MANAGEMENT REPORT ON THE FINANCIAL STATEMENTS 2018 › wp-content › uploads ›...

MANAGEMENT REPORT

ON THE FINANCIAL STATEMENTS

2018

1

Renco Group Spa ⏐ MANAGEMENT REPORT OF THE FINANCIAL STATEMENTS AS OF 31/12/2018

MANAGEMENT REPORT ACCOMPANYING

THE CONSOLIDATED FINANCIAL

STATEMENTS AS OF 31/12/2018

RENCO GROUP SpA

Registered office in Viale Venezia 53 - 61121 Pesaro (PU)

Share capital € 9,012,500.00 of which € 9,012,500.00 paid-in

Pesaro Companies’ Register No. 13250670158

Tax Code 13250670158

Pesaro Economic and Administrative Index no. 193317

3

I N D E X

5 Foreword

8 Methodological Note

9 Situation Of Group Companies And Operating Performance

11 Development of Demand and Trends in the Market the Company Serves

14 Overall Performance of the Main Companies in the Scope of Consolidation

21 Financial Aspects of Operations

23 Alternative Performance Indicators

25 Information Concerning the Environment

26 Information on Personnel

28 Description of the Main Risks and Uncertainties to Which the Group is Exposed

32 Notice As Per Art. 2428 No. 6 Bis

32 Company Objectives and Policies Concerning Financial Risk Management

33 Company Risk Exposure

34 Research And Development Activities

34 Transactions With Subsidiary, Associated, Parent And Partner Companies

35 Treasury Shares And Shares/Stocks In Parent Companies

35 Foreseeable Business Outlook

37 Activities Pursuant To Legislative Decree 231/01

Financial Statement

40 Consolidated financial statements as of 31/12/2018

46 Consolidated cash flow statement

Explanatory notes to the consolidated financial statementsas of 31/12/2018

53 Foreword

53 Activities carried out and significant events regarding the group

53 Preparation criteria

54 Scope and methods of consolidation and significant events during the year

56 Consolidation criteria

57 Measurement criteria

64 Reclassification

65 Balance sheet assets

76 Current assets

83 Balance sheet liabilities

93 Income statement

101 Other information

113 Independent Auditor’s Report

5


Dear Shareholders,

In support of the financial statements for the period ended 31.12.2018, we provide this Management Report

to the consolidated financial statements, prepared pursuant to art. 2428 of the Italian Civil Code, with the

aim of providing a faithful, balanced and comprehensive information framework regarding the situation

of the Group, the performance and results of operations, as well as the activities carried out by the Group

during the year.

FOREWORD

The “Renco Group”, of which Renco Group S.p.A. is the parent company, is an important Italian company

in the industrial plant engineering sector and in the general contracting area. The Group operates various

lines of business, which include the Industrial Plants division, Infrastructure division, Asset Management

division and Services division.

The activities are carried out, in addition to the two Italian companies Renco S.p.A. and Renco Group

S.p.A., also by the following portfolio companies:

NAME CITY OR COUNTRY % OWNERSHIP COMPANY ACTIVITIES

RENCO ALGERIA ALGERIA 100.00 Industrial plant engineering, energy sector

ANGORENCO * ANGOLA 100.00 Industrial services

RENCO ARMESTATE LTD ARMENIA 100.00 Asset management, Civil and industrial buildings

NUOVO VELODROMO ARMENIA 100.00 Asset management

PIAZZA GRANDE LLC ARMENIA 100.00 Asset management

ARMENIA GESTIONI LLC ARMENIA 100.00 Asset management and tourism-hotel activities

VELOFIRMA LLC ARMENIA 53.70 Asset management and tourism-hotel activities

ARMPOWER ARMENIA 60.00 Industrial plant engineering, energy sector

RENCO POWER CJSC ARMENIA 100.00 Industrial plant engineering, energy sector

RENCO CANADA LTD CANADA 100.00 Industrial plant engineering, energy sector

RENCO GESTION IMMOBILIERE CONGO 70.00 Asset management

RENCO TERNA JV GREECE/ALBANIA 50.00 Industrial plant engineering, energy sector

RENCO REAL ESTATE SRL ITALY 100.00Sub-holding with investments in the civil construction, asset management and hotel sectors

REAL ESTATE MANAGEMENT SRL ITALY 30.00 Asset management and tourism-hotel activities

RENCO HEALTH CARE SRL ITALY 90.00Civil and industrial buildings and asset management in health care (nursing homes)

TOLFA CARE SRL ITALY 42.54 Health care/Nursing home management

JOINT GREEN SRL ITALY 100.00 Industrial plant engineering, energy sector

RESIDENCE VISERBA SRL ITALY 100.00 Asset management

REN TRAVEL SRL * ITALY 99.00 Travel and Trips Sector

RENCO CAPITAL SRL ITALY 99.99 Asset management

CONSORZIO STABILE RENCOLANCIA ITER

ITALY 65.00 Civil construction

6

MANAGEMENT REPORT OF THE FINANCIAL STATEMENTS AS OF 31/12/2018 ⏐ Renco Group Spa

ITALSEC SRL ITALY 90.00 Security services

RENCO FOOD SRL ITALY 100.00 Organised distribution and catering

ARENGEST SRL ITALY 100.00 Asset management

RENCO KAT LTD KAZAKHSTAN 50.00 Civil and industrial buildings

RENCO PROPERTY LLP KAZAKHSTAN 100.00 Asset management

RENCO MAR * MOROCCO 97.00 Civil and industrial buildings

RENCO ENERGIES SA * MOROCCO 57.63 Industrial plant engineering, energy sector

RENCO MOZAMBICO LTD MOZAMBIQUE 97.00 Asset management and tourism-hotel activities

RENCO TEK LDA MOZAMBIQUE 100.00 Asset management and tourism-hotel activities

RENCO ENERGIA LDA MOZAMBIQUE 62.50 Industrial plant engineering, energy sector

RENCO IREM CONSTRUCOES LTD MOZAMBIQUE 31.25 Civil and industrial buildings

BAYTREE INVEST.& SERVICE LDA PORTUGAL 100.00Sub-holding with investments in the asset management and tourism-hotel sector

GRAPEVINE LDA PORTUGAL 50.00 Asset management and tourism-hotel activities

INTERRENKO LTD RUSSIA 100.00 Asset management

RENCO SAKH LLP RUSSIA 100.00 Asset management and tourism-hotel activities

SOUTHERN CROSS LLC RUSSIA 50.00 Asset management and tourism-hotel activities

BAYTREE LLCUNITED STATES OF AMERICA

100.00 Asset management and tourism-hotel activities

RENCO TANZANIA CONSTR. LTD TANZANIA 99.00 Civil and industrial buildings

RENCO ZANZIBAR LTD ZANZIBAR 99.99 Asset management and tourism-hotel activities

ITALSEC ARMENIA LLC ARMENIA 100.00 Security services

ITALSEC CONGO ARL CONGO 100.00 Security services

ITALSEC MOZAMBIQUE LDA MOZAMBIQUE 100.00 Security services

VILLA SOLIGO SRL ITALY 100.00 Asset management and tourism-hotel activities

REAL MOZ LDA MOZAMBIQUE 100.00 Asset management and tourism-hotel activities

TRADE MARK ITALY LLP KAZAKHSTAN 50.00 Assets management and food sale activities

NIASSA SANCTUARY LTD MOZAMBIQUE 50.00 Asset management and tourism-hotel activities

*Company in liquidation

From the previous year the following changes occurred in the Group structure:

in December 2018 Renco S.p.A. sold 100% of the shares of the company Hotel Yerevan Cjsc at a price

of 20 million Euros, generating a capital gain at a consolidated level of 11.6 million Euros, calculated

by taking into account the higher value contributed by the subsidiary in our consolidated financial

statements. The sale price was paid by the buyer for 5 million Euros at the time of the sale, while the

remaining 15 million Euros will be paid by 30 June 2019, guaranteed by a pledge benefiting Renco S.p.A.

on shares of the company Hotel Yerevan Cjsc;

in Mozambique, in order to apply for important works in the field of prefabrication and mechanical

installations for Oil&Gas, the Group decided to stipulate an exclusive commercial cooperation agreement

with the Italian company IREM S.p.A., specialised in the field of mechanical installations for Oil&Gas. For

NAME CITY OR COUNTRY % OWNERSHIP COMPANY ACTIVITIES

7


this reason, in October Renco S.p.A. sold to Irem S.p.A. 31.25% of the share capital of the Mozambican

company Renco Costrucoes Ltd, which subsequently changed its name to Renco Irem Costrucoes

Ltd. The sale led to the recognition of a capital gain of 3 thousand Euros, as well as the loss of control

thereof;

in August, Renco Real Estate Srl completed the acquisition of 100% of the share capital of Villa Soligo

Srl, a company operating in the Italian hotel sector and owner of the Hotel Villa Soligo in Farra di Soligo

(Treviso), a historic residence built in 1782. Villa Soligo is a 4-star hotel with a neoclassical structure in

Palladian style and consists of 35 rooms, restaurant, swimming pool and park. The property is located in

an urban setting in the heart of the Prosecco area, which has applied to be named as a UNESCO World

Heritage Site. In return for the investment, the amount of which is supported by a specific appraisal,

Renco Real Estate recorded payables to the sellers of Villa Soligo for 1,076 thousand Euros as a residual

part of the agreed price;

to strengthen the security services provided by Italsec Srl, the Group has boosted its presence in the

countries it operates in. To this end, Italsec Congo ARL, Italsec Armenia LLC and Italsec Mozambique

LDA were established to seek opportunities and synergies in the management of security for both

Group companies and third-party customers;

Real Moz LDA, a company 99% owned by Renco Real Estate S.r.l. and 1% by Renco S.p.A., was

established to develop projects in the real estate and hotel sector in the Republic of Mozambique. In

turn, Real Moz LDA participates for 50% of the share capital in the Niassa Sanctuary LDA, a business

that was established at the end of 2018;

In October, the Group decided to proceed with a merger by incorporation of the companies subject to

Kazakh law, Renco Ak LDA, with registered office in Astana, via Kosmonavtov 62, and Renco Property

LLP, with registered office in Almaty, Zenkov/Kazibek bi Str., 26/41, both 100% owned by Renco S.p.A..

The merger took effect on 1 January 2018 and had no effect on the consolidated financial statements;

8


in November, the Kazakh company Trademark Italy Ltd was set up, 50% owned by Renco S.p.A.,

which will be responsible for the marketing of Italian-made furniture, household articles and

accessories and for the distribution of food and foodservice products. This was done in order to

develop these activities in Kazakhstan, taking advantage of its experience and presence in the

country, by allocating the available commercial spaces at the recently built multifunctional building

in Almaty called “Ablay Khan”. This company is not included in the scope of consolidation as it

is not considered significant from the time it was created at the end of the year and was not yet

operational at 31 December 2018;

As part of the project to build a power plant in Armenia, during the year Renco S.p.A. sold 40% of its

interest in Armpower Cjsc to the company Siemens Venture Capital Gmbh of the Siemens group, the

project’s technology partner, and 60% to Renco Power Cjsc, an Armenian company owned by Renco

S.p.A..

METHODOLOGICAL NOTE

Unless otherwise specified, all comments and comparisons in the remainder of this report refer to the

economic and financial data for the 2018 financial year compared to the 2017 financial year. All figures in

the report on operations and the related schedules are expressed in thousands of Euros and all comments

in the “Notes to the financial statements” are also expressed in thousands of Euros. All percentage ratios

(margins and deviations) are calculated with regard to values expressed in thousands of Euro.

Figures for the previous year are shown in brackets.

9


SITUATION OF GROUP COMPANIES AND OPERATING PERFORMANCE

The value of production for the year 2018, including production to order and final inventories and revenues

from ancillary operations, amounted to 243.3 million Euros 248.2 million Euros), fundamentally in line with

the previous year.

The Industrial Plants division contributed 98.8 million Euros to the value of production (92 million Euros),

with growth of 7.6%; the Services division contributed 49.2 million Euros (43 million Euros), with growth of

13.2%; the Infrastructure division contributed 36.4 million Euros (71 million Euros). The Asset Management

division, which produced 58.9 million Euros (42.3 million Euros) in the year, is growing due to the growth

in revenues from newly established structures and the contribution deriving from the sale of the company

Hotel Yerevan, which owns the hotel of the same name.

The decrease in the value of production of the Infrastructure division is partly due to the exceptional nature

of 2017, which saw the production of the TCO order, and partly to a greater selectivity of the works.

EBITDA is equal to 38.5 million Euros (33 million Euros), 15.8% of the value of production. EBITDA increased

by 16.6% in relative terms compared to 13.3% in the previous year. The Group’s EBITDA % for works and/or

services rendered to third parties alone was 17.2% compared to 14.3% in the previous year. The increase in

EBITDA is characterised by the higher contribution recorded in the period by the Asset Management and

Industrial Plants divisions.

The reduction in the ratio between Ordinary Result and Production Value, in addition to what has already

been commented with reference to the effects on EBITDA, is characterised by the growth in amortisation

and depreciation, which amounted to 11.7 million Euros (8.8 million Euros). The growth is mainly due to

the higher investments in tangible fixed assets made in recent years, which were depreciated when fully

operational in 2018. In addition, an increase in the provision for doubtful accounts of 1.5 million Euros and

the creation of a provision for job orders to guarantee possible risks after the completion of the job orders,

with a provision of 1.3 million Euros, contributed to the reduction.

EBIT amounted to 25.2 million Euros compared to 23.3 million Euros in 2017.

The operating components of a financial nature express a balance of net financial charges of 13.1 million

Euros (12 million Euros in the corresponding period of comparison). The negative exchange rate differences

contributed to the decrease in the result for 2018, generating charges of 2.3 million Euros (-7.3 million

Euros).

Adjustments to the value of financial assets are mainly due to the valuation at net equity of the subsidiary

Renco Food. For the company a provision of 4,668 thousand Euros was set aside to cover losses due to

the accumulated losses and the substantial interruption of the investees of Renco Food active in food

distribution, which are in the process of disposing of their businesses.

The aforementioned operating dynamics generated a pre-tax profit of 12.1 million Euros, up compared to

11.3 million Euros in 2017.

Income taxes for the period amounted to 6 million Euros (9.8 million Euros), down on 2017. The tax charge

includes 2.2 million Euros of taxes relating to previous years, of which 0.9 million Euros for disputes raised

by tax authorities for the year 2014 and 1.3 million Euros for non-recoverable foreign taxes relating to

previous financial years.

By means of the following tables, we provide you with a summary of the financial situation and operating

performance of the company during the year, highlighting the factors described above:

10


DESCRIPTION 31.12.2018 31.12.2017 CHANGE

Fixed assets 248,800 204,227 44,573

Current assets 397,635 463,420 -65,785

Accrued expenses and deferred income 3,128 4,330 -1,202

TOTAL ASSETS 649,563 671,977 -22,414

Shareholders’ equity: 160,642 152,410 8,232

- of which profit (loss) for the year 6,101 1,505 4,596

Provisions for risks and future liabilities 20,919 16,291 4,628

Employee severance indemnity 2,411 2,009 402

Short-term payables 153,734 268,857 -115,123

Long-term payables 310,427 229,767 80,660

Accrued expenses and deferred income 1,430 2,643 -1,213

TOTAL LIABILITIES 649,563 671,977 -22,414

DESCRIPTION 31.12.2018 % ON REVENUES 31.12.2017 % ON REVENUES

Revenues from normal operations 228,744 94.02% 244,540 98.52%

Revenues from ancillary operations 14,538 5.98% 3,679 1.48%

VALUE OF PRODUCTION 243,282 100.00% 248,219 100.00%

Cost for the purchase of goods and services 144,811 59.52% 156,230 62.94%

Labour costs 56,476 23.21% 56,534 22.78%

Other operating costs 3,534 1.45% 2,467 0.99%

EBITDA 38,461 15.81% 32,988 13.29%

Depreciation, write-downs and other provisions

13,244 5.44% 9,700 3.91%

OPERATING RESULT (EBIT) 25,217 10.37% 23,288 9.38%

Financial income and expenses and adjust. of financial assets

(13,137) -5.40% (12,000) -4.83%

Financial income and expense (6,026) -2.48% (4,330) -1.74%

Exchange differences (2,280) -0.94% (7,341) -2.96%

Value adjustments to financial assets: (4,832) -1.99% (329) -0.13%

RESULT BEFORE TAXES 12,078 4.97% 11,288 4.55%

Income taxes 5,978 2.46% 9,784 3.94%

Profit (loss) for the year 6,100 2.51% 1,504 0.61%

11


DEVELOPMENT OF DEMAND AND TRENDS IN THE MARKET THE COMPANY SERVES

The protectionist shift in US trade policies has begun to affect world trade patterns, business confidence

and manufacturing activity. The main downward revision of estimates concerns the Eurozone as it is more

dependent on foreign demand and also affected by specific shocks. The short-term outlook for the global

economy as a whole remains favourable, with a reduction in the consensus growth outlook. The general

underlying weakness of inflation remains. While continuing to expand, world trade has decelerated,

recording a GDP close to 2.9% in 2018 (3.6% in 2017). The economic cycle continued to expand in the

United States, stabilising in the Eurozone and Japan. In emerging countries as a whole, growth is being

held back by the strength of the US dollar.

The current phase of economic expansion has other peculiarities in addition to moderate growth rates,

being characterised by low inflation rates in advanced countries, a reduced elasticity of international trade

in relation to GDP growth and a limited propensity to invest. There seem to be no factors at the moment

that would usually put an end to expansions: there are no inflationary pressures that push central banks to

impose very restrictive monetary policies, while fiscal policies remain in neutral territory.

Inflation in the main advanced economies net of volatile components remains moderate: it is close to 2% in

the United States and the UK, while it remains above 1% in the Eurozone. Inflation remains below historical

averages in the major emerging economies.

12


In the main emerging countries, the economic situation is hampered by the strengthening of the US dollar.

The cycle accelerated in India while it remained in line with estimates in China.

Russia’s economic outlook continues to improve gradually, linked to the expected evolution of oil prices. In

the first quarter of 2018, the price of oil was US$ 64.6 per barrel (+22% over the first quarter of 2017) and

rose to US$ 71.5 per barrel in the second quarter, up 11% over the previous quarter and 45% over the second

quarter of 2017. However, from the beginning of October the price of oil began to fall. At the beginning

of December, in order to support the price of oil the OPEC and non-OPEC countries agreed to reduce the

production of oil, with a cut of 1.2 million barrels a day. The downward trend is mainly due to shale oil in the

USA, whose production exceeded that of Saudi Arabia in 2018, which was also overtaken by record-setting

production in Russia.

Recently the U.S. dollar has stabilised against a broad basket of global currencies after the growth of

previous quarters. Over the next few months it is expected to gradually weaken. Emerging currencies

showed widespread devaluations in 2018. A trend of moderate appreciation is assumed to coincide with a

weakening of the US dollar’s relative strength.

Finally, also in 2018, the main companies in the sector continued their strategy of reducing costs and

resources, with consequent restructuring programmes and corporate operations like mergers and

acquisitions in order to remain as competitive as possible in the market, strengthening their financial and

equity structures and expanding their presence in “strategic” markets.

Market policies and industrial policy

The breakdown of value of production by geographical area is summarised below:

GEOGRAPHIC AREA 31.12.2017 % 31.12.2018 % CHANGE CHANGE %

Italy 37,494 15.11 35,722 14.68 -1,772 -4.73

European Union 58,025 23.38 73,332 30.14 15,307 26.38

Russia and former USSR countries 86,200 34.73 55,902 22.98 -30,298 -35.15

Africa 55,900 22.52 63,928 26.28 8,028 14.36

Middle East 5,300 2.14 7,400 3.04 2,100 39.62

Other 5,300 2.14 7,000 2.88 1,700 32.08

Total 248,219 100.00 243,282 100.00 -4,935 -1.99

The table above shows the absolute value and the percentage weight of production by geographical area.

In line with the previous year, production grew in Europe, the driving force behind the Group’s production.

The value of production in the African market grew to the same levels as in 2016. In the Russian market,

production contracted compared to the value of production in 2017, which saw the construction of the

TCO field, maintaining the same levels as in 2016.

Unlike previous years, the value of the Group’s production was balanced across all the main geographical

areas, excluding the Middle East and the remaining areas where, even if growing, the level of production

did not reach significant values.

13


Group order book

The Renco Group’s Order Book, excluding the Assets Management division, amounts to 820.4 million

Euros, with a backlog of 576.1 million Euros.

