf.it a printed copy can be obtained from:
SABAF SpA Project Team for Corporate Social Responsibility
Via del Carpini, 1 25035 Ospitaletto (BS) - Italy Tel. +39 030 6843001 Fax +39 030 6843250 E-mail: [email protected]