BUSINESS UNIT JOB COUNTRY CLIENTCONTRACT

VALUE YEAR ENDTO BE

PRODUCED

INDUSTRIAL PLANTS

YEREVAN PLANT ARMENIA ARMPOWER 159.8 2021 158.7

TAP ITALIA ITALY TAP 71.3 2020 42

TAP ALBANIA (Renco share)

ALBANIARENCO TERNA JV

89.7 2020 24.5

ENI CASSIOPEA ITALY ENI 17.9 2021 17.8

TAP GRECIA (Renco share)

GREECE TAP 62.6 2020 15.8

SARIR LIBIA LIBYA EMI FRANCE 53.4 2019 10.1

NAFT DASLARI PP EXPANSION AZERBAIJAN

AZERBAIJANNAFT DASLAARI

5 2020 5

OTHERS 32.8 9.2

TOTAL INDUSTRIAL PLANTS 492.5 283.1

INFRASTRUCTURE

ACCADEMIA GDF ITALY CDP 20.3 2020 19.7

ARMENIAN CIVIL WORKS

ARMENIA ARMPOWER 15.2 2020 15.2

VILLA ALMATY KAZAKHSTAN PRIVATE 12.1 2020 10.8

BUILDING CEC SAIPEM CONGO

CONGO SAIPEM 6.2 2019 5.5

NH LOGISTICS HEADQUARTERS - MOZAMBIQUE

MOZAMBIQUE NH LOGISTICS 2 2020 2

OTHERS 10.3 10.3

GROUP BUILDINGS 63.6 63.6

TOTAL INFRASTRUCTURE 129.7 127.1

SERVICES

ENI CONGO PERSONNEL + PSV

CONGO ENI CONGO 78.1 2022 63.4

BAKER HUGES - GE WORLD GE 36.1 2021 35

OTHERS 42.1 37.6

TOTAL SERVICES 156.3 136

ASSETTCO CAMP MANAGEMENT

KAZAKHSTANTENGIZ-CHEVROIL

41.9 2023 29.9

MANAGEMENT

TOTAL ASSETS 41.9 29.9

GRAND TOTAL 820.4 576.1

14


OVERALL PERFORMANCE OF THE MAIN COMPANIES IN THE SCOPE OF CONSOLIDATION

Below is the performance of the main companies included in the scope of consolidation:

Renco Armestate LLC

Renco Armestate closed the year ended 31/12/2018 with revenues of 3.4 million Euros (5.2 million Euros

in 2017).

The activities of Renco Armestate were mostly concentrated in 2018 on the Jermuk mine for the Amulsar

Gold Project of the customer Lydian Armenia. In 2017 Renco Armestate had built a housing camp that

can accommodate up to 1,000 people, staff who will work in mining, and during 2018 additional activities

requested by the client were carried out.

Lastly, as mentioned last year, Renco Armestate was positively affected by the signing by Renco S.p.A.

of a Memorandum of Understanding with the Armenian government for the construction of a combined-

cycle power plant (about 250 MW) near Yerevan, with works beginning in 2019. This is a project worth

approx. 300 million dollars which for Renco Armestate can translate into contracts for civil and electro-

instrumental works worth over 70 million Euros in 25 months.

Armpower CJSC

In August 2016, the Group established Armpower based on the memorandum of understanding signed with

the Government of the Republic of Armenia. The company has the purpose of implementing the project

15


for the construction of a 250 MW gas-powered combined-cycle power plant near the city of Yerevan, the

capital of Armenia.

In April 2017, Armpower, Renco and the Government of the Republic of Armenia signed a framework

agreement to regulate the relations and commitments of the parties on the project and entrusted

Armpower with the financing, construction and management of the plant for twenty years. Renco S.p.A.

was assigned the role of project finance developer and EPC contractor for the construction of the plant.

The investment amounts to approx. 300 million dollars to be financed by (non-recourse) project financing

with a debt/equity ratio of approx.70:30.

In order to raise the financial resources necessary for the implementation of the investment, Armpower

appointed the International Finance Corporation (IFC), as the arranger bank and co-financier of the

operation.

In August 2017, Renco S.p.A. and Siemens Venture Capital Gmbh signed a collaboration agreement that

envisages the entry of Siemens as Armpower’s equity partner (with a 40% stake), technological partner for

the supply of turbines and operator and maintainer of the plant.

At the beginning of 2018, together with the government of Armenia the lending banks reviewed the

content of the Framework Agreement signed with the government in 2017 in order to bring it into line with

international standards for similar projects.

For negotiations with the banks the Armenian government involved the gas supplier Gazprom Armenia

and the company ENA, which is committed to purchase electricity.

The negotiations were successfully concluded in March 2018. The text of the Framework Agreement for

the construction of the plant negotiated between the Government of the Republic of Armenia and the

banks was approved by Renco, Siemens and Simest S.p.A. (CDP Group) and on 9 April 2018 the Board of

Directors of IFC (World Bank) approved the investment.

At the end of April 2018, pending the signing of the renegotiated Framework Agreement, Armenia

experienced a political crisis caused by a popular movement of peaceful protest that led to the fall of the

current government and the renewal of the country’s political class. The new government did not take

office with full powers until September 2018.

Following further negotiation of the Framework Agreement with the new government in office, the

Framework Agreement was then signed with the new government and all other parties involved on 13

November 2018.

Financial closure is expected by early 2019 and work on the site is expected to commence by March 2019.

Pursuant to contractual and statutory agreements with the shareholder Siemens Venture Capital Gmbh,

the company is subject to joint control and, as such, is not consolidated in the financial statements of

Renco Group S.p.A., but valued with the equity method.

Renco Power CJSC

Renco Power Cjsc was established by Renco S.p.A. in October 2017 (initial capital of 100,000 Dram

equivalent to USD 209.09).

The company was set up with the aim of financing the project company Armpower for the construction of

the Yerevan power plant, involving Simest S.p.A. (Cdp Group) as an institutional partner, on the basis of the

conditions set out in the investment contract signed between Renco and Simest S.p.A. on 27 December

2017.

16


On 29 November 2018 Renco S.p.A. capitalised Renco Power for 196,200,000 Armenian Drams (equivalent

to € 353,843) and amended its Articles of Association on the basis of the text shared with its partner

Simest S.p.A..

On the same date, Renco Power Cjsc purchased a 60% interest in Armpower Cjsc from Renco S.p.A. at the

price of 196,260,000 Dram.

Renco Kat Ltd

The company has been present for nearly twenty years in Kazakhstan, located in all of the areas of greatest

economic interest in the country and established in the field of civil and industrial construction and the

provision of services.

In 2018, Renco Kat completed the construction of the Ablay Khan multifunctional complex in Almaty. The

contract was acquired in 2015 by the client Darin Ltd for a total value of 40 million Euros. The complex is

spread over 11 floors above ground and 3 floors underground for a total gross area of 51 thousand square

metres divided into two blocks. The first block is dedicated to a 4-star hotel affiliated with the Accor

brand, and occupies a total area of 8,287 square metres. The second block, dedicated to the executive and

commercial part, contains a shopping centre, apartments, executive offices, a sky restaurant on the top

floor and underground car parks on which the company will carry out fit-out work as the spaces are rented.

In the construction business, Renco Kat acquired a contract of 12.1 million Euros for the construction of a

villa in Almaty.

The company is also engaged in managing the 300-seat field for the customer Tengizchevroil (TCO) in

the Atyrau region. The contract was acquired in 2016 and in addition to the construction of the camp,

concluded in 2017, it also has the purpose of managing the same for a period of four years, for a value

equal to a further 37.2 million Euros of production that the company will implement during the course of

the four-year period 2018-2021. Revenues for the period relating to the management of the TCO camp

amounted to 6.1 million Euros.

Renco Kat ended the year at 31.12.2018 with a production value of 7.5 million Euros (16.5 million Euros in

2017).

Renco Property Ltd

Renco Property was founded in 2014 as a real estate spin-off of Renco Kat, and in October 2018 it merged

Renco Ak by incorporation, a company that owns the Presidential Plaza of Astana, a building of 24,000

square metres in the city centre used for management offices leased to prestigious customers like

multinational companies and international institutions.

In this manner the Group has decided to concentrate the entire Kazakhstan property stock in Renco

Property with a benefit in terms of costs and unified management.

The company closed 2018 with revenues of 16.5 million Euros (17.9 million Euros in 2017 on a like-for-like

basis) and a net profit of 7.6 million Euros (6.1 million Euros in 2017).

The decrease in the value of revenues is mainly due to the weakening of the local currency against the euro

compared to the previous year, while the increase in net profit is due not only to better management of the

17


cost structure but also to the positive contribution of the exchange rate effects, which this year recorded

a positive value of 2 million Euros (-0.2 million Euros in 2017 on a like-for-like basis).

Renco Mozambique Lda

This is the Mozambique real estate company of the Group. In 2010, the company was awarded the right

to build a tourist resort on a 32-hectare piece of seafront land in the Mecufi district, located in the north

of Mozambique. The area is an emerging tourist destination in international circuits, with very interesting

potential.

The Diamonds Mecufi Beach Resort has been fully operational from February 2016 and consists of 40

deluxe rooms and 10 suites. The resort is considered to be an absolute highlight in the country’s tourist

offering, as demonstrated by its affiliation with the prestigious Small Luxury Hotel of the World during

2016. This affiliation represents a strategic change from a commercial point of view, and will ensure access

to international circuits for the luxury segment in future years.

The facility was further enhanced in 2016 with a horse riding facility, with seven horses available to guests,

and a yoga corner for meditation.

During 2017 the company completed the investment related to the Bay Palace Apart Hotel, a structure

consisting of 12 luxury apartments, built and furnished with European standards. The property is located

on a plot of 10,000 sqm, and enjoys the use of the beach in front of it, overlooking the bay of Pemba, the

third largest bay in the world.

18


In order to increase its presence in the North of the country, Renco Mozambique has also acquired

the right to use and exploit a 3-hectare plot of land, in the centre of Palma, near the Afungi Peninsula,

where the industrial activities in the Oil&Gas sector will be implemented. Based on a consolidated

knowledge of the local market, the company’s development plan provides for an additional real estate

investment on this lot, aimed at serving the future demand for logistics services with international

standards by all operators in the Oil&Gas sector.

Rencotek Lda

This is the Mozambican portfolio company established in 2013, wholly owned by Renco S.p.A. and to

which all civil engineering and industrial plants in Mozambique are being handled.

Rencotek has in fact contracted the works for the construction and subsequent improvements of the

Diamonds Mecufi Beach Resort as well as the works for the construction of the Bay Palace Apart Hotel.

The company has also built a 3,100 sqm multifunctional building, located in the city of Pemba in a

strategic position, about 1.5 km away from the city’s International Airport. The building, which consists

of 3 floors and offers offices, residential areas and the canteen service, in compliance with the highest

international standards of quality and safety, was created to support Rencotek Lda’s activities as well

as to be rented to third parties. During 2018, the company started the fit-out activities of the part of

the building destined to accommodate qualified third-party companies of high standing that will rent

offices during 2019, including the National Institute of Petroleum (INP), regulatory body in the oil and

gas sector, and Mozambique Rovuma Venture, a subsidiary of Eni Rovuma Basin Mozambique Branch,

confirming the excellent competitive position of Rencotek Lda, considered a reliable partner for both

foreign companies and local authorities of strategic importance.

Rencotek has also acquired the right to use and develop an area of 1 hectare, located in the industrial

area of Pemba, Muaria district, where in the near future further investments will be possible, to service

the gas extraction logistics activities in the Rovuma basin.

Following confirmation of the launch of the ENI Coral project, and with the entry of EXXON Mobil as

an operator in Area 4, an important increase in the demand for logistics services is expected in the

course of 2019, both to host expatriate and local staff as well as for storage and handling, by numerous

international and local companies operating in the energy sector.

Renco IREM Construções Lda

This is a Mozambican company that was formed in partnership with a local partner. Initially, Renco

S.p.A. owned 62.5% of the company, which was partly sold in 2018 to IREM S.p.A. (for 31.25%). As a

result, Renco S.p.A. held 31.25% at 31 December 2018 and it is not included in the consolidation.

Renco IREM Construçoes Lda operates in civil construction; the partnership between the Renco Group,

IREM and its local partner brings significant strategic expertise to the company in order to acquire and

develop new projects.

During 2017, Renco IREM Construcoes Lda acquired the contract for the maintenance of the ENI offices

and Hangars in Pemba, a two-year contract, renewable for a further year.

In addition, the company acquired from ENI the contract for the construction of civil works at the

19


Paquitequete school in Pemba, demonstrating the technical skills and deep knowledge of the local

market and context, acknowledged by a customer of global importance.

In light of the growing ferment in the Oil&Gas sector, Renco IREM Construcoes Lda acquired the right

to use and exploit a plot of land of approx. 12.5 hectares, strategically located in the industrial area of

Palma, just 18 km from the Afungi Peninsula, where the industrial activities of the Oil&Gas sector will

be developed. The company has already carried out preliminary activities on this plot, instrumental to

the future development of an industrial base and highly specialised mechanical workshops.

Renco Energia Lda

This is the Mozambican holding company, established in partnership with a local partner and 62.5%

owned by Renco S.p.A.. The partnership with the local partner brings significant strategic competences

to the company, aimed at acquiring and developing new projects. The company’s business purpose is

the performance of industrial plant activities related to Oil & Gas, as well as other activities within the

energy sector. In this regard, Renco Energia Lda’s activity is synergistic and complementary to that

of Renco Irem Construçoes Lda, and is therefore intended to provide the Group with all of the tools

needed to achieve leadership in the market for the provision of services related to development in

Northern Mozambique.

In 2018, following intense commercial activity over the years, Renco Energia Lda signed a contract

with the ENH Group (Empresa Nacional de Hidrocarbonetos), a Mozambican state-owned company,

to develop a detailed master plan for “City Gas”, which will be built on the Afungi peninsula, near the

plants for the liquefaction of gas from fields off the coast of Mozambique.

On an area of about 18,000 hectares the Mozambican government plans to build a city with residential

areas, business districts, industrial areas and all the infrastructure necessary for a settlement that –

according to government estimates – will exceed 200,000 inhabitants in a few years. As part of this

project, the company will have to prepare the master plan for the area, identifying the ways in which

the project will be implemented (public, private and public-private investments are planned) and

assisting ENH in identifying the funding and implementing parties of the works that will be carried out.

Renco Energia Lda closed the year on 31.12.2018 with a value of production of 394 thousand Euros and

a net result of 164 thousand Euros.

Renco S.p.A.

Renco S.p.A. is the main company in the Group to which the foreign-owned companies directly refer.

Renco S.p.A. closed 2018 with a value of production of 136.7 million Euros (145.5 million Euros in 2017)

and with a net profit of 15.8 million Euros (1.7 million Euros in 2017).

The change in net income compared to the previous year was positively impacted by the capital gain

of 19 million Euros recorded following the sale of the company owning the Hotel Yerevan, offset by the

higher provisions made during the period for the order warranty provision of 1.3 million Euros and for

the bad debt provision of 1.4 million Euros.

The main acquisitions made in 2018 are listed below:

20


award of a contract in joint venture with the Italian CMB worth 20.3 million Euros (Renco’s share) for the

construction of the new Guardia di Finanza Academy located in Bergamo. The work will be completed

in 2020.

award in Italy of a contract in joint venture with Solar worth 17.9 million Euros (Renco’s share) for the

construction of a gas compression system to be built in Italy on the Cassiopeia offshore platform of the

ENI group. The engineering phase is scheduled to begin in early 2019 and work will be completed in

2021.

award in Congo (Brazzaville) of a contract worth € 5.5 million for the construction of three different

process buildings for Centrale Electrique du Congo. The works were commissioned by Boscongo SA, a

subsidiary of Saipem S.p.A., and will be completed in 2019.

award in Congo (Brazzaville) of a contract worth 4 million Euros for the revamping of the rescue

system on the offshore platforms of the company ENI Congo. The works will be completed in 2019.

The Mozambican Government foresees the

realization, on a territory of approximately

200km2 a City with residential areas, business

headquarters/district, industrial areas, as well

as all of the necessary infrastructures for a

settlement that – according to the government

estimates – will exceed 200.000 inhabitants

within a few years.

21


FINANCIAL ASPECTS OF OPERATIONS

The table below shows the net financial position.


a) Short-term assets

Bank deposits 72,194 91,009 (18,815)

Cash and equivalents on hand 283 351 (68)

Shares and bonds not classified as fixed assets 52 136 (84)

Financial receivables within 12 months 1,758 3,187 (1,429)

Other short-term assets

CASH AND CASH EQUIVALENTS AND SECURITIES IN CURRENT ASSETS

74,287 94,683 (20,396)

b) Short-term liabilities

Bonds and convertible bonds (within 12 months)

Payables due to banks (within 12 months) 44,101 30,788 13,313

Payables due to other lenders (within 12 months) 60 50 10

Other short-term liabilities

SHORT-TERM FINANCIAL PAYABLES 44,161 30,838 13,323

NET SHORT-TERM FINANCIAL POSITION 30,126 63,845 (33,719)

c) medium / long-term assets

Financial receivables beyond 12 months: 20,739 13,490 7,249

Other non-trade receivables 5,080 4,850 230

TOTAL MEDIUM/LONG-TERM ASSETS 25,819 18,340 7,479

d) Medium/long-term liabilities

Bonds and convertible bonds (within 12 months) 44,368 44,214 154

Payables due to banks (within 12 months) 49,569 61,999 (12,430)

Due to other lenders (beyond 12 months) 1,605 1,430 175

Other medium/long-term liabilities

TOTAL MEDIUM/LONG-TERM LIABILITIES 95,542 107,643 (12,101)

NET MEDIUM/LONG-TERM FINANCIAL POSITION (69,723) (89,303) 19,580

NET FINANCIAL POSITION (39,597) (25,458) (14,139)

With regard to the trend of the Group’s cash flows, reference should be made to the Cash Flow Statement

and the Notes to the Financial Statements.

The net financial position recorded a result of -39.6 million Euros (compared to -35.5 million Euros in 2017).

The cash and cash equivalents as of 31.12.2018 amounted to 74.3 thousand Euros (94.7 thousand Euros in

2017).

22


The decrease in the net financial position is due to lower cash flows compared to 2017, mainly as a result

of the reduction in trade payables and the increase in trade receivables, which increased due to the sale of

the subsidiary Hotel Yerevan.

On the other hand, the following table provides a reclassification of the Balance Sheet based on the uses

and sources of liquidity.

USES 31.12.2018 31.12.12017

Immediate liquidities 72,478 91,360

Deferred liquidity 98,846 61,984

Stock availability (net of advances received) (9,822) 18,894

Total current assets 161,502 172,238

Intangible fixed assets 3,627 3,355

Tangible fixed assets 213,590 208,246

Financial fixed assets 40,585 37,972

Total fixed assets 257,802 249,573

TOTAL USES 419,304 421,811

SOURCES 31.12.2018 31.12.12017

Current liabilities 136,833 140,255

Consolidated liabilities 121,827 129,144

Total minority capital 258,660 269,399

Share capital 9,013 9,013

Reserves and profits (losses) carried forward 145,530 141,894

Profit (loss) for the year 6,101 1,505

Total own capital 160,644 152,412

TOTAL SOURCES 419,304 421,811

Fixed assets

Intangible, tangible and financial fixed assets amounted to 257.8 million Euros.

Shareholders’ equity

2018 closed with a Shareholders’ Equity of 160.6 million Euros.

23


ALTERNATIVE PERFORMANCE INDICATORS

Renco’s management assesses the performance of the Group and its business segments based on certain

indicators that are not included in the OIC accounting principles. In particular, EBITDA is used as the main

indicator of profitability, as it enables the analysis of the Group’s margins, eliminating the effects deriving

from volatility originating from non-recurring items or items unrelated to ordinary operations.

The components of each of these indicators are described below:

Order book: this is the sum of the backlog from the previous period and the orders taken.

EBITDA or Gross Operating Margin: this is given by Production Value - Production Costs + depreciation,

write-downs, provisions and taxes on foreign income not recoverable and not deductible for tax purposes

(therefore reclassified from the item “Other operating costs” to the item “Income taxes”).

The EBITDA is then used in the calculation of the ROI (Return on Investment) and the ICS (Interest

Coverage Ratio).

Net Financial Position: expresses the ability to meet financial obligations, represented by gross financial

debt less cash and cash equivalents and other financial assets.

In accordance with the provisions of art. 2428 par.2 of the Italian Civil Code, the main financial and non-

financial indicators are highlighted.

24


STRUCTURAL RATIOS MEANINGPREVIOUS

YEARCURRENT

YEAR COMMENT

Secondary structural ratio

The ratio measures the ability of the corporate financial structure to cover long-term uses with long-term sources.

1.26 1.10 Permanent capital fully finances fixed assets and partly current assets. The Company is in the condition for further development of investments.

Shareholders’ equity + Consolidated liabilities---------------------------Fixed assets of the year

EQUITY AND FINANCIAL RATIOS MEANING

PREVIOUS YEAR

CURRENT YEAR COMMENT

Total debt ratio

Expresses the degree of equilibrium of financial sources.

1.77 1.61The Company has a situation of balance between equity and third party resources.

Minority interest means------------------------Shareholders’ Equity

LIQUIDITY RATIO MEANINGPREVIOUS

YEARCURRENT

YEAR COMMENT

Availability ratio The ratio measures the level of coverage of short-term payables through assets that are presumably realisable in the short term and the sale of inventory.

1.42 1.18

The ability to meet short-term commitments is highlighted.

Current assets------------------------Current liabilities

Treasury ratioThe ratio measures the level of coverage of short-term payables through assets that are presumably realisable in the short term.

1.09 1.25

The Company has a situation of financial equilibrium.

Imm. Liq. + Def. Liq.------------------------Current liabilities

PROFITABILITY RATIOS MEANINGPREVIOUS

YEARCURRENT

YEAR COMMENT

Return on investments (R.O.I.) The ratio provides a measurement in

% of the viability of current normal operations and of the self-financing capacity of the company regardless of the financial structure choices.

5.48 6.01

The profitability ratios show an improvement in the company’s profitability compared to the previous year

EBITDA------------------------Capital invested in yr.

Return on Equity (R.O.E.)The ratio provides a measurement in % of the overall viability of company operations and of the ability to remunerate equity.

0.67 3.80

Period result------------------------Shareholders’ Equity

25


FINANCIAL EQUILIBRIUM RATIOS MEANING

PREVIOUS YEAR

CURRENT YEAR COMMENT

Debt/Equity

The ratio measures the degree of equilibrium between third-party resources and equity.

0.2 0.2

The Company has a situation of equilibrium.

Net financial position------------------------Shareholders’ Equity

NFP/EBITDA The ratio expresses in how many years it would theoretically be able to repay financial debts if it used all of its operating cash flow for this purpose.

0.8 1.02

The Company has a situation of equilibrium.Net financial position

------------------------EBITDA

Interest Coverage Ratio (ICS) The ratio measures the degree of

coverage that the operating profit can provide to the cost of financial charges.

7.2 7.0

The Company has a good situation.EBITDA

------------------------Financial charges

INFORMATION CONCERNING THE ENVIRONMENT

The commitment on the issues of corporate social responsibility and of the territory is now an integral

part of the Group’s principles and conduct, oriented towards technological excellence, maintenance of

high levels of safety, environmental protection and energy efficiency, as well as training, awareness and

involvement of personnel on corporate social responsibility issues.

The Group has always operated in the markets in which it operates, with particular attention to the problems

of pollution and environmental damage. During the year, no damage was caused to the environment for

which Group companies were declared definitively guilty.

Environmental litigation

The Group currently has no civil or criminal litigation with third parties for damage caused to the

environment or environmental crimes.

The Group obtained ISO 14001 certification on 22/12/2000.

During the audit carried out in July 2018 by the certifying body, the Group’s certification for the ISO

14001:2015 standard was renewed, which is now valid until 18 December 2021.

26


INFORMATION ON PERSONNEL

Safety

The Group operates in all its environments in compliance with the provisions of Italian Legislative Decree

81/08 for the safety of workers.

The Group obtained OHSAS 18001 certification on 19/12/2003.

During the audit carried out in July 2018 by the certifying body, the Group’s certification for the OHSAS

18001:2007 standard was renewed, which is now valid until 11/03/2021.

The activity carried out in this field includes:

training of employees and collaborators;

periodic medical examinations;

organisation and training of intervention teams provided for by the standard;

continuous company monitoring of the HSM;

preparation and dissemination of the documents of Legislative Decree 81/08.

Coordination and supervision of compliance with Health and Safety requirements in construction site

27


In particular, during the year the following initiatives were undertaken:

20 different health and safety training courses were held and a total of 265 employees were trained.

The main courses held are shown below

- 12-hour firefighting course

- 16-hour first aid course

- RLS course for new appointed representatives

- Worker training according to the State-Regions Agreement of 21/12/2001

- Training of managers and supervisors

- Specific courses for construction site risks (Work, Height, Confined spaces, Personal protection

equipment, etc.)

The courses were provided both in classrooms and using e-learning systems, adopting the different

methods envisaged by the regulations

The group has implemented a supplier qualification system based on the monitoring of technical,

administrative and financial aspects as related to Quality, Health, Safety and the Environment using the

Qualiware information system. This system has been associated with a process of assigning Ratings to

monitor the performance of these suppliers.

A dedicated procedure has been put in place to determine the inputs and outputs, objectives and

interfaces of the different business processes.

A RACI (Responsible, Accountable, Consulted and Informed) Responsibility Matrix has been established

to define responsibilities among the QAHSE, Engineering, Procurement, Test Inspection and Expediting

offices.

The figure of the Company Physician as Coordinating Physician has been introduced in the group. The

purpose of this position is to coordinate the health monitoring of workers working in foreign offices,

ensuring greater health protection

Following the annual safety meeting, visits to working environments in construction sites were added.

Injuries

During the year, there were:

no injuries to Renco S.p.A. personnel;

6 commuting accidents;

no ascertained occupational diseases;

no deaths.

Litigation

For disputes pending at 31/12/2018, entrusted to our lawyers, the Group believes that these will not have

significant consequences from the point of view of potential liabilities beyond the provisions indicated in

the paragraph “Provisions for risks and charges” of the Explanatory Notes.

28


Information on Group personnel

With reference to employees directly employed by Renco S.p.A., with the exclusion of its branches, the

following information is provided:

434 employees were in the workforce at the end of the financial year, including 357 men and 77 women,

256 with open-ended contracts of whom 201 men and 55 women and 178 men and 22 women with

fixed-term contracts;

average length of service is 5.88 years;

388 days of training were carried out during the year;

122 employees, collaborators and interns were hired, and 98 people terminated the employment

relationship, with an increase of 24 units.

DESCRIPTION OF THE MAIN RISKS AND UNCERTAINTIES TO WHICH THE GROUP IS EXPOSED

In carrying out its activities, the Group is exposed to risks and uncertainties deriving from external factors

related to the general or specific macroeconomic context of the operating sectors in which it operates, as

well as to the risks deriving from strategic choices and to internal operating risks.

The identification and mitigation of these risks has been systematically carried out, allowing for timely

monitoring and management of the risks occurring.

With reference to risk management, the Group has a centralised risk management function, while

delegating identification, monitoring and mitigation of the same to the functional level, also in order to

better measure the impact of each risk on business continuity, reducing the occurrence and/or limiting the

impact according to the causal factor (controllable or otherwise by the Company).

In the context of business risks, the main risks identified, monitored and managed by the company are the

following:

risks depending on exogenous variables;

risk linked to competitiveness;

risks related to demand/macroeconomic cycle;

risk linked to financial management;

risks associated with the activation of partnerships.

Risks depending on exogenous variables

The Group operates at an international level, and is therefore exposed to risk arising from the fluctuation

of foreign currency exchange rates with which the Group operates, especially as regards the Kazakh

Tenge, Armenian Dram, Rouble and USD. Currency risk derives from future business transactions, assets

and liabilities recorded in the financial statements. The management policy stipulates that the Group will

manage its exposure to currency risk by sometimes hedging its net foreign currency position. The approach

is to cover the expected cash flows in the main currency of the Group’s operations, in Euro.

The Group is exposed to Country risk by operating in “emerging” markets and countries; the continuous

29


monitoring of local situations of reference and the continuous presence of managerial staff trained in Renco

S.p.A. allows constant monitoring of the situation. In any case, the exposure to this risk can be defined as

limited because it in any case refers to countries in a condition of sufficient political stability since many

years and whose ratings have recorded constant improvements over the years. This diversification of

markets in which the Group operates represents a precise strategy to limit risk.

Risk linked to competitiveness

The Group operates on open, unregulated markets, not protected by any tariff barriers, administered

regimes or public concessions, excluding the photovoltaic business partially linked to the existence of

incentive policies promoted by local governments. The markets are highly competitive in terms of product

and service quality, innovation, price competitiveness, reliability and customer service.

On certain markets and services, the Group is faced with very fierce competitors, some of which are large

operators and may have superior resources or cost positions, both due to economies of scale and to more

competitive factor costs, allowing them to be able to implement very aggressive pricing policies.

The success of the Group’s activities will depend on its ability to focus its efforts on specific industrial

sectors, focusing on the solution of technological problems and on customer service, so as to provide a

higher value to the customer in the market niches in which it competes.

Risks related to the evolution of the general economic scenario

The performance of the sector in which the Group operates is related to the general economic situation

and therefore any negative economic or recession periods may result in a consequent reduction in the

demand for the products and services provided.

The Group operates through its subsidiary companies in many international markets, such as in particular

Africa, the Middle East, CIS countries as well as in European countries; this widespread geographical

presence allows the Group as a whole to mitigate the effects of the recession, which has mainly affected

the countries of the Eurozone and Italy. Diversification of the markets in which the Group operates and of

the products and services that the Group offers mitigates and decreases its exposure to cyclical trends in

certain markets; nevertheless, it is not possible to exclude that these cyclical trends may have a significant

impact on the business and economic and financial situation of the Group.

Risk linked to financial management

The Group has a financial situation characterised by the presence of a controlled current financial

indebtedness, in line with the growth in the volume of activity produced. This determines the presence of

a positive net working capital without any sign of financial difficulties.

In exercising its activity, the Group is exposed to various financial or similar risks (liquidity, exchange rate,

interest and credit).

Regarding the information required by art. 2428 of the Italian Civil Code par. 3 point 6 bis, the following is

specified.

30


Liquidity risk

As of 31 December 2018, the Group had total bank credit facilities granted for approximately 210.9 million

Euros (192.8 million Euros in 2017), of which 66.9 million Euros in the short term (60.9 million Euros in 2017)

and 144 million Euros in the medium and long term (131.9 million Euros in 2017), and pursues a policy of

careful management of liquidity risk.

At the Group level, the correct and timely planning of short-term cash flows guarantees the ability to meet

future financial commitments, through the availability of funds generated by current assets and through

the use of an adequate amount of committed credit lines.

The bank credit facilities currently granted to the Group and the cash and cash equivalents and liquidity

generated by ordinary activities are therefore deemed to be adequate and such as to be able to meet

obligations in a timely manner on the due dates.

Liquidity is managed by the company through the use of short-term or easily disposable assets.

Exchange rate risk

The Group operates at an international level, and is therefore exposed to risk arising from the fluctuation of

foreign currency exchange rates with which the Group operates, especially as regards the Kazakh Tenge,

Armenian Dram, Ruble and USD. The policy adopted by the Group is based on a correct assessment of

foreign exchange risks, deriving from future commercial and financial transactions in currencies other than

the Euro, and is aimed at stabilizing the flows expected in Euros through the use of derivative instruments

and forward contracts. To this end, USD/Euro exchange rate option contracts have been stipulated to

hedge future cash flows relating to the payment of capital for the Power Plant Armenia project, capital

that will be paid in USD. These contracts in 2018 allowed stabilisation of the USD exchange rate, bringing

a financial benefit of approx. 307 thousand Euros.

On the basis of the financial statements for the year ended on 31 December 2018, the Group recorded

losses on exchange rates for a total of 2.3 million Euros.

These consist mainly of unrealised exchange rate losses resulting from the conversion of intercompany

trade receivables or payables denominated in foreign currency (transaction risk).

Finally, the Group, through its currency current accounts, hedges against the risk of fluctuations in exchange

rates with certain foreign currencies with a natural hedging approach.

Credit risk

The Group’s credit risk is mainly attributable to the amount of trade receivables from its customers, which

mainly include large oil companies, international operators and institutions.

The credit management functions establish the quality of the customer, considering its financial position,

past experience and other factors. In any case, the high standing of the commercial counterparties with

which Renco operates determines a credit risk for customer exposure of limited amount.

Provisions for credit depreciation by Group companies accurately reflect the actual risk on receivables

through the targeted quantification of the provision.

31


As a result of the current economic situation, the Group has improved its risk on receivables control

through the strengthening of monitoring and reporting procedures, in order to promptly identify potential

countermeasures in the event of identified causes. In order to control the risk on receivables, methods for

monitoring and controlling the former have been defined along with the definition of strategies to reduce

credit exposure, among which is a solvency analysis of customers being acquired and the management of

legal disputes of receivables for services rendered.

Interest rate risk

The interest rate risk refers to the potential effects on the income statement that may result from any

fluctuations in interest rates on Group loans.

The amount of debt of the company at variable rates not hedged by the interest rate risk represents the

main risk element for the negative impact resulting from an increase in market interest rates. The interest

rate risk to which the company is exposed mainly derives from medium/long-term financial payables.

The Renco Group’s policy to manage this risk aims to achieve a properly balanced debt structure in order

to, on the one hand, reduce the amount of financial debt subject to variable rates and, on the other, at the

same time limit the cost of the loan.

With regard to medium and long-term loans, the company has Interest Rate Swaps and Interest Rate Caps

in place at 31 December 2018 with financial counterparties of primary standing for a total of 46.4 million

Euros of notional amount. Such derivative instruments allow for coverage of the risk of increased interest

rates by transforming variable rates into fixed rates.

32


At 31 December 2018, at Group level, 71.6% of medium/long-term gross debt with third parties was at a

fixed rate (81% in 2017), while 28.4% at a variable rate (19% in 2017).

Risks associated with the activation of partnerships.

The increasing complexity of the works implemented and/or conditions of opportunities for sharing risks

make recourse to models for the management of certain investments and projects in partnership with

other operators in the sector in question increasingly frequent. This approach facilitates entry into new

countries and/or sectors but, at the same time, determines potential risks and complexities related to

cultural and organisational integration with partners which, in the worst case scenario, could even lead to a

discrepancy between the vision of the Group and that of the partnership. There are also further problems

related to the exposure to the economic-financial situations of the partners. The management of this type

of risk is guaranteed through an effective assignment of roles and responsibilities within the individual

strategic initiatives, as well as a correct application of the process of defining and subsequently managing

contracts and any shareholders’ agreements.

NOTICE AS PER ART. 2428 NO. 6 BIS

The Group has no investments in significant financial assets.

COMPANY OBJECTIVES AND POLICIES CONCERNING FINANCIAL RISK MANAGEMENT

The Group pursues the objective of containing financial risks also through hedging transactions with

derivatives and by means of a control system managed by the Administrative Department.

The corporate policy for hedging financial risks consists of hedging exchange risks on purchases and

sales through the stipulation of derivative financial instruments without speculative purposes; of hedging

credit risks through the periodic verification of the reliability of customers and insurance programs for

guaranteeing trade receivables.

This includes the stipulation by Group companies of insurance policies with SACE to protect the loans

disbursed (and to be disbursed) to Mozambican subsidiary companies.

With reference to debt towards the banking system, fluctuations in interest rates affect the market value

of the Group’s financial assets and liabilities and net financial charges. The Group’s policy is to seek to

maintain a ratio between fixed and variable rate exposure such as to minimise the risk deriving from the

fluctuation in interest rates without renouncing to exploit the particularly favourable economic situation

in terms of low interest rates. In order to maintain this balance, the Group has entered into derivative

contracts, typically interest rate swaps and interest rate caps.

33


COMPANY RISK EXPOSURE

Price risk

Since the Group’s production processes are mainly linked to high value-added services, engineering and

assembly activities, exposure to energy price fluctuations is very limited.

The Group is exposed to changes in the price of basic raw materials (such as oil, minerals, etc.) to an

insignificant extent, given that the product cost component linked to these materials is very limited.

Credit risk

Credit risk derives from cash and cash equivalents, derivative financial instruments and deposits with banks

and financial institutions, as well as from customer exposure, which includes outstanding receivables and

planned transactions. Precise policies have been put in place in order to limit the extent of credit exposure

to any bank. Please refer to that stated previously for a detailed description of credit risk management.

34


Liquidity risk

The Group’s policy is to carefully manage its treasury, through the implementation of income and expense

planning tools. The Group expects to maintain an adequate capacity to meet the financial resources

required for planned investments and to manage operations. Credit lines and cash and cash equivalents

are adequate with respect to the Company’s operations and growth forecasts.

Please refer to that stated previously for a detailed description of credit risk management.

RESEARCH AND DEVELOPMENT ACTIVITIES

During 2018 there was a significant development of IT activities following the implementation of Oracle

JDEdwards in smaller Italian companies (Renco Capital, Joint Green, Renco Health Care, Renco Real Estate,

Arengest and Italsec) and in the foreign subsidiary companies of Armenia (Renco Armestate, Piazza

Grande, Italsec Armenia, Armenia Gestioni, Nuovo Velodromo and Armpower) and Kazakhstan (Renco

Property and Renco Kat), which went live on 1 January 2019. The adoption of the Oracle management

system will continue in 2019 for the Mozambican companies and this will mean that the main companies

of the Group will have a single, uniform system, with consequent improvements in terms of timeliness and

accuracy in data analysis and reporting.

At the same time, interfaces were developed between the management suites of the owned hotels in

Kazakhstan (3 hotels) and Italy (1 hotel) and Oracle JDE to allow the automation of invoicing and

management of food & beverage stocks.

The research project, in collaboration between the Company and Alma Mater Studiorum - University of

Bologna continues with the identification of innovative membrane processes for the separation of acid

compounds from natural gas. Further results of the research activities carried out have been published

in scientific journals of international importance and the experimental test facility was developed for

hydrogen sulphide tests.

Finally, during the year Renco S.p.A. achieved GDPR compliance and ISO/IEC 27001:2013 certification on

information system security, reaching an international standard of excellence.

At the end of the year the company also renewed the company’s data centre, equipping itself with

technologically advanced equipment based on Netapp hyperconvergence and Cisco solutions that

guarantee the company’s IT performance over the next five years.

TRANSACTIONS WITH SUBSIDIARY, ASSOCIATED, PARENT AND PARTNER COMPANIES

With regard to transactions with related parties and in particular the transactions with associated and

partner companies, please refer to the detailed table included in the specific paragraph of the Explanatory

Notes.

Transactions with associated and partner companies, which do not include any atypical and/or unusual

operations, are regulated at normal market conditions.

35


TREASURY SHARES AND SHARES/STOCKS IN PARENT COMPANIES

In compliance with points 3) and 4), par. 2, art. 2428 of the Italian Civil Code, we provide an appropriate

summary table of the data relating to treasury shares held by the parent company Renco Group S.p.A.,

highlighting the changes during the year and we inform that the Company did not hold any shares or

stocks of parent companies during the year.

DESCRIPTION

NO. OF SHARES HELD AT THE BEGINNING OF

THE YEAR

NO. OF NEW SHARES SOLD/CANCELLED DU-

RING THE YEAR

NO. OF NEW SHARES SUBSCRIBED DURING

THE YEAR

NOMINAL VALUE OF NEW SHARES SUBSCRI-BED DURING THE YEAR

SHARES:

- treasury shares 36,050

Total 36,050

With reference to treasury shares recognised as a reduction in equity, it should be noted that these were

purchased in part in 2010 and in part in 2012. As of 31.12.2018 the Parent Company held 36.050 shares equal

to a nominal 360,500 representing 4% of its share capital; the percentage share held respects the legal

constraints set forth by articles 2357 and 2357-bis of the Code.

FORESEEABLE BUSINESS OUTLOOK

In 2018 the Renco Group consolidated its growth in value of production, reaching production of 243 million

Euros compared to 248 million Euros in 2017 and 187 million Euros in 2016.

The Group’s margin is also an important element of the financial year. With regard to the value of production

from third parties, EBITDA rose from 14% in 2017 to 17% in 2018, confirming the Group’s ability to generate

a significant margin.

The growth in margins is linked to commercial, industrial and organisational choices that the group has

made in recent years. First of all, the decision to participate only in tenders that by geographical area, type

of activity and technology required allow the group to be competitive in a manner that is not exclusively

attributable to the lowest price. A further action aimed at improving margins involves a commercial

commitment to acquire O&M contracts (Operation and Maintenance). From an internal point of view,

the process of strengthening the company’s management team, especially with respect to its technical

structure, has enabled us to tackle highly complex orders with greater capacity than in the past.

Margin growth was also supported by the establishment of the PMO (Project Management Office)

organisational unit, the decision to equip all the Group’s operating companies with a powerful ERP (ORACLE

JDE), but also by the strategic choices made in recent years aimed at fuelling the growth of the Asset

Management division through major investments and that of the other divisions (Services, Infrastructures

and Industrial Plants), through a focus on niche markets with higher margins.

36


As planned, in 2018 production growth continued for the Services and Asset Management divisions, which,

thanks to their recurring business, contribute to stabilising the economic and cash volumes of the other

divisions, which by their nature are more subject to changes in the Oil&Gas market and to the risks typical

of the order execution phase.

The decrease in the value of production of the Infrastructure division, which amounted to 36 million

Euros compared to 70.6 million Euros in 2017, is due to the completion of the important contract for the

construction of the TCO field, commenced and completed in 2017, and should be read in the light of the

Group’s strategy that sees an increasing selection of orders and markets to operate in.

The Group’s excellent result in the 2018 financial year acquires even greater value in the light of certain

exogenous elements that occurred during the same financial year. Due to the complex Italian political

situation, the delay in the launch of the TAP Italia project increased in 2018, contributing less to the value

of production than planned. In Armenia, again for political reasons, the Velvet Revolution that took place

in the spring of 2018 led to the postponement of the Yerevan power plant project, with the consequent

postponement of the value of production planned for 2018 to subsequent years and an increase in the

project development costs.

These factors, while negatively affecting the 2018 financial year, contributed to increasing the Group’s

portfolio, which boasts a total volume of work acquired and still to be produced of 576.1 million Euros,

to which should be added the annual turnover of the Asset Management division estimated at 59 million

Euros for the 2019 financial year. The size of the order book and its quality in terms of expected margins

guarantee the Group’s growth and sustainability in the coming years.

37


Mozambique will play a particularly important role in the Group’s future development. Indeed, our company

has been present in the country since 2010. In Mozambique, Renco has made important investments like

the Mecufi resort and the Pemba office building, now leased to important companies like Anadarko, Eni

and the National Hydrocarbons Agency of Mozambique. As is well known, there will be huge investments

in this country linked to the exploitation of gas deposits and the construction of liquefaction plants.

Renco’s presence in the country and the establishment of a number of local companies in possession of all

the necessary licences represent an undoubted competitive advantage for the near future.

Renco’s presence in the country was recognised by the National Hydrocarbons Authority, which awarded

it the assignment to prepare the City Gas master plan. City gas will be the city hosting the staff, services

and industrial activities supporting the gas liquefaction facilities.

Investment in real estate assets designed to increase the Group’s current assets, which include more than

280,000 m2 of owned structures, remains one of the elements characterising the growth strategy for 2018.

Investments made in 2018 amounted to 20 million Euros. The budget of the investments planned for the

following years boasts a portfolio of initiatives amounting to 63.6 million Euros (of which 9.8 million Euros

planned for the year 2019, in addition to the project of the power plant in Armenia under implementation).

From a financial point of view, despite the important investment plan carried out during the year, the

Group closed with an NFP of 39.6 million Euros and maintained the financial performance indicators at

the excellent levels of 2017, corroborating the expertise gained in previous years in the management of

internal processes that impact the cash flow of the core business.

The ever-increasing organisational complexity of the Group due to the simultaneous operations in several

countries with all its divisions has led to the emergence of the need to start a process of corporate

reorganisation in 2018, aimed at rationalising and simplifying the Group’s corporate structure. The objective

is to group together the companies that hold and manage real estate assets in a single vehicle under the

direct control and coordination of the holding company Renco Group S.p.A., separating them from Renco

S.p.A..

This new organisational structure, which will separate the industrial branch of the company from the

branch that owns and manages the properties, will provide the group with greater transparency and clarity

towards the outside, making the group’s financial structure more efficient and laying the foundations for

attracting new capital.

ACTIVITIES PURSUANT TO LEGISLATIVE DECREE 231/01

In 2018, the Supervisory Body monitored the updating of the adopted Model, proceeding with constant

verification of the company’s activities and ascertaining the absence of any violations of and compliance

with the Organisational Model adopted by the subsidiary Renco S.p.A..

Pesaro, Italy, 20 April 2019

On behalf of the Board of Directors

The Chairman

Giovanni Gasparini

FINANCIAL STATEMENT

40

CONSOLIDATED STATEMENT OF CASH FLOWS AS OF 31/12/2018 ⏐ Renco Group Spa

CONSOLIDATED FINANCIAL STATEMENTS AS OF 31/12/2018(Balances in thousands of Euros)

BALANCE SHEET ASSETS 31/12/2018 31/12/2017

A) Receivables due from shareholders for payments still due

I) Receivables due from shareholders for payments still due - -

II) (of which already called) - -

B) Fixed assets

I) Intangible fixed assets

1) Start-up and expansion costs 9 46

2) Development costs - -

3) Industrial patents and intellectual property rights 2,063 2,365

4) Concessions, licences, trademarks and similar rights 78 49

5) Goodwill - -

6) Assets under construction and advances 767 -

7) Other 710 896

3,627 3,355

II) Tangible fixed assets

1) Land and buildings 183,629 153,420

2) Plants and machinery 2,667 2,484

3) Industrial and commercial equipment 5,928 6,751

4) Other assets 5,022 6,428

5) Assets under construction and advances 16,344 39,163

213,590 208,246

III) Financial fixed assets

1) Equity investments in:

a) Subsidiary companies 1,596 65

b) Associated companies 1,341 1,305

d bis) Other companies 53 23

2,989 1,393

2) Receivables

a) Due from subsidiary companies 4,882 3,187

1) Due within 12 months 4,882 3,187

b) Due from associated companies 21,306 13,490

1) Due within 12 months 567 -

2) Beyond 12 months 20,739 13,490

c) from parent companies - -

d) from companies subject to the control of parent companies - -

d-bis) from others 1,591 1,068

1) Due within 12 months 381 37

2) Beyond 12 months 1,210 1,031

27,780 17,744

3) Other securities - -

4) Derivative financial asset instruments 814 70

31,583 19,207

Total fixed assets 248,800 204,227

41

Renco Group Spa ⏐ CONSOLIDATED STATEMENT OF CASH FLOWS AS OF 31/12/2018

C) Current assets

I) Inventories

1) Raw and ancillary materials and consumables 4,059 6,896

2) Products under construction and semi-finished products 229 658

3) Contract work in progress 206,851 252,200

4) Finished products and goods 8,456 8,445

5) Advances 843 861

220,438 269,060

II) Receivables

1) Trade receivables 50,541 25,922


2) Due from unconsolidated subsidiary companies 7,534 1,668


3) Amounts due from associated companies 2,877 8,520


2) Beyond 12 months - 5,825

4) From parent companies - -

5) From companies subject to the control of parent companies - -

5-bis) Tax receivables 22,172 18,021


2) Beyond 12 months 834 1,703

5-ter) Prepaid tax 7,184 6,979

5-quater) from others 14,360 15,173


2) Beyond 12 months 8,168 8,385

104,668 76,283

III) Financial assets not classified as fixed assets

6) Other securities 52 136

52 136

IV) Cash and cash equivalents

1) Bank and post office deposits 72,194 91,009

3) Cash and equivalents in hand 283 351

72,478 91,360

Total Current assets 397,635 463,420

D) Accruals and deferrals 3,128 4,330

Total Assets 649,564 671,977

BALANCE SHEET ASSETS 31/12/2018 31/12/2017

42


BALANCE SHEET - LIABILITIES 31/12/2018 31/12/2017

A) Shareholders’ equity

I) Share capital 9,013 9,013

II) Share premium reserve 25,988 25,988

III) Revaluation reserves 4,696 4,802

IV) Legal reserve 1,281 1,168

V) Statutory reserves - -

VI) Other reserves 25,595 23,266

VII) Reserve for hedging operations for expected financial flows 398 (591)

VIII) Retained earnings (accumulated losses) 86,963 87,544

IX) Profit (loss) for the year 8,755 707

X) Negative reserve for own shares held in portfolio (3,609) (3,609)

Total Group Shareholders’ equity 159,078 148,286

Minority interest

Minority interests in capital and reserves 4,218 3,326

Income (Loss) pertaining to minority shareholders (2,655) 798

Total Minority Shareholders’ equity 1,563 4,124

Total Consolidated Shareholders’ equity 160,641 152,410

B) Provisions for risks and charges

1) Provision for pensions and similar obligations - -

2) Provisions for taxes, including deferred taxes 13,457 14,102

3) Derivative financial liability instruments

4) Others 7,183 1,377

20,919 16,291

C) Employee severance indemnity 2,411 2,009

D) Payables

1) Bonds 44,368 44,214

2) Beyond 12 months 44,368 44,214

2) Convertible bonds - -

3) Payables to shareholders for loans 6,201 6,426


4) Payables to banks 93,670 92,787


2) Beyond 12 months 49,569 61,999

43


5) Payables to other lenders 1,665 1,480

1) Due within 12 months 60 50

2) Beyond 12 months 1,605 1,430

6) Advances 230,260 250,166


2) Beyond 12 months 211,927 118,918

7) Trade payables 61,483 79,425


2) Beyond 12 months - 182

8) Payables represented by credit instruments - -

9) Payables to subsidiary companies 1,925 38

1) Due within 12 months 1,925 38

10) Payables to associated companies 2,126 1,732


11) Payables to parent companies - -

11 bis) Payables to companies subject to the control of parent companies - -

12) Tax payables 6,871 5,986


13) Payables to social security and welfare institutions 1,759 1,486


14) Other payables 13,833 14,884


2) Beyond 12 months 2,958 3,024

464,160 498,622

E) Accruals and deferrals 1,432 2,646

Total Liabilities 649,564 671,977

BALANCE SHEET - LIABILITIES 31/12/2018 31/12/2017

44


INCOME STATEMENT 31/12/2018 31/12/2017

A) Value of production

1) Revenues from sales and services 253,639 254,954

2) Change in inventories of products currently being manufactured, semi-worked products and finished products

(451) 52

3) Changes in contract work in progress (44,443) (28,059)

4) Increases in fixed assets for in-house works 19,999 17,593

5) Other revenues and income, with separate indication of operating grants

a) Various items 14,538 3,679

b) Operating grants - -

Total Value of production 243,282 248,219

B) Cost of production

6) Raw, ancillary and consumable materials and goods for resale 61,203 83,395

7) For services 76,765 67,263

8) For use of third party assets 4,589 5,313

9) Personnel 56,476 56,535

a) Wages and salaries 46,206 46,451

b) Social security contributions 8,311 8,024

c) Severance indemnity 1,372 1,472

d) Pensions and similar commitments - -

e) Other costs 588 588

10) Amortisation/depreciation and write-downs 11,745 8,824

a) Depreciation of intangible fixed assets 705 675

b) Depreciation of tangible fixed assets 9,323 7,728

c) Other write-downs of fixed assets 248 -

d) Impairment of receivables including in current assets and cash and cash equivalents 1,469 421

11) Changes in inventories of raw, ancillary materials, consumables and goods 2,254 259

12) Provision for risks 199 876

13) Other provisions 1,300 -

14) Other operating expenses 3,534 2,467

Total cost of production 218,066 224,931

Difference between value and cost of production (A-B) 25,216 23,288

C) Financial income and charges

15) Income from equity investments 4 -

a) From subsidiary companies 4 -

b) From associated companies - -

c) From parent companies - -

d) From companies subject to the control of parent companies - -

e) Others - -

16) Other financial income 622 211

a) from receivables recorded as fixed assets - -

1) From subsidiary companies - -

2) From associated companies - -



5) Others - -

45


b) From securities included under fixed assets not comprising equity investments - -

c) From securities included under current assets not comprising equity investments

- -

d) Income other than the above 622 211

1) From subsidiary companies 16 -

2) From associated companies 143 -



5) Others 463 211

17) Interest and other financial charges 6,652 4,541

a) Due from subsidiary companies - -

b) Due from associated companies - -

c) Due from parent companies - -

d) Due from companies subject to the control of parent companies - -

e) Others 6,652 4,541

17 bis) Exchange losses and gains (2,280) (7,341)

Total financial income and expense (8,305) (11,671)

D) Value adjustment to financial assets and liabilities

18) Revaluations 36 49

a) Of equity interests 36 49

b) Of financial fixed assets (not comprising equity investments) - 274

c) Of securities included under current assets (not comprising equity investments) - -

d) Of derivative financial instruments - -

e) Of financial assets for centralised cash management - -

19) Write-downs 4,868 652

a) Of equity interests 4,667 497

b) Of financial fixed assets 101 -

c) Of securities included under current assets (not comprising equity investments) 84 138

d) Of derivative financial instruments 16 16

e) Of financial assets for centralised cash management - -

Total value adjustments to financial assets (4,832) (329)

Pre-tax profit/loss (A-B+C+D) 12,078 11,289

20) Income taxes for the year, current, deferred and prepaid

a) Current taxes 5,970 10,087

b) Prior year taxation 2,605 66

c) Deferred and prepaid taxes (1,794) 148

d) income (expense) from compliance with the tax consolidation / tax transparency regime

803 (517)

Profit (Loss) for the year 6,100 1,504

Profit (loss) for the year relating to the Group 8,755 707

Profit (loss) for the year relating to minority interests (2,655) 798

The Chairman of the Board of Directors

Giovanni Gasparini

INCOME STATEMENT 31/12/2018 31/12/2017

46


CONSOLIDATED CASH FLOW STATEMENTIndirect method as of (values expressed in thousands of Euros)

31/12/2018 31/12/2017

A. Cash flow from operating activities (indirect method)

Income (loss) for the year 6,100 1,504

Income taxes 5,979 9,784

Interest expense / (interest income) 6,029 4,330

Value adjustments to financial assets 472 354

Write-downs for impairment losses 248 -

(Gains)/losses from the sale of assets (11,640) (397)

1. Profit (loss) before income tax, interest, dividends and capital gains/losses on disposals 7,188 15,575

Adjustments for non-monetary items not offset in net working capital

Allocations to provisions 9,788 3,204

Depreciation of fixed assets 10,028 8,403

Adjustments to the value of derivative financial instruments 28 18

Other upward or downwards adjustments for non-monetary elements (1,639) 11,379

2. Cash flow before changes in NWC 18,205 23,004

Changes to net working capital

Decrease/(increase) in inventories 28,676 (10,537)

Decrease/(increase) in trade receivables (14,423) 10,120

Increase/(decrease) in trade payables (16,185) 21,516

Increase/(decrease) in accrued income and prepaid expenses 1,206 (1,265)

Increase/(decrease) in accrued liabilities and deferred income (2,338) (785)

Other changes in net working capital (4,958) 2,020

3. Cash flow after changes in NWC (8,022) 21,069

Other adjustments

Interest collected/(paid) (4,909) (3,881)

(Income tax paid) (7,608) (4,409)

(Use of provisions) (3,540) (1,035)

4. Financial flow after other adjustments (16,056) (9,324)

Cash flow generated by income management (A) 1,315 50,324

B. Cash flow from investment activities

Tangible fixed assets

(Investments) (22,754) (37,887)

Disposals 103 1,231

47


Intangible fixed assets

(Investments) (998) (866)

Disposals

Financial fixed assets

(Investments) (6,186) (3,941)

Disposals 1,028 1,736

Total non-current financial assets

(Acquisition of business units, net of cash and cash equivalents) (870)

Sale of business units, net of cash and cash equivalents 6,828 -

Cash flow from investment activities (B) (22,849) (39,727)

C. Cash flow from financing activities

Minority interest means

Increase (decrease) in payables to banks 5,132 (11,906)

Loans taken out 10,417 15,465

Loans repaid (14,667) (12,601)

Repayment of loans to shareholders (225) (651)

Increase (decrease) in payables to bond holders 154 34,214

Increase (decrease) in payables to other lenders (466) 1,023

Own resources

Dividends paid (19) (19)

Change in reserve for translation differences 2,325 (5,412)

Cash flow from financing activities (C) 2,651 20,112

Increase (decrease) of cash and cash equivalents (A ± B ± C) (18,883) 30,710

Cash and cash equivalents at beginning of year 91,361 60,651

Cash and cash equivalents at end of year 72,478 91,361

As shown in the cash flow statement, prepared using the indirect method, there was a decrease in liquidity

of 18,883 thousand Euros during the year. The main changes in the cash flow statement are shown below.

Change in trade receivables, inventories, trade payables - This item includes the cash absorption or cash

generation relating to net working capital, therefore changes in trade receivables, inventories and trade

payables. It should be noted that changes in inventories refer to the item in question and include change

in advances, and recorded an increase of 28.6 million Euros. The change in inventories and advances

is directly linked to the life cycle of orders, for the analysis of which reference should be made to the

paragraph “Inventories” of these explanatory notes.

31/12/2018 31/12/2017

48


Other changes in net working capital - This item includes the change in all other assets and liabilities

both current and non-current, net of the effects produced in the same by the allocations of non-monetary

charges or income, i.e. the change that had a direct effect on cash absorption or generation.

Disbursements for investments in tangible fixed assets and collections for disinvestments in tangible

fixed assets - For detailed information on the cash flow for investments in tangible fixed assets please refer

to the paragraph “Tangible fixed assets” in these explanatory notes.

Disbursements for investments in intangible assets - The cash flow for investments in intangible assets is

related to the investments made in the new Oracle JDE ERP system.

Collections for disinvestments in financial fixed assets and Disbursements for financial fixed assets -

For a precise representation of the cash flow for disinvestments and investments in financial fixed assets

please refer to the paragraph “Financial fixed assets” in these explanatory notes.

Increase/(decrease) in payables to banks - This item includes the change in payables due to banks, which

during the period underwent a positive change of 0.8 million Euros due to taking out new loans for the

amount of 10.4 million Euros and the repayment of loans for the amount of 14.7 million Euros.

49


Disposal of business units net of cash and cash equivalents - This item mainly includes the consideration

received during the year for the sale of the investee Hotel Yerevan (equal to 5 million Euros) net of cash

and cash equivalents sold (equal to 62 thousand Euros). In compliance with OIC 17, the book values of the

related assets/liabilities sold are shown below:

HOTEL YEREVAN

Fixed assets 9,755 Shareholders’ Equity 6,754

Receivables and Inventories 340 Deferred tax provision 969

Cash and cash equivalents 62 Payables 2,434

Total Assets 10,157 Total Liabilities 10,157

The Chairman of the Board of Directors

Giovanni Gasparini

EXPLANATORY NOTESTO THE CONSOLIDATED FINANCIAL

STATEMENTS AS OF 31/12/2018

52


53

Renco Group Spa ⏐ EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF 31/12/2018

FOREWORD

Dear Shareholders,

These consolidated financial statements, submitted for your examination, show a period profit of 6,100

thousand Euros.

ACTIVITIES CARRIED OUT AND SIGNIFICANT EVENTS REGARDING THE GROUP

The “Renco Group”, of which Renco Group S.p.A. is the parent company, is an important Italian company

in the industrial plant engineering sector and in the general contracting area. The Group operates various

lines of business, which include the Energy Division, Construction division, Asset Management division and

Services division.

PREPARATION CRITERIA

These consolidated financial statements consisting of balance sheet, income statement, cash flow statement

and explanatory notes have been prepared in accordance with Art. 29 of Italian Legislative Decree 127/91

as emerges from these explanatory notes, drawn up in accordance with Art. 38 of the same decree. Where

necessary, the accounting standards issued by the OIC (Italian Accounting Body) have been applied in the

most recent version and, where these are lacking, the accounting standards recommended by IASC and

incorporated by CONSOB.

The presentation currency of the financial statements is the Euro. The balances are expressed in thousands

of Euros, unless specifically stated otherwise. It should also be noted that any differences found in certain

tables are due to the rounding of the values expressed in thousands of Euros.

The consolidated financial statements show the figures from the previous year for comparison, in

parentheses.

The criteria used in the preparation and valuation of the financial statements as of 31.12.2018 take into

account the changes introduced into national law by Legislative Decree 139/2015, which from 2016

implemented Directive 2013/34/EU. As a result of Legislative Decree 139/2015 the OIC national accounting

standards were amended.

With these explanatory notes we highlight the data and disclosures provided by Art. 38 of the same

decree, therefore the Financial Statements consist of the following documents:

Balance Sheet

Income Statement

Cash Flow Statement

Explanatory Notes

In addition to the schedules provided for by law, the statement reconciling the net profit and shareholders’

equity of the consolidating company with the respective values resulting from the consolidated financial

statements is presented.

54

EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF 31/12/2018 ⏐ Renco Group Spa

SCOPE AND METHODS OF CONSOLIDATION AND SIGNIFICANT EVENTS DURING THE YEAR

The consolidated financial statements originate from the financial statements of @X005001RENCO GROUP

S.P.A.@X005001End (Parent Company) and of the Companies in which the Parent Company directly or

indirectly holds the controlling interest or exercises control. The financial statements of the Companies

included in the scope of consolidation were consolidated by using the line-by-line method. The list of these

companies is shown in Annex 1.

From the previous year the following changes occurred in the Group structure:

in December 2018 Renco S.p.A. sold 100% of the shares of the company Hotel Yerevan Cjsc at a price

of 20 million Euros, generating a capital gain at a consolidated level of 11.6 million Euros, calculated

by taking into account the higher value contributed by the subsidiary in our consolidated financial

statements. The sale price was paid by the buyer for 5 million Euros at the time of the sale, while the

remaining 15 million Euros will be paid by 30 June 2019, guaranteed by a pledge benefiting Renco S.p.A.

on shares of the company Hotel Yerevan Cjsc;

in Mozambique, in order to apply for important works in the field of prefabrication and mechanical

installations for Oil&Gas, the Group decided to stipulate an exclusive commercial cooperation agreement

with the Italian company IREM S.p.A., specialised in the field of mechanical installations for Oil&Gas. For

this reason, in October Renco S.p.A. sold to Irem S.p.A. 31.25% of the share capital of the Mozambican

company Renco Costrucoes Ltd, which subsequently changed its name to Renco Irem Costrucoes

Ltd. The sale led to the recognition of a capital gain of 3 thousand Euros, as well as the loss of control

thereof;

in August, Renco Real Estate completed the acquisition of 100% of the share capital of Villa Soligo S.r.l.,

a company operating in the Italian hotel sector and owner of the Hotel Villa Soligo in Farra di Soligo

(Treviso), a historic residence built in 1782. Villa Soligo is a 4-star hotel with a neoclassical structure in

Palladian style and consists of 35 rooms, restaurant, swimming pool and park. The property is located in

an urban setting in the heart of the Prosecco area, which has applied to be named as a UNESCO World

Heritage Site. In return for the investment, the amount of which is supported by a specific appraisal,

Renco Real Estate recorded payables to the sellers of Villa Soligo for 1,076 thousand Euros as a residual

part of the agreed price;

to strengthen the security services provided by Italsec, the Group has boosted its presence in the

countries it operates in. To this end, Italsec Congo, Italsec Armenia and Italsec Mozambique were

established to seek opportunities and synergies in the management of security for both Group

companies and third-party customers;

Real Moz, a company 99% owned by Renco Real Estate S.r.l. and 1% by Renco SpA, was established to

develop projects in the real estate and hotel sector in the Republic of Mozambique. In turn, Real Moz

participates for 50% of the share capital in the Niassa Sanctuary, a business that was established at the

end of 2018;

In October, the Group decided to proceed with a merger by incorporation of the companies subject to

Kazakh law, Renco Ak, with registered office in Astana, via Kosmonavtov 62, and Renco Property LLP,

with registered office in Almaty, Zenkov/Kazibek bi Str., 26/41, both 100% owned by Renco SpA. The

merger took effect on 1 January 2018 and has no effect on the consolidated financial statements;

in November, the Kazakh company Trademark Italy Ltd was set up, 50% owned by Renco SpA, which

will be responsible for the marketing of Italian-made furniture, household articles and accessories

55


and for the distribution of food and foodservice products. This was done in order to develop these

activities in Kazakhstan, taking advantage of its experience and presence in the country, by allocating

the available commercial spaces at the recently built multifunctional building in Almaty called “Ablay

Khan”. This company is not included in the scope of consolidation as it is not considered significant

from the time it was created at the end of the year and was not yet operational at 31 December 2018;

As part of the project to build a power plant in Armenia, during the year Renco S.p.A. sold 40% of its

interest in Armpower Cjsc to Siemens, the project’s technology partner, and 60% to Renco Power, an

Armenian company owned by Renco SpA;

As a result of significant events during the year, in 2018 the Group continued to implement Oracle

JDEdwards, extending it to a number of foreign subsidiary companies in Armenia and Kazakhstan. The

project will continue in 2019 with the companies in Mozambique, and this way Oracle will be used by

all the relevant companies of the Group. For further significant events, please refer to the explanations

given in the Management Report.

The Companies for which, due to legal or factual reasons, consolidation is irrelevant for the Group, are

excluded from the consolidation. The list is provided in Annex 3 to the explanatory notes.

It should be noted that the Armenian company Velofirma Llc as of 31.12.2018, although 53.7% indirectly

owned through Nuovo Velodromo, is not controlled by the Group on the basis of agreements with the local

partner. Among other things, the agreements provide for the gradual acquisition of the majority by the

local partner and the permanence of the Renco Group with a final shareholding of 20%.

The Companies over which joint control is exercised pursuant to art. 37 of Italian Legislative Decree 127/91

are included in the consolidation in proportion to the shareholding held. A list of these Companies is

provided in Annex 2.

56


Associated companies, over which the Parent Company exercises either directly or indirectly significant

influence and holds between 20% and 50% of the share capital are valued according to the equity method

or, in the absence of appropriate information for the correct application of this method, to the cost method

net of impairment losses. A list of these Companies is provided in Annex 3.

The other subsidiary companies excluded from consolidation pursuant to Italian Legislative Decree 127/91

are valued according to the cost method, net of impairment losses. These companies are listed in Annex 3,

with an indication of the reasons for their exclusion.

With regard to the company Ren Travel S.r.l. in liquidation, it should be noted that it was put into liquidation

on 20.12.2017 since there are no longer any business objectives that justify the continuation of the company’s

business. Liquidation has been completed. The final liquidation balance sheet as of 31.12.2018 and the

related allocation plan are currently being approved. For this reason, the company has been excluded from

the consolidation.

The Companies having a shareholding greater than 50% but with shareholders’ agreements that demonstrate

joint control, as defined in paragraph 13 of OIC 17, are recorded under Investments in associated companies

and valued using the equity method. Specifically, this is the case of the Armenian company Armpower

Cjsc where the Shareholder Agreement signed with Siemens highlights a joint governance of the company.

For the consolidation, the financial statements of the individual companies were used, already approved by

the Shareholders’ Meetings or prepared by the Boards of Directors for approval, reclassified and adjusted,

in order to standardise them with the accounting standards and presentation policies used by the Group.

CONSOLIDATION CRITERIA

The book value of the equity investment in the consolidated company is eliminated against the corresponding

fraction of shareholders’ equity. The differences resulting from the elimination are attributed to the

individual financial statement items that justify them and, the residual amount, if positive, is recognised

in an asset item called “goodwill”, unless it must be fully or partially charged to the income statement

under item B14. The amount recognised under assets is depreciated in the period provided for by the first

paragraph, point 6, of article 2426. If negative, the difference is recognised, where possible, as a deduction

from the assets recognised for values above their recoverable value and to liabilities recognised at a value

lower than their repayment value. The residual negative difference is recognised under the shareholders’

equity item “Consolidation reserve” or in the specific “Consolidation provision for future risks and charges”,

in compliance with the criterion of art. 33, paragraph 3 of Italian Legislative Decree 127/91.

The provision is used in subsequent years to reflect the assumptions made for its estimate at the time of

purchase.

The portions of shareholders’ equity pertaining to minority interest are recorded under a specific item of

the balance sheet. The portion of result pertaining to minority interest is highlighted separately on the

income statement.

Equity and economic relations between the Companies included in the scope of consolidation are

eliminated.

Gains and losses on transactions between consolidated Companies, not realised on transactions with third

parties are eliminated.

Gains and losses on transactions between group companies and relating to values included in the assets

of one of them at the closing date of the consolidated financial statements are not eliminated since they

57


are irrelevant for the purposes of a true and correct representation of the equity, financial and operating

position of the group.

Prior to consolidation entries relevant solely for taxes were eliminated and the related deferred taxes

allocated to a fund.

In the case of acquisition or loss of control of investee companies, the related effects of consolidation or

deconsolidation, respectively, are made starting from the date on which the transaction was finalised.

The conversion of the financial statements of foreign subsidiary and associated companies was carried

out using the spot exchange rate at the balance sheet date for assets and liabilities while, for income

statement items, the average exchange rate for the period was used. The net effect of the translation of the

financial statements of the investee company into the accounting currency is recognised in the “Reserve

for translation differences”.

For the conversion of financial statements expressed in foreign currencies, the rates stated in the table

below were applied:

CURRENCY EXCHANGE RATE AS OF 31.12.2017 EXCHANGE RATE AS OF 31.12.2018

AS OF 31.12. 2017 2017 AVERAGE AS OF 31.12. 2018 2018 AVERAGE

Algerian Dinar 137.83 125.31 135.49 137.65

Libyan dinar 1.63 1.57 1.60 1.61

Armenian dram 579.65 544.93 555.10 570.58

CFA franc 655.96 655.96 655.96 655.96

Lek 133.58 134.13 123.53 127.62

N. Metical 70.66 71.68 70.51 71.29

Readjustado Kwanza 198.91 187.39 353.02 297.38

Russian Ruble 69.39 65.89 79.72 74.04

Tanzanian shilling 2,683.14 2,525.56 2,630.94 2,686.24

Tenge Kazakhstan 397.96 368.63 437.52 406.91

MEASUREMENT CRITERIA

The criteria used for preparation of the consolidated financial statements as of 31.12.2018 are those used for

the financial statements of the parent company that prepares the consolidated financial statements and

are consistent with those used for the preparation of the previous years’ consolidated financial statements,

particularly with regard to measurements and continuity of said criteria.

In application of the principle of materiality, pursuant to Art. 2423, paragraph 4, of the Italian Civil Code, the

Explanatory Notes do not contain comments to financial statement items, even if specifically provided for

in Art. 2427 of the Italian Civil Code or by other provisions, in cases where the amount of such items and

the related information are irrelevant in providing a true and fair view of the equity and financial position

and operating profit of the Company and the Group.

58


The recognition and presentation of the financial statement items was performed taking into consideration

the substance of the transaction or contract.

The valuation of item lines was performed according to the general criteria of prudence and competence;

the recording and presentation of items was made taking into account the substance of the transaction or

contract, where compatible with the provisions of the Italian Civil Code and the OIC accounting standards;

More specifically, the following measurement criteria were adopted.


Intangible fixed assets have been recorded at their purchase or internal production cost, inclusive of

directly related accessory charges.

These amounts were stated net of amortisation, calculated systematically with reference to the rates

indicated below and taking their residual use into account.

DESCRIPTION RATES OR CRITERIA APPLIED

Start-up and expansion costs 20%

Industrial patents and intellectual property rights 20%

Concessions, licences, trademarks and similar rights 33.33%

Other intangible fixed assets Rates depending on the residual duration of the contract

Special treatment was reserved for investment in the new integrated Oracle - JDEdwards management

system implemented by Renco S.p.A. operational from 2017 for which a depreciation rate of 10% was used

considering a very long useful life; a choice corroborated by a market analysis on the main companies of

the international scenario that for decades have been using this ERP system, which in fact turns out to be

one of the most used.

There have been no changes in depreciation rates compared to the previous year.

If an asset suffers lasting impairment independently of the depreciation already entered, the asset will

be written down accordingly. If the reasons for the write-down no longer apply in subsequent years, the

assets’ original value will be restored, adjusted to reflect depreciation only.


Tangible assets have been recorded in the financial statements at their purchase cost or internal production

cost. This cost is inclusive of related costs, as well as directly attributable costs.

Other costs in the amount that were reasonably related to the asset were also included, incurred during

manufacturing and up to the time from which the asset may be used.

Any financial charges incurred in the acquisition or construction of capitalised assets for which a certain

period of time normally elapses to make the asset ready for use or sale, are capitalised and depreciated

over the life of the class of assets to which they refer. In this regard, during the period, 1,437 thousand Euros

were capitalised on the building in Pointe Noire (Hotel Delux) and 38 thousand Euros on the Pesaro office.

59


All other financial expenses are recognised in the income statement during the year to which they refer.

The amounts are stated net of accumulated amortisation, and calculated systematically with reference to

the rates indicated below, in relation to their remaining useful life in consideration of their use, destination,

and the economic-technical useful life of the assets.

DESCRIPTION RATES APPLIED

Buildings 3%

Plant and machinery 10%

Plant and machinery (photovoltaic systems part related to the system) 9%

Industrial and commercial equipment 12.5%

Other assets:

- Furniture and fixtures 12%

- Electronic office machines 20%

- Cars and motorcycles 25%

- Motor vehicles 20%

There were no changes in depreciation rates from the previous year.

For photovoltaic systems, being complex systems and following the accounting principle OIC 16, the

cost was broken down according to the nature of the related components (component approach) with a

different useful life. Therefore, starting from 2016, the part relating to photovoltaic systems was reclassified

from “Land and buildings” to “Plant and machinery”.

60


If an asset suffers lasting impairment independently of the depreciation already entered, the asset will

be written down accordingly. If the reasons for the write-down no longer apply in subsequent years, the

assets’ original value will be restored, adjusted to reflect depreciation only.


Financial assets consisting of investments in unconsolidated subsidiary and associated companies have

been valued according to the equity method, adjusted for the intercompany profits/losses, including

ancillary charges, or, in the absence of appropriate information for the correct application of this method, to

the cost method; the recording value in the financial statement is determined on the basis of the purchase

or subscription price or the value attributed to the assets.

Investments that are expected to be sold within one year are classified as current assets under financial

assets other than fixed assets.

Investments in other non-subsidiary and/or associated companies were recorded at their acquisition cost,

adjusted on the basis of the losses recorded by investee companies and therefore exposed to a value less

than their acquisition cost.

Receivables posted under financial fixed assets are recognised in the financial statements according to the

amortised cost criterion, taking into account the time factor and estimated realisable value. This criterion

is applied for receivables recognised from 1 January 2016, as permitted by OIC 15.

The amortised cost criterion is not applied when the effective interest rate is not significantly different

from the market interest rate or when the effects of applying this criterion are irrelevant compared to the

criterion adopted.

Inventories, securities and financial assets

Inventories, securities and financial assets not held as fixed assets are stated at the lesser purchase cost,

including any directly attributable expenses and the estimated realisable value based on market conditions.

Raw materials, ancillary materials and finished products have been recorded using the specific cost method

because they are not interchangeable and are correlated to the specific nature of the materials used in the

job orders.

Products in progress have been recorded according to the expenses incurred during the year.

Work in progress (projects of duration within the year) are recognised based on the costs incurred during

the year or on the completed contract criterion: the project revenues and margin are recognised only when

the contract is completed, i.e. when the works are completed and delivered.

Works in progress (projects of duration beyond the year) are recognised according to percentage

completion or interim payment certificate criterion: project costs, revenues and margins are recognised

according to effective progress of production activities. For the application of this criterion the cost-to-

cost method is adopted.

Any reasonably estimated losses on projects have been fully charged to the income statement in the year

in which they become known.

61


Receivables

Receivables are recognised in the financial statements according to the amortised cost criterion, taking

into account the time factor and estimated realisable value.

In the initial recognition of receivables with the amortised cost criterion, the time factor is complied with

by comparing the effective interest rate with the market interest rates. If the effective interest rate is

significantly different from the market interest rate, the latter is used to discount future cash flows deriving

from the receivable in order to determine its initial recognition value.

At the end of the financial year, the value of receivables measured at amortised cost is equal to the present

value of future cash flows discounted at the effective interest rate. In the event that the contractual rate

is a fixed rate, the effective interest rate determined at the time of initial recognition is not recalculated. If,

on the other hand, it is a floating rate based on market rates, then the future financial flows are periodically

recalculated to reflect changes in market interest rates, recalculating the effective interest rate.

The discounting of receivables was not made for receivables due within less than 12 months.

With reference to the receivables recognised in the financial statements prior to the financial year starting

from 1 January 2016, these are recognised at their presumed realisable value since, as envisaged by the

accounting standard OIC 15, it was decided not to apply the criterion of amortised cost and discounting.

The nominal value of receivables is adjusted to their estimated realisable value by means of a specific

allowance for doubtful accounts, taking into account the existence of indicators of a permanent loss. The

receivables originally collectible by the end of the year and subsequently turned into long-term receivables

have been listed under financial fixed assets in the balance sheet.

These are taken off the balance sheet when contractual rights on cash flows resulting from the receivable

are extinguished or if all risks related to the liquidated receivable have been transferred.

Securities

Securities held as fixed assets expected to remain in the Group’s portfolio until their maturity are recorded

at acquisition cost. The book value takes into account the directly chargeable related costs.

Cash and cash equivalents

The item consists of availability of cash and cash equivalents in both national and in foreign currency,

stamps and cash holdings resulting from the accounts held by the company with credit institutions, all

expressed at nominal value, specially converted into the national currency if it concerns accounts in foreign

currency.

Accruals and deferrals

Accruals and deferrals were determined on an effective accruals basis.

With regard to accrued expenses and deferred income, steps were taken to verify the retention of the

original registration; necessary changes were made where appropriate.

62


Treasury shares

Treasury shares held by the parent company in its financial statements are also recognised in the

consolidated financial statements as treasury shares of the group and follow the accounting treatment

envisaged by OIC 28.

Derivative financial instruments

Derivative financial instruments, even if incorporated into other financial instruments, were initially

recognised when the related rights and obligations were acquired; their measurement was made at fair

value both at the initial recognition date and at each financial statements closing date. The changes in fair

value compared to the previous year were recognised in the income statement; in the case of instruments

that hedge the risk of changes in the expected cash flows of another financial instrument or of a planned

transaction and in line with the requirements of OIC 32, the changes were recognised in a positive reserve

in shareholders’ equity.

Derivative financial instruments with a positive fair value were recognised in balance sheet assets. Their

classification in fixed assets or current assets depends on the nature of the instrument itself:

a derivative financial instrument hedging cash flows or the fair value of an asset follows the classification,

under current assets or fixed assets, of the asset hedged;

a derivative financial instrument hedging the cash flows and the fair value of a liability, an irrevocable

commitment or a highly probable planned transaction is classified under current assets;

a non-hedging derivative financial instrument is classified under current assets within 12 months.

Changes in the fair value of the effective component of derivative financial instruments hedging financial

assets were recognised in the reserve for hedging operations for expected financial flows.

Derivative financial instruments with negative fair value were recognised in the financial statements under

provisions for risks and charges.

Provisions for risks and charges

These were allocated to cover known or likely losses or liabilities of a determined or probable nature, the

timing and amount of which cannot be determined at year-end.

The value of these provisions is determined on the basis of the general criteria of prudence and the pro

tempore principle, and no generic provisions for risks are set up without economic justification.

Potential liabilities are stated in the financial statements and recorded in the reserves since they are

believed to be probable and the amount of the related charge can be reasonably estimated.

Employee severance indemnities (TFR)

The employee severance indemnity reflects the actual liability of the Company for each employee,

determined in accordance with existing legislation and art. 2120 of the Italian Civil Code and the collective

bargaining agreements and company agreements.

63


This liability is subject to revaluation using indices.

The provision reflects the total of the individual indemnities accrued in favour of the employees until 31

December 2006, net of any advances paid out, and is equal to that which would have to be paid to the

employees in the event of the termination of the employment contract as of that date.

The provision does not include indemnities matured as from 01 January 2007, destined to additional

pension forms in accordance with legislative decree no. 252 dated 05 December 2005 (namely transferred

to the INPS treasury fund).

Payables

These are recognised according to the amortised cost criterion, taking into account the time factor.

In the initial recognition of payables with the amortised cost criterion, the time factor is complied with by

comparing the effective interest rate with the market interest rates.

At the end of the financial year, the value of payables measured at amortised cost is equal to the present

value of future cash flows discounted at the effective interest rate.

The discounting of payables was not carried out for payables due within less than 12 months {and/or if the

effects are insignificant compared to the discounted value}.

With reference to the payables recognised in the financial statements prior to the financial year starting

from 1 January 2016, these are recognised at their nominal value since, as envisaged by the accounting

standard OIC 19, it was decided not to apply the criterion of amortised cost and discounting.

Translation of foreign currency balances

Receivables and payables originally in foreign currency are converted into Euro at the exchange rates

in force on the day on which they arose. The exchange differences arising from foreign currency debt

payments and the collection of receivables are recorded in the income statement.

As regards receivables in foreign currency existing at the year-end, these were converted into Euros at

the exchange rate of the closing date of the financial statements; gains and losses on foreign exchange

identified as such were disclosed in the financial statements under the item C.17-bis “Exchange gains/

losses”.

Property acquired and/or held through leasing contracts (so-called Leases)

Properties held under leasing, through which all the risks and benefits of ownership are substantially

transferred to the Group, are presented as Group assets and classified under property, while the

corresponding liability towards the lessor is shown under financial payables; the cost of the leasing fee

is decomposed into its components of financial charges, charged to the income statement, and capital

repayment, recognised as a reduction of the financial payable. The value of the leased asset is determined

on the basis of the fair value of the asset itself.

Capitalised leased assets are depreciated over the estimated useful life of the asset.

64


Accounting of revenues and costs

Revenues and income are recorded net of returns, discounts, allowances, as well as the taxes directly

associated with the sale of products and the provision of services.

Specifically:

revenues from services are recognised on the basis of the service itself and in accordance with the

relevant contracts. Revenues related to contract work in progress are recorded in proportion to the

progress of the work;

income from the sale of goods is recognised when ownership passes, which normally coincides with the

time of shipment or delivery of the goods;

revenues from increases in fixed assets for internal works are recognised on the basis of the cost

incurred for the construction of the fixed asset;

costs are accounted on an accruals basis;

financial income and expenses are recognised on an accruals basis.

Income taxes

Taxes are allocated on the basis of the pro tempore principle; they therefore represent:

the allocations for taxes paid or to be paid for the year, determined in accordance with current rates

and legislation in force in the individual countries;

the sum total of deferred taxes or prepaid taxes relating to timing differences which have arisen or been

cancelled during the year;

The amount of the deferred and prepaid taxes is also subject to recalculation in the event of changes in

the tax rates originally considered.

RECLASSIFICATIONS

It should be noted that during 2018 the Directors reviewed the classification in the financial statements

of the building area of Viserba and, while maintaining the same destination, consider that the land is a

tangible fixed asset and was therefore reclassified under the item “Land and buildings” of Tangible Fixed

Assets, for 26,582 thousand Euros. The land had been recorded under the item “Work in progress and

semi-finished products” as a current asset since its purchase in 2000 due to the initial prospects for the

rapid development of the investment. To date, the investment prospects have been confirmed, but given

the long period of time required to obtain authorisations and start it up, it is considered that the most

suitable classification is within fixed assets.

In order to comply with the principle of data comparability, the 2017 financial statements have been

adjusted by applying the same classification.

65


I N F O R M A T I O N O N F I N A N C I A L S T A T E M E N T I T E M S

The following is an analysis of the financial stat-ement items, in compliance with the contents of art. 2427

of the Italian Civil Code.

BALANCE SHEET ASSETS


The item consists of the following.

BALANCE SHEET ITEMS 31.12.2017

ACQUISI-TIONS

RECLASSIFI-CATIONS SALES

TRANSLA-TION DIFFE-

RENCES

AMORTISA-TION AND DE-

PRECIATION 31.12.2018

Start-up and expansion costs

46 2 - - (1) (38) 9

Industrial patent and intellectual property rights

2,365 262 (146) - 2 (420) 2,063

Concessions, licences, trademarks and similar rights

49 59 (5) - (3) (22) 78

Fixed assets under construction and advances

612 172 - (17) - 767

Other intangible assets

896 59 (21) - 1 (225) 710

Total 3,355 994 - - (18) (705) 3,627

Intangible assets also include the accounting results of the foreign permanent establishments.

Start-up and expansion costs

“Start-up and expansion costs”, equal to 9 thousand Euros, decreased during the year by 37 thousand

Euros mainly due to the amortisation for the period.

Patents and intellectual property rights

The net balance amounts to 2,063 thousand Euros (2,365 thousand Euros), and includes the rights to use

third-party software. The increase of 187 thousand Euros in the previous year relates to various investments

66


in the JDE Oracle (“Oracle”) management system, mainly made in Renco SpA, relating to compliance with

the adoption of electronic invoicing, integration with the Cosmo engineering management system and

other customised implementations, and 75 thousand Euros relating to the implementation of the Tagetik

consolidation software.

The investment in Oracle of previous years made within the scope of improvement of the administrative

structure in Group companies and to make the systems adopted in the main companies homogeneous,

and required, in addition to the use of external consultants, the use of internal resources dedicated to the

project.

Based on the option granted by the OICs, this category of intangible assets is depreciated on a straight-line

basis over a period of 5 years, with the exception of the new Oracle JDE ERP which was depreciated over

a period of 10 years, for the reasons indicated above.

Amortisation for the period amounted to 420 thousand Euros.

Concessions, licences, trademarks and similar rights

Equal to 78 thousand Euros, the item recorded an increase of 29 thousand Euros mainly due to the

capitalisations recorded during the period, of 59 thousand Euros and amortisation recognised during the

year equal to 22 thousand Euros.


The item increased by a total of 767 thousand Euros with respect to the expenses incurred for the

implementation of the Oracle management system in the Armenian and Kazakh businesses, which were

fully adopted and went live on 1 January 2019. The change is due to the capitalisation of 612 thousand

Euros incurred during the period and the reclassification of the costs incurred in 2017 by the Armenian

companies for the work carried out in Oracle on the Logistics module, which in 2017 were represented

under the item “Industrial patents and intellectual property rights” but which, in line with the go live of 1

January 2019 of the entire management program, were reflected under “Assets under construction and

advances”.

Other intangible fixed assets

The net balance amounts to 710 thousand Euros (896 thousand Euros), and mainly consists of capitalisation

of the ancillary charges for the bond issue in 2015 of the Parent Company Renco Group S.p.A. for the

amount of 177 thousand Euros (287 Euros at 31 December 2017) and of capitalisation of the transaction

and procedural costs for the medium-long term bank loans prior to 2016 of Renco S.p.A amounting to 279

thousand (316 thousand Euros as of 31 December 2017). The increase in the period was recorded at Renco

S.p.A. and is due to the costs incurred for the certification of ISO/IEC 27001:2013, security of information

systems. The decrease in the item is due to the depreciation for the period.

67




BALANCE SHEET ITEMS

LAND AND BUILDINGS

PLANT AND MACHINERY

INDUSTRIAL AND

COMMERCIAL EQUIPMENT

OTHER ASSETS

ASSETS UNDER CONSTRUCTION AND ADVANCES TOTAL

Balance as of 31.12.2017 153,420 2,484 6,751 6,428 39,163 208,246

Acquisitions for the year 6,083 332 988 1,526 17,552 26,481

Change in the scope of consolidation

(9,193) (102) (1) (628) - (9,924)

Reclassifications 40,467 335 (366) (41) (40,395) -

Disposals/decreases for the year

- (39) (14) (49) (1) (103)

Amortisation/Depreciation in the year

(5,624) (313) (1,402) (1,984) - (9,323)

Write-downs (248) - - - - (248)

Translation differences (1,276) (30) (28) (230) 25 (1,539)

Balance as of 31.12.2018 183,629 2,667 5,928 5,022 16,344 213,590

As specified in the paragraph “Reclassifications” to which reference should be made, the building area

of the company Residence Viserba S.r.l. has been classified under the item “Land and buildings”. On the

basis of the information available to date and the valuations made by the directors, there are no problems

relating to the recoverability of the amounts recorded considering the importance of the investment which,

despite the slowdowns, continues to be considered strategic by the Group.

Land and buildings

These amount to 183,629 thousand Euros (153,420 thousand Euros as of 31 December 2017).

The increase deriving from the acquisitions for the year amounts to 6.1 million Euros and consists of:

3.7 million Euros for the change in the scope of consolidation; in fact Villa Soligo Srl owns a 4-star hotel

and the increase refers to this property;

0.3 million Euros for the fit-out work carried out on the Palazzina Gingone in Pemba, owned by Rencotek

Lda, necessary to accommodate the tenants who will enter during 2019;

0.5 million Euros for the improvement works carried out on the Congolese structures of Pointe Noire

and Djeno;

0.4 million Euros for the works supported by Renzo Zanzibar, which involved the renovation of

the barriers protecting the beach, the finishing touches to the beach restaurant and suites and the

arrangement and securing of the poles supporting the wharf where the restaurant, bar and living area

are located;

68


1.18 million Euros for the extraordinary maintenance of the various Group structures aimed at maintaining

production activities.

In 2018, the Zanzibar government granted Renco Zanzibar Ltd a 49-year extension of the right to use the

20.84-hectare area where the Resort is located.

The increase deriving from the reclassifications made from the item “Assets under construction and

advances” to the item “Land and buildings” amounts to 40.5 Euros and consists of:

3.4 million Euros for the finalisation of the extension of the building located in Djeno in Congo, which

includes landscaping (as it was previously uncultivated), the urbanisation of the area, the construction

of the warehouses, the extension of the mechanical workshop and the fences protecting the area;

36.9 million Euros for works supported by Renco Gestion Immobiliere Sarl for the completion of the

hotel in Pointe Noire, Congo. The property is affiliated with the Hilton Worldwide Group and consists

of 121 rooms in total divided into Senior Suites, Junior Suites and Executive rooms; a multi-purpose

meeting room, a restaurant, two bars, one of which is located by the pool, a swimming pool, a gym and

a large park, as well as a fully fenced and guarded parking lot.

The decrease of 9.2 million Euros during the year reflects the deconsolidation of the Armenian company

Hotel Yerevan, located in the Armenian capital Yerevan, following the sale during the period, which resulted

in a capital gain of 11.6 million Euros, as discussed above.

The write-down of 248 thousand Euros relates to the capital gain previously allocated to the investee

company Interrenko.

The depreciation for the period amounts to 5.6 million Euros (3.9 million Euros in 2017).

In accordance with the OIC Accounting Standard No. 16, the value of the land on which the buildings exist

has been spun off and recognised separately.

69


Plant and machinery



The increases for the period equal to 332 thousand Euros are due to the purchase of machinery used to

carry out the orders or for the functionality of the structures. In particular, 152 thousand Euro refer to Renco

Property Llp, 143 thousand Euros to JV Renco Terna, 17 thousand Euros to Renco S.p.A. and 20 thousand

Euros to Villa Soligo Srl.

Industrial and commercial equipment


The increases, equal to 988 thousand Euros, are due to the purchase of equipment for the implementation

of the operational contracts under implementation by the Group. In particular, the increases refer to Renco

S.p.A. for 470 thousand Euros, Rencotek Lda for 177 thousand Euros, Renco Zanzibar for 235 thousand

Euros and 105 thousand Euros for other Group companies.


Other assets


The increase of 1,526 thousand Euros is due to the various Group companies for the purchase of furnishings

for fit-out works and technical office equipment for 564 thousand Euros, the purchase of motor vehicles

for 471 thousand Euros and other assets for a value of 491 thousand Euros.

The decrease of 628 thousand Euros refers to the deconsolidation of the Hotel Yerevan, the effects of

which were described above.

The depreciation for the period amounts to 2 million Euros (2.3 million Euros in 2017).



The increase in the item “Assets under construction” is due in part to the capitalisation of internal costs for

the implementation of investment initiatives still in progress and partly to the costs related to investment

initiatives completed during the year. In this second case the amounts were subsequently reclassified to

the asset item in question. Reclassifications amounted to 40.4 million Euros and relate to the Hotel Pointe

Noire in Congo for 36.9 million Euros and the expansion of the Djeno base in Congo for 3.6 million Euros,

investments completed in 2018.

The main increases refer to investments for the construction of the Hotel Delux in Pointe Noire in Congo for

11.8 million Euros, subsequently reclassified as completed properties as described above; 5.6 million Euros

for the construction of the new headquarters of the Renco Group on the area owned by Renco Capital S.r.l.

70


in Strada Montefeltro (Pesaro); the remaining part of 0.1 million Euros for works underway to modernise

and renovate the Group’s structures.

The investment for the new headquarters is 12 million Euros and consists of a structure that is spread over

6 levels, with an area of 7,840 m2 of offices for 352 workstations. In addition to ensuring a very high degree

of energy efficiency, the building will be powered by an important photovoltaic system and will house a

company canteen, a nursery, a gym and a laundry for the exclusive use of the group employees.

Its location near the access to the A14 motorway and its operational characteristics have been designed

to ensure greater organisational efficiency, concentrating the staff who are currently located in several

offices in the centre of Pesaro in a single building. The building is scheduled for completion in July 2019.



DESCRIPTION 31.12.2017 INCREASES DECREASES 31.12.2018

Equity investments in:

b) subsidiary companies 65 1,853 (322) 1,596

b) Associated companies 1,305 36 - 1,341

d) other companies 23 30 - 53

Receivables from:

a) subsidiary companies 3,187 2,256 (561) 4,882

b) Associated companies 13,490 8,355 (539) 21,306

d) other companies 1,068 556 (33) 1,591

Derivative asset instruments 70 744 - 814

Total 19,207 13,831 (1,455) 31,583

Equity investments

The changes which took place in equity investments are the consequence of the following:

DESCRIPTIONEQUITY INVESTMENTS INSUBSIDIARY COMPANIES

INVESTMENTS IN ASSO-CIATED COMPANIES

EQUITY INVESTMENTS IN OTHER COMPANIES

Balance as of 31.12.2017 65 1,305 23

Increases for the financial year 1,802 - 30

Translation differences 41 - -

Change in the scope of consolidation 10 - -

Revaluations during the year - 36 -

Write-downs during the year (322) - -

Balance as of 31.12.2018 1,596 1,341 53

71


Subsidiary companies that are not consolidated

The following information relating to the equity investments held directly or indirectly for subsidiary and

associated companies, is provided below (art. 2427, first paragraph, point 5 of the Italian Civil Code).

Changes in investments in non-consolidated subsidiary companies are shown in the table below:

DESCRIPTION 31/12/2017 INCREASES DECREASESEXCHANGE

EFFECTOTHER

ADJUSTMENTS 31/12/2018

CONSORZIO RENCO - LANCIA - ITER

65 - - - - 65

RENCO FOOD SRL SHARE - - - - - -

RENCO POWER CJSC SHARE 0.2 - - - 0.2 -

TRADEMARK ITALY LLP SHARE

- 0.3 - - - 0.3

REAL MOZ LTD SHARE - 4 - - - 4

ARMPOWER 0.2 1,796 - 41 (323) 1,514

ITALSEC MOZAMBICO - 2 - - - 2

REN TRAVEL SRL - - - - - 10

TOTAL 65 1,802 - 41 (323) 1,596

During the 2018 financial year, the share capital of the subsidiary Armpower Cjsc was increased by a total

of 1.7 million Euros in order to equip it with the means necessary for the construction of the Yerevan power

plant.

The other adjustments to Armpower, amounting to a negative 323 thousand Euros, derive from the

valuation of the company using the equity method, which is valued using the equity method as a result

of the shareholders’ agreements, as described in greater detail in the paragraph “Preparation criteria”, to

which reference should be made.

NAMEREGISTERED

OFFICESSHARE

CAPITAL

SHAREHOLDERS’ EQUITY AS OF

31.12.2018PROFIT (LOSS)

AS OF 31/12/2018% OWNER-

SHIPBOOK

VALUE

CONSORZIO RENCO-LANCIA-ITER (1)

ITALY 100 100 - 71.0% 65

RENCO FOOD SRL (2) ITALY 100 (4,632) (4,732) 100.0% -

TRADEMARK ITALY LLP (2)

KAZAKHSTAN 0 0 - 50.0% 0

REAL MOZ LTD (2) MOZAMBIQUE 4 4 - 100.0% 4

ARMPOWER (2) ARMENIA 3,082 2,524 (231) 60.0% 1,514

ITALSEC MOZAMBICO (2) MOZAMBIQUE 2 2 - 100.0% 2

REN TRAVEL in liquidation (1) (3)

ITALY 10 417 33 100.0% 10

TOTAL 1,596

(1) Measured with the cost method(2) Measured with the equity method(3) Values as of 31.12.2017

72


The investment in Renco Food, which is not consolidated, was valued at cost and a provision to cover losses

was recognised as a provision for risks and charges. The provision of 4,732 thousand Euros was set aside

due to the accumulated losses and the substantial interruption of the subsidiary’s business, which is in the

process of disposing of the business units managed by the subsidiary companies involved in distribution.

Associated companies

Changes in investments in associated companies are shown in the table below:


EFFECTOTHER


RENCO IREM COSTRUCOES - - - - - -

RENCO NIGERIA 8 - - - - 8

RENCO QATAR 43 - - - - 43

REAL ESTATE MANAGEMENT

9 - - - - 9

DARIN CONSTRUCTION 642 - - - - 642

TOLFA CARE 602 - - - 36 638

VELOFIRMA - - - - - -

TOTAL 1,305 - - - 36 1,341

The other Tolfa Care adjustments, amounting to a positive 36 thousand Euros, derive from the valuation of

the company using the equity method.

NAMEREGISTERED

OFFICESSHARE

CAPITAL

SHAREHOL-DERS’ EQUITY

AS OF 31.12.2018

PROFIT (LOSS) AS OF

31/12/2018 % OWNERSHIPBOOK

VALUE

DARIN CONSTRUCTION (1) (4) KAZAKHSTAN 44 (2,502) 616 25.0% 642

REAL ESTATE MANAGEMENT (1) (3)

ITALY 10 838 619 30.0% 9

RENCO IREM COSTRUCOES (2)

MOZAMBIQUE 0 (0) (0) 31.3% (0)

RENCO NIGERIA (1) AFRICA na na na 49.0% 8

RENCO QATAR (1) QATAR 52 3,812 270 49.0% 43

TOLFA CARE (2) ITALY 1 1 0 47.6% 638

VELOFIRMA (1) (4) ARMENIA 7 (3,388) (628) 58.1% -

Total 1,340

(1) Measured with the cost method(2) Measured with the equity method(3) Values as of 31.12.2017(4) Values as of 31.12.2016

73


It should be noted that, should it be impossible to obtain the information necessary for application of the

equity measurement method required by Article 36 of Legislative Decree 127/91, the cost method was

used. In this case, the value of the booking in the financial statements is determined on the basis of the

purchase or subscription price.

The cost as described above is reduced in the event that impairment is ascertained; should the reasons for

the adjustment cease to exist, the value of the investment shall be reset within the limit of the acquisition

cost.

In compliance with Art. 2426 paragraph 2 of the Italian Civil Code, the recording of the following investments

at a higher value than the corresponding share of equity is justified as specified below.

Darin Construction

Darin Construction is a vehicle company for the development of a real estate operation in the centre of

Almaty, the economic capital of Kazakhstan, consisting of a multifunctional complex. The complex was

completed in 2018 and is spread over 11 floors above ground and 3 floors underground for a total gross

area of 51 thousand square metres divided into two blocks. The first block is dedicated to a 4-star hotel

affiliated with the Accor brand, which went into operation in 2018 and occupies a total area of 8,287 square

metres. The second block, dedicated to the executive and commercial part, contains a shopping centre,

apartments, executive offices, a sky restaurant on the top floor and underground car parks on which the

company will carry out fit-out work as the spaces are rented. The percentage of office space occupied was

7% at the end of 2018, and increased in April 2019 to 52%.

The investment will be fully operational in 2020/2021, years in which the first economic returns of the

investment are expected.

The higher recognition value of the investment is mainly justified by the higher value of the fixed assets

owned by the investee company. Once the investments are fully operational, it is expected that the

company will develop cash flows that will rebalance its economic and financial situation. To date, the

company has completed the investment and is in the start-up phase of the management and rental of the

property, therefore the directors consider the impact in the consolidated financial statements of the failure

to adjust the equity investment to shareholders’ equity to be insignificant, given its insignificance in the

current operations of the Group.

Velofirma

Velofirma is a vehicle company for the development of an important buildable lot near the historical centre

of the capital of Armenia, Yerevan. The company that owns the lot completed the first development phase

in 2015 with the inauguration of the Yerevan City Center hotel associated with the Double Tree by Hilton

chain. The higher recognition value of the investment is mainly justified by the higher value of the fixed

assets owned by the investee company. Once the investments are fully operational, it is expected that the

company will develop cash flows that will rebalance its economic and financial situation.

Note also that the company Velofirma is not consolidated since the Group, based on the shareholders’

agreements with the other shareholders, does not control said investee company. Furthermore, the

agreements provide for the gradual acquisition of the majority by the local partners and the permanence

of the Renco Group with a 20% interest.

74


For the Renco Nigeria companies, at the date of preparation of this document no definitive data were

available. However, based on the information in their possession, the directors consider that the impact on

the consolidated financial statements of the failure to adjust the equity investment to shareholders’ equity

is insignificant in view of its irrelevance in the current operations of the Group.

Other companies

Changes in investments in other companies are shown in the table below:


EFFECTOTHER


CEDECORP SA-CAMERUN 23 - - - - 23

PROM INVEST ENGIN ATYRAU 0 - - - - 0

CONAI SHARE - 0 - - - 0

JSC Astanaenergoservic - 30 - - - 30

TOTAL 23 30 - - 53

Receivables

DESCRIPTION RECEIVABLES FROM SUB-

SIDIARY COMPANIESRECEIVABLES FROM AS-

SOCIATED COMPANIESRECEIVABLES FROM

THIRD PARTIES

Balance as of 31.12.2017 3,187 13,490 1,068

Increases for the financial year 2,256 8,355 556

Decreases during the year (561) (539) (33)

Balance as of 31.12.2018 4,882 21,306 1,591

Receivables from subsidiary companies, equal to 4,882 thousand Euros (3,187 thousand Euros), consist of:

receivables from the subsidiary company Armpower claimed by Renco S.p.A. amounting to 154

thousand Euros (542 thousand Euros as of 31 December 2017);

receivables from the subsidiary company Renco Food S.r.l. claimed by Renco S.p.A. amounting to

4,701 thousand Euros (2,640 thousand Euros as of 31 December 2017). The Group has set aside a

provision to cover losses of 4,732 thousand Euros, for which reference should be made to the section

“Unconsolidated subsidiary companies” for further information.

receivables from Mozambican companies, Italsec Mozambique, Real Moz, Nyassa Sanctuary, for 26

thousand Euros and relate to the share capital of the company. These companies were created at the

end of 2018 and have not been consolidated as they are not significant;

Receivables from associated companies, equal to 21,306 thousand Euros (13,490 thousand Euros) consist

of:

75


receivables from the associate company Velofirma claimed by the company Nuovo Velodromo for 6,311

thousand Euros (650 thousand Euros as of 31 December 2017), which increased due to the conversion

of the trade receivable – already present in previous financial statements – into a financial receivable;

the directors consider the receivable to be fully recoverable by virtue of the investments made and

the new initiatives relating to the subsidiary, already described in the paragraph relating to equity

investments;

receivables from the associated company Real Estate Management S.r.l. amounting to 1,644 thousand

Euros (1,644 thousand Euros as of 31 December 2017) claimed by Renco Real Estate S.r.l. The

administrators consider this position to be completely recoverable due to the expected cash flows of

the Hotel Palazzo Castri 1874 in Florence;

receivables from the associated company Darin Construction amounting to 12,783 thousand Euros (11,195

thousand Euros as of 31 December 2017) claimed by Renco Real Estate S.r.l. The Group owns 25% of Darin

Construction and the financial loan was disbursed in order to finance the pertinent portion of the real

estate development transaction, as better described in the paragraph “Associated companies” of these

notes, whose cash generation will also be used for the repayment of loans received from shareholders;

receivables from Renco Irem Construcoes for 568 thousand Euros. The company became an associate

following the deconsolidation of the company in the period following the sale of 31.25% by Renco SpA.

Receivables from others amounting to 1,592 thousand Euros (1,068 thousand Euros as of 31 December

2017) consist of 1,210 thousand Euros of deposits held at the Congolese branch. The sum of 1,105 thousand

Euros is currently subject to seizure at the request of a supplier, whose dispute is being examined by

the courts. In the presence of this situation, the Group, supported by the information received from the

lawyers, deemed it necessary to make a prudential allocation to the risk provision for legal disputes for

the same amount. Remember that in previous years there was a second seizure in the Congolese branch

relating to a case, which in the course of 2017 was concluded in favour of the Group with the recovery of

the amounts paid of 510 thousand Euros.

The breakdown of receivables as of 31.12.2018 by geographic area, is shown in the following table (Article

2427, first paragraph, no. 6, of the Italian Civil Code).

BALANCE SHEET ITEMS ITALY EUROPEAFRICA AND

MIDDLE EASTREST OF THE

WORLD TOTAL

Due from subsidiary companies 4,702 - 180 - 4,882

Due from associated companies 1,644 - 6,879 12,783 21,306

Due from others - - 1,591 - 1,591

Total 6,346 - 8,650 12,783 27,780

Other securities and derivative asset instruments

DESCRIPTION OTHER SECURITIESDERIVATIVE ASSET

INSTRUMENTS

Balance as of 31.12.2017 - 70

Increases for the financial year - 744

Decreases during the year - -

Balance as of 31.12.2018 - 814

76


The item derivative asset instruments, amounting to 814 thousand Euros, represents the valuation of

derivatives as of 31 December 2018. For a more detailed description of derivative instruments, please refer

to the appropriate section of these explanatory notes.

CURRENT ASSETS

Inventories

BALANCE SHEET ITEMS 31.12.2017 31.12.2018 CHANGES

Inventories:

1) Raw and ancillary materials and consumables 6,896 4,059 (2,837)

2) Work in progress and semi-finished products 658 229 (429)

3) Contract work in progress 252,200 206,851 (45,349)

4) Finished products and goods for resale 8,445 8,456 11

5) Advances 861 843 (18)

Total 296,060 220,438 (48,622)

The measurement criteria adopted are consistent with those used in the previous year, as described in the

initial part of these explanatory notes.

As for the work in progress of a multi-year duration, it should be noted that as outlined in the first part

of the explanatory notes, they are measured according to their percentage of completion. The progress

payments and advances received from clients are recorded under liabilities in the balance sheet under item

6 of class D; advances for work to be performed amounted to 843 thousand Euros (861 thousand Euros).

On the acquisition of contracts, the Group undertakes to release both bank guarantees that insurance

guarantees for clients for the completion of said contracts; the extent of the commitments undertaken by

the Group is shown in the “Off balance sheet commitments, guarantees and contingencies”, paragraph of

these explanatory notes.

The decrease in inventories derives from the conclusion of important contracts acquired during previous

years. In particular, the 45 million Euro decrease in Contract work in progress relates to the closure of

contracts in the energy sector (Industrial Plants Division), with particular reference to the works closed

in Congo (Moho Nord Djeno Integration and the Revamping of security systems for the DP4 and DP5

platforms), in Italy (the gas compressor stations in Sergnano and Minerbio) and also to the closure of

contracts in the Construction Division, with the completion in Kazakhstan of the Multifunctional Building

in Almaty.

The order portfolio as of 31 December 2018 with reference to work in progress of the Infrastructure and

Industrial Plant Divisions amounts to 820.4 million Euros of which 576.1 million Euros to be produced.

Finished products and goods for sale include a building located in Rome with a value of 5,900 thousand

Euros (5,900 thousand Euros as of 31 December 2017), used as a residential building, purchased for resale

by Renco Real Estate S.r.l. in May 2015; the property was granted to third parties on the basis of a rent to

77


buy contract. The asset is recorded at its estimated realisable value, corresponding to the amount agreed

in the rent-to-buy contract in the event the purchase option is exercised.

Receivables

The balance of consolidated receivables included under current assets, after eliminating intercompany

values, are divided up as follows according to due dates.


Receivables

1) Trade receivables 25,922 50,541 24,619

2) to subsidiary companies 1,668 7,534 5,866

3) to associated companies 8,520 2,877 (5,643)

5-bis) Tax receivables 18,021 22,172 4,151

5-ter) Prepaid taxes 6,979 7,184 205

5-quater) others 15,173 14,360 (813)

Total 76,283 104,668 28,385

The balance is divided up according to due dates (Article 2427-bis, point 6 of the Italian Civil Code).

BALANCE SHEET ITEMS WITHIN 12 MONTHS BEYOND 12 MONTHS BEYOND 5 YEARS TOTAL

Receivables

1) trade receivables 50,541 - - 50,541

2) to subsidiary companies 7,534 - - 7,534

3) to associated companies 2,877 - - 2,877

5-bis) Tax receivables 21,338 834 - 22,172

5-ter) Prepaid taxes 7,184 - - 7,184

5-quater) others 6,192 7,465 703 14,360

Total 95,666 8,299 703 104,668

Receivables are broken down as follows, according to the geographical areas of operation of the debtor

(art. 2427, paragraph 6 of the Italian Civil Code).

78


DESCRIPTION 31.12.2017 31.12.2018

Italy 12,066 25,332

European Union 12,198 22,551

Russia and former USSR countries 22,802 11,710

Africa 17,166 16,633

Middle East 5,562 26,949

Other 6,488 1,493

Total 76,283 104,668

Finally, a detail of the most significant receivable items is provided.

Trade receivables

The item “Trade receivables” amounting to 50.5 million Euros (25.9 million Euros) is shown net of the

provision for credit depreciation amounting to 2,005 thousand Euros, which was used in the course of 2018

for the amount of 741 thousand Euros and increased by 1,469 thousand Euros compared to the previous

year.

The change in trade receivables is mainly attributable to the increase in services rendered by the Services

and Real Estate Divisions, in particular 15,000 thousand Euros from the purchaser of the shareholding in

Hotel Yerevan Ojsc, the collection of which, in accordance with the contractual terms defined at the time

of the sale of the hotel, is expected within 12 months. It is also pointed out that in the first months of 2019,

collection of receivables from customers has not had any problems.

The adjustment of the presumed nominal loan value has been obtained by means of a specific provision

for credit depreciation, that has been affected as follows during the year:

DESCRIPTION 31.12.2017 USE PROVISIONSTRANSLATION DIFFERENCES 31.12.2018

Provision for credit depreciation of current receivables

1,281 (741) 1,469 (4) 2,005

The provision, set up on 31 December 2018, is deemed appropriate to cover both specific situations, which

have already seen write-offs in the current period, as well as implicit risks implicit in uncollectable in bonis

receivables.

Receivables from subsidiary companies that are not consolidated

The item “Receivables from subsidiary companies that are not consolidated”, equal to 7.5 million Euros

(1.7 million Euros as of 31 December 2017), consist of trade receivables and include 7.5 million Euros in

receivables from the subsidiary Armpower and 43 thousand Euros in receivables from the subsidiary

Renco Food; both receivables are owed to Renco SpA.

79


Receivables from associated companies

The item “Receivables from associated companies”, equal to 2.8 million Euros (8.5 million Euros as of 31

December 2017), consists exclusively of receivables of a commercial nature and specifically:

receivables from the associated company Velofirma for 917 thousand Euros (6,222 thousand Euros as

of 31 December 2017) of which 858 thousand Euros (380 thousand Euros as of 31 December 2017) is

due from the subsidiary Renco Armestate and 55 thousand Euros (18 thousand Euros as of 31 December

2017) from the company Renco SpA, 4 thousand Euros from Italsec Armenia, while the receivables from

Nuovo Velodromo, which last year amounted to 5,825 thousand Euros, have been entirely reclassified

under financial receivables as described above;

receivables from the associated company Renco Nigeria amounting to 1,293 thousand Euros (2,011

thousand Euros the previous year) claimed by Renco S.p.A. During the year, Renco S.p.A. received from

the associated company 1,331 thousand Euros and turnover of 613 thousand Euros;

receivables from the associated company Tolfa Care S.r.l. amounting to 49 thousand Euros (38 thousand

Euros the previous year) claimed by Renco Health Care S.r.l.;

receivables from the associated company Darin Construction amounting to 240 thousand Euros (in line

with the previous year) claimed by Renco Real Estate S.r.l.;

receivables from the associated company Real Estate Management S.r.l. of 312 thousand Euros (9

thousand Euros last year) due to Renco Real Estate S.r.l. for 305 thousand Euros and Renco S.p.A. for

7 thousand Euros;

receivables from the associated company Renco Irem Costrucoes Lda for 65 thousand Euros due to

Renco S.p.A. for 39 thousand Euros, Rencotek Lda for 5 thousand Euros and Renco Mozambique for 21

thousand Euros. Renco Irem Construcoes Lda is represented as an associated company following the

sale of 31.25% of the company, as previously noted.

The decrease during the year is mainly due to the reclassification of Velofirma’s position from a trade

receivable to a financial receivable.

Tax receivables

The item “tax receivables” amounting to 22.2 million Euros (18 million Euros at 31.12.2017) is made up as

follows.


Tax credits

Foreign tax receivables 7,887 7,005 (882)

Tax receivables 2,186 3,863 1,677

VAT receivables 7,486 10,493 3,007

Other tax receivables 462 811 349

Total 18,021 22,172 4,151

The item receivables for taxes paid abroad is solely attributable to Renco Group S.p.A. and refers to taxes

paid abroad, almost all of which have already become final and not yet recovered.

80


The remainder consists of 5,990 thousand Euros of taxes paid in the Congo by the branch of the subsidiary

Renco S.p.A. in previous years that are believed to be recoverable in the coming financial years. The branch

has in fact signed an agreement with the local Congolese tax authorities for a tax reduction; with this

agreement, it is planned to generate Italian tax receivable surpluses on the income produced in the Congo

that will allow the recovery of foreign tax credit surpluses accrued in previous years.

The item tax receivables includes the amount of 129 thousand Euros relating to IRES advances in excess

of the amount to be paid as the balance for the 2018 financial year on the income taxed for transparency

relating to the subsidiary companies falling under the “CFC” regulations referred to in art. 167 of the Tuir.

Receivables for prepaid taxes

Receivables for prepaid taxes of 7,184 thousand Euros (6,979 thousand Euros as of 31 December 2017)

refer to temporary differences deductible also on tax losses carried forward, for a description of which

reference should be made to the appropriate paragraph in the last part of these Explanatory Notes. They

are considered to be recoverable with reasonable certainty through future taxable profits.

BALANCE SHEET ITEMS 31.12.2017 PROVISIONS USESTRANSLATION DIFFERENCES

OTHER CHANGES 31.12.2018

Receivables for prepaid taxes 6,979 1,982 (1,516) (258) (3) 7,184

Receivables from others

The item “receivables from others” amounting to 14,360 thousand Euros (15,173 thousand Euros at 31

December 2017) is made up as follows.


Receivables from third parties

Advances to suppliers 737 1,437 700

Receivables from employees 1,088 1,211 123

Deposits 107 168 61

Receivables for sale of shareholdings 4,850 5,080 230

Receivables for rent-to-buy 3,467 3,106 (361)

Loan receivables 1,381 1,399 18

Amounts due from pension and social security institutions 40 8 (32)

Receivables from Terna 2,180 1,192 (988)

Other receivables 1,323 759 (564)

Total 15,173 14,360 (813)

The receivables for disposals of equity investments, equal to 5,080 thousand Euros (4,850 thousand Euros),

consist of receivables deriving from the sale of 50% of the Kazakh investee company Renco Kat, which

81


took place during 2015; compared to the previous year, the aforementioned receivables did not change

and the only differences refer to exchange differences. According to the contractual agreements, the

receivable will be collected by bank transfers equal to a determined percentage of the profits distributed

to the buyer as shareholders of Renco Kat for a number of years such as to allow total payment of the

selling price.

Receivables for rent-to-buy of 3.1 million Euros (3.5 million Euros) are recorded under Renco Real Estate

and relate to the amendment made to the rent-to-buy contract in 2016. Amendment which provides for

a further down payment by the buyer for the part of consideration agreed for the sale of the property,

assuming the amount of 3.7 million Euros. Since this is an external assumption with the consent of the bank

but not constituting a release, already in 2016 the amount of 3.7 million Euros was recognised among other

receivables and other payables, an amount that was reduced to 3.1 million Euros over the years;

Receivables from Terna of 1.2 million Euros (2.2 million Euros) relate to the trade receivable from the

Renco Terna JV. The company is consolidated using the proportional method and the trade receivable

still outstanding after the consolidation elimination entry was reclassified among receivables from others.

Loan receivables of 1.4 million Euros are recorded in Grapevine and relate to receivables from minority

shareholders.

Financial assets not classified as fixed assets


Financial assets not listed under fixed assets

Other investments 136 52 (84)

Total 136 52 (84)

The group holds shares of Banca Monte dei Paschi di Siena S.p.a. for the amount of 274 thousand Euros

obtained in exchange for subordinated bonds for a nominal amount of 300 thousand Euros recognised

in previous financial statements and fully written down; against the exchange, the previously allocated

provision for depreciation was released for the amount of 274 thousand Euros in 2017. Finally, the value of

the MPS shares was adjusted during the current year, making a write-down of 84 thousand Euros based

on the share price as of 31 December 2018.




Bank and post office deposits 91,009 72,194 (18,815)

Cash and equivalents on hand 351 283 (68)

Total 91,360 72,477 (18,883)

The balance represents cash and cash equivalents in existence as of the end of the year.

82


Accrued income and deferred expenses

These represent the connecting items for the accounting period reckoned on an accruals basis. The

composition of the caption is analysed as follows.


Accrued income 163 140 (23)

- Bank interests 4 6 2

- GSE contribution 159 134 (25)

Prepaid expenses 4,167 2,988 (1,179)

- Rents and leases 18 378 360

- Insurance 151 257 106

- Bank commissions and factoring 28 30 2

- Derivatives 82 94 12

- Software licences 223 273 50

- Surety charges 184 194 10

- Subsidies to the children of employees for schooling 145 189 44

- Villa Molaroni lease fees 311 252 (59)

- others 3,025 1,321 (1,704)

Total 4,330 3,128 (1,202)

These represent income and expense whose pertinence is advanced or deferred with respect to the cash

and/or documental manifestation and are irrespective of the date of payment or collection of the related

income and expense spanning two or more accounting periods which can be spread over time.

83


BALANCE SHEET LIABILITIES

Shareholders’ equity

Shareholders’ equity pertaining to the Group

BALANCE SHEET ITEMS 31.12.2017 INCREASES DECREASES 31.12.2018

Group shareholders’ equity

Share capital 9,013 - - 9,013

Share premium reserve 25,988 - - 25,988

Revaluation reserve 4,802 - (106) 4,696

Legal reserve 1,168 113 - 1,281

Other reserves 23,265 3,927 (1,597) 25,595

Reserve to cover expected cash flows (591) 989 - 398

Profit (loss) carried forward and other reserves

87,544 965 (1,546) 86,963

Reserve for the purchase of own shares (3,609) - - (3,609)

Group profit/(loss) for the year 707 8,755 (707) 8,755

Total 148,286 14,749 (3,956) 159,078

The item Other Reserves is broken down as follows


Other reserves

Extraordinary or optional reserve 18,058 2,140 - 20,198

Payments towards capital 25,026 - - 25,026

Conversion reserves from foreign consolidation

(25,729) 1,787 - (23,942)

Consolidation reserve 5,910 - (1,597) 4,313

Total 23,265 3,927 (1,597) 25,595

The translation reserve from foreign consolidation includes the effect of consolidation of foreign subsidiary

companies, with financial statements in currencies other than the Euro, and is determined according to the

consolidation criteria indicated above.

At the balance sheet date, there were 901,250 ordinary shares outstanding with a nominal value of 10

Euros each.

84


Shareholders’ equity pertaining to minority interest

FINANCIAL STATEMENT ITEMS (IN THOUSANDS OF EUROS) 31.12.2017 31.12.2018 CHANGES

Minority interest

Capital and reserves 3,326 4,218 892

Profit (loss) for the year 798 (2,655) (3,453)

Total 4,124 1,563 (2,561)

The statement of changes in shareholders ‘equity and the statement of reconciliation between the net

profit and the shareholders’ equity of the consolidating company and the respective values resulting from

the consolidated financial statements are shown in Annexes 3 and 4 to these Explanatory Notes.

Provision for risks and charges


Provisions for risks and charges

2) Provisions for taxes, including deferred taxes 14,102 1,687 (2,332) 13,457

3) Derivative financial liability instruments 812 - (532) 280

4) Others 1,377 6,277 (471) 7,183

Total 16,291 7,964 (3,335) 20,920

The provision for taxes, equal to 13,457 thousand Euros (14,102 thousand Euros), includes 12,846 thousand

Euros (12,902 thousand Euros) for the temporary differences recorded in Group companies as well as

the tax effects deriving from the consolidation entries; all described in detail in the specific paragraph

“deferred/prepaid tax” of these Explanatory Notes.

Furthermore, tax provisions include probable liabilities for taxes and penalties of 610 thousand Euros

(1,200 thousand Euros) for tax audits on Renco S.p.A. conducted by the tax authorities on the years 2013

and 2014. Changes to this provision are as follows:

BALANCE SHEET ITEMS 31.12.2017 PROVISIONS USESTRANSLATION DIFFERENCES

CHANGE IN THE SCOPE OF

CONSOLIDATION 31.12.2018

Tax provisions, including deferred

Tax provisions, to be probably assessed

1,200 408 (998) - - 610

Deferred tax provision 12,902 1,278 (1,187) (50) (96) 12,847

Total 14,102 1,686 (2,185) (50) (96) 13,457

85


allocation of 408 thousand Euros to the tax provision for audits conducted by the tax authorities on the

year 2013;

use of the tax provision for the amount of 998 thousand Euros for settlement of the dispute for the

years 2013 and 2014 with the tax authorities;

change of a total of 645 thousand Euros in the provision for deferred taxes. In the section of this

explanatory note on the exposure of the effects of deferred taxes, details related to deferred tax

liabilities are provided.

Other reserves for risks and charges

The balance amounts to 7,183 thousand Euros (1,377 thousand Euros) and is made up as follows:

BALANCE SHEET ITEMS 31.12.2017USE FOR THE

YEARPROVISION FOR

THE YEAR 31.12.2018

Other provisions

Provision for legal disputes 906 - 199 1,105

Provision for warranties on plant orders - - 1,300 1,300

Provision to cover losses on equity investments

471 (471) 4,778 4,778

Total 1,377 (471) 6,277 7,183

Provision for legal disputes

The provision for legal disputes refers to the Congolese branch and is discussed in the paragraph

“Receivables” in the section “Financial fixed assets”. During the period, the balance increased to cover the

dispute with a Congolese customer, which in any case can be traced back to the legal dispute specified

above.

Provision for warranties on plant orders

Set up in 2018, the warranty fund takes into account recently updated contractual practices for orders for

industrial plants. It represents an estimate of the costs to be incurred for service under warranty between

the issue of the Preliminary Acceptance Certificate (“PAC”) and the Final Acceptance Certificate (“FAC”).

The PAC is the moment in which the ownership of the plant passes to the customer and the warranty

period commences (established on a contractual basis which usually lasts 24 months), and the FAC is

issued at the end of the warranty period. The provision is calculated on the basis of the historical incidence

of warranty costs for similar job orders. This provision was determined in the amount of 1,300 thousand

Euros upon reaching the CAP of some plant orders noted in the paragraph “Inventories”.

Provision to cover losses on equity investments

The change during the year refers to provisions of 46 thousand Euros relating to Renco Irem Construcoes

and 4,732 thousand Euros relating to Renco Food S.r.l. Additional information about the position of Renco

Food is provided in the section of these Notes entitled “Subsidiary companies that are not consolidated”

and “Receivables” under Financial fixed assets.

86


Employee severance indemnity

DESCRIPTION OPENING BALANCE

TFR PAID DURING

THE YEAR PROVISIONS

CHANGE IN THESCOPE OF

CONSOLIDATION

OTHER CHANGES

(+/-)CLOSING

BALANCE

Employee severance indemnity

2,009 (139) 535 6 - 2,411

The provision allocated represents the amount effectively payable by the Group as of 31.12.2018 to its

employees in the workforce as of that date, net of any advances paid.

Payables

The breakdown and changes in the individual items are shown in the table below (Article 2427, paragraph

4 of the Italian Civil Code).


Payables

1) Bonds 44,214 44,368 154

3) Payables to shareholders for loans 6,426 6,201 (225)

4) Payables to banks 92,787 93,670 883

5) Payables to other lenders 1,480 1,665 185

6) Advances 250,166 230,260 (19,906)

7) Trade payables 79,425 61,483 (17,942)

9) Payables to subsidiary companies that are not consolidated

38 1,925 1,887

10) Payables to associated companies 1,732 2,126 394

12) Tax payables 5,986 6,871 885

13) Payables to social security and welfare institutions 1,486 1,759 273

14) Other payables 14,884 13,833 (1,051)

Total 498,622 464,160 (34,463)

The tables relating to the breakdown of payables by due date and by geographical areas, respectively,

based on the combined provisions of art. 2427, point 6 of the Italian Civil Code are provided below.

87


BALANCE SHEET ITEMS WITHIN

12 MONTHSBEYOND

12 MONTHSBEYOND 5 YEARS TOTAL

Payables

1) Bonds - 44,368 - 44,368

3) Payables to shareholders for loans 6,201 - - 6,201

4) Payables to banks 44,101 45,753 3,816 93,670

5) Payables to other lenders 60 942 663 1,665

6) Advances 18,333 211,927 - 230,260

7) Trade payables 61,483 - - 61,483

9) Payables to subsidiary companies that are not consolidated

1,925 - - 1,925

10) Payables to associated companies 2,126 - - 2,126

12) Tax payables 6,871 - - 6,871

13) Payables to social security and welfare institutions

1,759 - - 1,759

14) Other payables 10,875 2,255 703 13,833

Total 153,734 305,245 5,182 464,160

DESCRIPTION 31.12.2017 31.12.2018

Italy 116,587 238,226

European Union 130,616 147,663

Russia and former USSR countries 69,234 21,106

Africa 174,775 50,400

Middle East 2,451 4,702

Other 4,959 2,063

Total 498,622 464,160

Bonds

The item “bonds” refers to the following bond issues:

bond issued on 13 August 2015 by the parent company Renco Group S.p.A. for the nominal amount

of 10 million Euros consisting of 100 bonds of 100,000 Euros each and maturing on 13 August 2020,

admitted to trading on the professional segment ExtraMOT PRO, interest rate 5%;

bond issued on 23 November 2017 by the parent company Renco Group S.p.A. for the nominal amount

of 35 million Euros consisting of 350 bonds of 100,000 Euros each and maturing on 23 November 2023,

admitted to trading on the professional segment ExtraMOT PRO, interest rate 4.75%.

It should be noted that the regulations of the bond issues contain the following financial covenants that

must be respected at group level. At the closing date of the financial year the envisaged covenants were

respected.

88


FINANCIAL EQUILIBRIUM RATIOS COVENANT CONSOLIDATED RESULT *

NFP/Equity ≤ 1.5 0.28

Net financial position

------------------------

Shareholders’ Equity

NFP/EBITDA ≤ 3.5 1.21

Net financial position

------------------------

EBITDA

Interest Coverage Ratio (ICS) ≥ 4.5 6.85

EBITDA

------------------------

Financial charges

*Computation in accordance with parameters defined in the regulations of the bonds.

Payables to shareholders for loans

Amounts due to shareholders for loans consist of the conversion in 2009 of the total coupon on bonds

matured in favour of the shareholders of the Parent Company Renco Group S.p.A. at 31 December 2008

and not yet paid by the company. The loan expiring on 31 December 2014 has been extended from time to

time until 21 December 2019. As a result of new guarantees given by the Parent Company to the subsidiary

Renco SpA, the shareholder loans were supplemented by a subordination clause valid until 31 December

2019.

89


Payables to banks

The balance of payables to banks as of 31.12.2018, inclusive of loans, represents the effective liability for

principal, interest and related charges accrued and due.

During the year, the Group took out new loans of 10.4 million Euros (23.3 million Euros as of 31 December

2017), of which 7.2 million Euros related to loans obtained for the new Group headquarters in Pesaro,

2.7 million Euros for a medium/long-term loan and 0.5 million Euros (15.7 million Euros) as an advance

on contracts. The average weighted duration of the new loans acquires is 68 months. Some of the loans

granted to the Company envisage the observance of covenants which, as of the balance sheet date, were

observed.

It should be noted that during the year the subsidiary and consolidated Renco Capital S.r.l. obtained the

following loans for the construction of the new headquarters:

Floating rate loan of 1 million Euros maturing on 30 June 2025, indexed to the 6-month Euribor interest

rate and with a spread of 1.85%;

Floating rate loan of 2 million Euros maturing on 30 June 2022, indexed to the 6-month Euribor interest

rate and with a spread of 1.75%;

Mortgage loan up to 12 million Euros with maturity on 30 June 2032, indexed to the 6-month Euribor

interest rate and a spread of 2.3%. The amount disbursed as of 31 December 2018 amounted to 5.16

million Euros.

As of 31.12.2018, the balance of payables for foreign currency loans was USD 0.9 million.

The balance of payables to banks beyond 12 months totalling 49.6 million Euros is broken down as follows

(in parentheses the balances as of 31.12.2017):

6.3 million Euros (7 million Euros) is represented by a mortgage credit line granted to the subsidiary

Residence Viserba S.r.l. in view of the start of construction work for the area located in Viserba (Rimini);

1.7 million Euros (2.1 million Euros) is represented by the residual payable with maturity beyond 12

months of the loans to Joint Green S.r.l.;

34.9 million Euros (47.5 million Euros) is represented by the residual payable with maturity beyond 12

months of the loans to Renco S.p.A.

6.6 million Euros is represented by the residual payable with maturity beyond 12 months of the loans to

Renco Capital S.r.l.;

The balance of bank borrowings due beyond five years, which amounted to 3.8 million Euros, represents

the outstanding balance of the loan owed to Renco Capital S.r.l.

The company is currently in line with the payment of overdue instalments.

Payables to other lenders

“Payables to other lenders” of 1,665 thousand Euros (1,480 thousand Euros as of 31 December 2017)

include payables to leasing companies of 1 million euros, to the previous shareholders of Villa Soligo

S.r.l. of 0.7 million euros (position held by the company Villa Soligo S.r.l. and already present before the

acquisition).

90


Advance payments

The balance of the item “Advance payments” includes advances already collected from customers when

ordering, advances received from customers on job orders in progress and advances relating to the rent-

to-buy contract. Specifically, advances amount to 6.5 million Euros (14.8 million Euros), advances on job

orders in progress amount to 218 million Euros (230 million Euros), advances to others relating to the

rent-to-buy contract stipulated in 2015 amount to 5.8 million Euros (5.8 million Euros). The decrease in the

“Advances” item is strictly related to the closure of ongoing contracts.

The amount of foreign currency advances is USD 29.7 million and LYD 6.3 million.

Trade payables

“Trade payables” amounting to 61,483 thousand Euros (79,425 thousand Euros as of 31.12.2017) are

recognised net of commercial discounts; cash discounts, on the other hand, are recognised at the time

of payment. The nominal value of these payables has been adjusted, at the time of returns or allowances

(invoicing adjustments), to an extent corresponding to the amount agreed with the counterpart.

Payables to subsidiary companies that are not consolidated

Payables to subsidiary companies that are not consolidated, equal to 1,925 thousand Euros (38 thousand

Euros as of 31 December 2017) refer to:

1.5 million Euros owed by Renco Power CJSC to its non-consolidated subsidiary Armpower CJSC for

unpaid share capital approved in December. Renco Power made the payment during 2019;

payables of the parent company Renco Group to the non-consolidated subsidiary Rentravel of 0.3

million Euros relate to positions arising from the tax consolidation;

other minor payables for subsidiary and non-consolidated companies of 0.1 million Euros.

Amounts due to associated companies

The item payables to associated companies of 2,126 thousand Euros (1,732 thousand Euros as of 31.12.2017)

includes short-term positions that are frequently transacted with Group companies. In particular, these are

payables of the company Renco S.p.A. to the associated companies Real Estate Management S.r.l. for 9

thousand Euros (4 thousand Euros as of 31 December 2017), Renco Qatar for 2,065 thousand Euros (1,672

thousand Euros as of 31 December 2017) and to the company Renco Irem Costrucoes for 51 thousand Euros.

Tax payables

The item “Tax payables” amounting to 6,871 thousand Euros (5,986 thousand Euros as of 31.12.2017)

includes only those payables representing certain taxes of known amount, as tax liabilities which are

91


probable or uncertain in amount or due date and deferred taxes are entered under item B.2 in the liabilities

(Provisions for taxes).

In particular, tax payables include:


Tax payables

Payables for withholding taxes 1,999 1,065 (934)

Current tax liabilities 920 1,877 957

Payables for taxes to be assessed 838 1,407 569

Payables for VAT 1,553 1,436 (117)

Other tax payables 676 1,086 410

Total 5,986 6,871 885

Other payables

The balance of “Other payables” includes the following items:


Payables to others

Payables to employees 4,889 5,394 505

Payables for rent-to-buy 3,319 2,958 (361)

Payables for the purchase of equity investments - 1,077 1,077

Dividends payable 500 500 -

Other sundry payables 6,176 3,904 (2,272)

Total 14,884 13,833 (1,051)

Amounts due to employees represent the payable for wages and salaries and holidays accrued by

employees.

The item “Payables for rent-to-buy” refers to the rent-to-buy contract stipulated in 2015 and relates to

the property in question included in the inventories. In this regard, it should be noted that in 2016 a deed

amending the rent-to-buy contract was signed. With the amendment to the contract, the buyer paid a

further advance for the portion of the consideration agreed for the sale of the property, taking over the

amount of 3,729 thousand Euros of the remaining portion of the mortgage loan taken out with MPS bank.

Since this is an external transaction with the bank’s consent but not in full discharge of its obligations,

the increase in advances paid and the cancellation of the loan payable to the bank were offset by the

recognition of the amount of 3,729 thousand Euros under other receivables and payables (amounts

reduced in 2018 as a result of the payment of loan instalments due during the year). In fact, in the event

of default by the buyer, the bank could request performance directly from Renco Real Estate S.r.l. as it is

obliged to do so on a subsidiary basis.

The “Payables for the purchase of equity investments” derive from the purchase of the equity investment

in Villa Soligo, whose debt due beyond one year has been appropriately discounted at a rate of 4.41%.

92


Accrued liabilities and deferred income

These represent the connecting items for the accounting period reckoned on an accruals basis, and are

comprised as follows:


Accrued expenses 1,118 1,000 (118)

- Interest expense and commissions 664 613 (51)

- Bond interest 345 345 -

- Derivatives 33 24 (9)

- Others 76 18 (58)

Deferred income 1,528 432 (1,096)

- Revenues from asset management 1,116 150 (966)

- Others 412 282 (130)

Total 2,646 1,432 (1,214)

These represent income and expense whose pertinence is advanced or deferred with respect to the cash

and/or documental manifestation and are irrespective of the date of payment or collection of the related

income and expense spanning two or more accounting periods which can be spread over time.

93


INCOME STATEMENT

Value of production

Indication is made of the composition of the value of production, as well as the changes in the individual

items, with respect to the previous year:

ITEM 31.12.2017 31.12.2018 CHANGE CHANGE %

Sales of goods and services 254,954 253,639 (1,315) (0.52)

Changes in inventories of work in progress, 52 (451) (503) na

Change in contract work in progress (28,059) (44,443) (16,384) -

Increases for in-house works 17,593 19,999 2,406 13.68

Other income and revenues 3,679 14,538 10,859 na

Total 248,219 243,282 (4,937) (1.99)

Revenues by category of activity

Below we provide the breakdown of value of production by production division.

ITEM 31.12.2017 31.12.2018 CHANGE CHANGE %

Services division 43,433 49,155 5,722 13.17

Construction division 70,614 36,447 (34,167) (48.39)

Real Estate Division 42,324 58,902 16,578 39.17

Energy division 91,848 98,778 6,930 7.55

Total 248,219 243,282 (4,937) (1.99)

The Renco Group achieved a “Value of Production” of 243,282 thousand Euros (248,219 thousand Euros in

the same period of 2017), with a decrease of 4,937 thousand Euros (-1.99%), substantially in line with the

previous year.

The maintenance of the value of production was supported by the Services Division, which contributed

with an increase of 5.7 million Euros, the Assets Management Division, with an increase of 16.6 million Euros

to which the sale of the Hotel Yerevan contributed, the values of which are specified in the “Introduction”

of this note, and the Energy Division with an increase of 6.9 million euros. The value of production of the

Construction Division decreased by 34 million Euros; it should be noted that in 2017 the construction work

of the TCO field was a determining element in reaching that value of production.

The result of the Energy Division, albeit on the increase, suffered delays not attributable to the Renco

Group in the contracts acquired which generated a production lower than expected.

For a complete analysis of the business performance, please refer to the Management Report.

94


Revenues by geographic area

Below we provide the breakdown of value of production by geographical area.

GEOGRAPHIC AREA 31.12.2017 31.12.2018 CHANGE CHANGE %

Italy 37,494 35,722 (1,772) (4.73)

European Union 58,025 73,332 15,307 26.38

Russia and former USSR countries 86,200 55,901 (30,299) (35.15)

Africa 55,900 63,927 8,027 14.36

Middle East 5,300 7,400 2,100 39.62

Other 5,300 7,000 1,700 32.08

Total 248,219 243,282 (4,937) (1.99)

The table above shows the absolute value and the percentage weight of production by geographical area.

For a more in-depth analysis of the foreseeable evolution of operations and on the industrial and commercial

strategies, reference should be made to the Management Report.

Other income and revenues

The balance of “Other revenues and income” includes the following items:

ITEM 31.12.2017 31.12.2018 CHANGE

Other income and revenues

Capital gains from disposal of assets 1,019 13,272 12,253

Income from insurance 616 33 (583)

GSE photovoltaic contribution 524 478 (46)

Other sundry revenues 1,520 755 (765)

Total 3,679 14,538 10,859

The item “Capital gains from asset disposals” mainly consists of the capital gain from the sale of the

Armenian company Hotel Yerevan during the period, which owns the hotel of the same name.

Cost of production

Indication is made of the composition of the production costs, as well as the changes in the individual

items, with respect to the previous year:

95



Cost of production

Raw, ancillary and consumable materials 83,395 61,203 (22,192)

Services 67,263 76,765 9,502

Leased assets 5,313 4,589 (724)

Wages and salaries 46,451 46,206 (245)

Social security contributions 8,024 8,311 287

Employee severance indemnity 1,472 1,372 (100)

Other personnel costs 588 588 -

Amortisation/depreciation of intangible fixed assets 675 705 30

Amortisation/depreciation of tangible fixed assets 7,728 9,323 1,595

Other amounts written off fixed assets - 248 248

Write-down of receivables included in current assets 421 1,469 1,048

Change in raw material inventories 259 2,254 1,995

Allocation for risks 876 199 (677)

Other provisions - 1,300 1,300

Other operating expenses 2,467 3,534 1,067

Total 224,931 218,066 (6,866)

Costs of raw materials

The item “Costs of raw materials” includes the following items:

ITEM 31.12.2017 31.12.2018 CHANGE

Raw, ancillary and consumable materials

Raw materials 77,445 54,911 (22,534)

Production components and materials 1,757 2,396 638

Capital goods valued less than € 516 196 50 (146)

Miscellaneous tools and equipment (repair parts, spare parts, building materials, etc.)

726 359 (367)

Fuel 2,131 1,048 (1,083)

Stationery and printed matter 158 923 765

Working clothes 450 285 (165)

Customs clearance materials 501 1,189 688

Other costs for raw materials 31 43 12

Total 83,395 61,203 (22,192)

The decrease in raw material purchase costs is attributable to the lower incidence of procurement activity

recorded in 2018.

96


Service costs

“Costs for Services” includes the following items:

ITEM 31.12.2017 31.12.2018 CHANGE

Services

Work carried out by third parties 20,638 35,716 15,078

General works and services 1,770 5,144 3,375

Project collaborations 10,768 9,802 (966)

Transport costs 6,043 2,316 (3,727)

Costs for production licences 472 0 (472)

Property maintenance and repair 948 201 (747)

Motor vehicle maintenance and repair 262 510 248

Cleaning costs 144 228 84

Lighting 1,400 1,317 (83)

Other utilities 628 691 63

Postal and telephone charges 736 977 241

Security expenses 1,134 1,216 82

Technical and commercial consulting 3,702 4,063 361

Legal, administrative and tax consulting 1,392 1,832 440

Insurance 949 837 (112)

Travel expenses 3,741 3,885 144

Reimbursement of expenses 2,863 73 (2,790)

Other maintenance and repair 214 193 (21)

Advertising and promotional expenses 509 655 146

Personnel refresher courses 851 416 (435)

Software licences 786 1,242 456

Remuneration of corporate bodies 353 399 46

Company canteen 711 500 (211)

Health services 989 1,181 192

Bank commission 2,755 2,554 (201)

Other costs for services 2,508 818 (1,690)

Total 67,263 76,765 9,502

The amount for the financial year mainly includes 17 million Euros relating to the TAP Greece and TAP

Albania contracts of the Renco Terna Joint Venture and 51.2 million Euros relating to contract costs of

Renco SpA.

97


Costs for use of third party assets

The balance of “Costs for use of third party assets” includes the following items:

ITEM 31.12.2017 31.12.2018 CHANGE

Use of third party assets

Rental of premises and offices 3,458 2,705 (753)

Rental of vehicles and equipment 1,692 1,752 60

Other lease and rental expenses 164 133 (31)

Total 5,313 4,589 (724)

The amount mainly consists of rents for offices and warehouses and rental costs, of which 2.6 million Euros

for Renco SpA.

Personnel costs

The item “Personnel costs” totalling 56.5 million Euros, in line with 2017, mainly includes personnel costs of

41.7 million Euros relating to Renco S.p.A.

Below is the average number of employees of companies included in the consolidation with the line-by-line

method broken-down according to category.

DESCRIPTION 31.12.2017 31.12.2018 CHANGE AVERAGE NUMBER

Executives and Managers 56 59 3 58

Ordinary employees 645 706 61 676

Workers 2,367 2,467 100 2,417

Other 78 47 (31) 63

Total 3,146 3,279 133 3,213

98


Other operating expenses

The balance of “Other operating expenses” includes the following items:

ITEM 31.12.2017 31.12.2018 CHANGE

Other operating expenses

Miscellaneous taxes 728 2,277 1,549

Membership fees 61 64 3

Rounding down 4 3 (1)

Administrative sanctions 286 159 (127)

Losses on receivables not covered by a specific provision

39 459 421

Capital losses on disposal of assets 632 25 (607)

Other sundry expenses 717 548 (169)

Total 2,467 3,534 1,067

The item “Other taxes” is mainly made up of 0.5 million Euros for the land occupation tax paid by the

company Renco Kat relating to the TCO field (whose construction was completed at the end of 2017), 0.9

million Euros for the non-deductible VAT of Baytree LLC on intercompany invoicing with Renco Zanzibar

and 0.4 million Euros for the taxes on real estate of the various Group companies.

Financial income and expenses


ITEM 31.12.2017 31.12.2018 CHANGES

Financial income and expense

Income from equity investments due from subsidiary companies

- 4 4

Income other than the above 211 622 411

(Interest and other financial expenses) (4,541) (6,652) (2,111)

Exchange gains (losses) (7,341) (2,280) 5,061

Total (11,671) (8,305) 3,366

The item Interest and other financial charges equal to 6,652 thousand Euros includes interest of 1,114

thousand Euros deriving from the tax assessments closed in the period.

With regard to foreign exchange losses of 2.2 million Euros (exchange losses of 7.3 million Euros as of 31

December 2017), it should be noted that these include both the monetary changes on the items closed

during the year as well as “Unrealised exchange gains and losses” since they relate to transactions not yet

closed at the end of the period.

99


The economic result relating to realised and unrealised exchange differences reflects the trend of the

foreign exchange market that characterised 2018. In fact, with regard to the average exchange rates for

the period there was a consolidation of the Euro against the US Dollar, the Rouble, the Kazakh Tenge and

the Armenian Dram which again this year negatively impacted the exposure in these currencies of Group

companies present in these markets.

“Exchange gains (losses)” can be broken down as follows:


Exchange gains 1,394 8,640 (7,246)

Exchange losses (2,191) (11,909) 9,718

Unrealised exchange gains 8,800 1,670 7,130

Unrealised exchange losses (15,343) (681) (14,662)

Total (7,341) (2,280) (5,061)

Income taxes for the period


Income tax for the year

Current taxes 10,087 5,970 (4,117)

Taxes relating to previous years 66 2,605 2,539

Deferred/(prepaid) taxes 148 (1,794) (1,942)

Expenses (Income) from adhering to the tax consolidation

(517) (803) (286)

Total 9,784 5,978 (3,806)

The item Income taxes amounts to a total of 5,978 thousand Euros (9,784 thousand Euros), with a tax

rate of 49% (87% in the previous period). The tax rate for the year was affected by income from equity

investments benefiting from PEX (Participation Exemption).

Deferred/prepaid taxation

Deferred taxation is stated by the allocation to the tax provision, amounting to 12.8 million Euros. Deferred

taxes are calculated in accordance with the overall allocation approach, taking into account the cumulative

sum of all the timing differences on the average rates expected as of such time as these timing differences

shall reverse.

Prepaid taxes have been recorded since reasonable certainty exists regarding the occurrence – in the years

in which the deductible timing differences will reverse, against which prepaid taxes have been recorded –

of taxable income no lower than the total of the differences which will be cancelled.

The main timing differences which led to the reporting of deferred and prepaid taxes are indicated in the

following table together with the related effects.

100


YEAR 31/12/2017 YEAR 31/12/2018

VALUE OF TEMPORARY

DIFFERENCES TAX EFFECTAMOUNT OF TEMPO-RARY DIFFERENCES TAX IMPACT

Prepaid taxes

Unrealised exchange losses 86 21 45 11

Real estate lease instalments referring to land

81 23 94 27

Real estate depreciation referring to land 196 56 196 56

Maintenance costs 59 14 41 10

Maintenance costs 0 0 0 0

Provisions for risks and charges 906 253 2,552 706

Prepaid taxes foreign financial statements

16,111 3,222 19,759 3,952

ACE 7 2 9 2

Prepaid taxes on reserve for expected derivative flows

812 195 280 67

Tax losses that can be carried forward 4,833 1,160 392 94

Provision for credit depreciation 512 123 1,444 347

Other 147 35 26 6

Elimination of intercompany margins 5,973 1,875 6,832 1,906

Total deferred tax assets 23,751 6,980 24,838 7,184

Deferred taxes 0 0 0 0

Unrealised exchange gains 945 227 2,393 574

Reserve to cover cash flows 34 8 806 193

PO issue costs 757 182 632 152

Villa Soligo property greater value 0 0 538 150

Leasing accounting (equity method) 1,454 406 1,673 467

Deferred taxes foreign financial statements

16,924 3,385 8,307 1,661

Elimination of intercompany profits 877 263 877 694

Recognition of greater values 33,449 8,431 35,057 8,955

Recognition of Interrenko greater value (*) 264 53 0 0

Recognition of Renco kat greater value (*) 8,915 1,783 8,369 1,674

Recognition of Residence Viserba greater value (*)

22,043 6,150 22,043 6,150

Recognition of Renco AK greater value (*) 2,226 445 2,090 418

Recognition of Renco AK greater value (*) 0 0 2,555 713

Total deferred taxes 54,440 12,902 50,284 12,847

Net deferred tax liabilities (assets) 30,689 5,922 25,447 5,663

(*) These tax effects derive from the consolidation entries

101


OTHER INFORMATION

Disclosure on the fair value of derivative financial instruments

It should be noted that the Group decided to conclude derivative contracts to hedge the interest rate risk,

connected with part of the bank loans.

The detailed information required by Article 2427 bis, paragraph 1, no.1 of the Italian Civil Code is presented

as follows.

DESCRIPTION

FAIR VALUE

31/12/2017

2017 TAX

EFFECT

FAIR VALUE

31/12/20182018 TAX

EFFECT

CHANGE IN INCOME

STATEMENTCHANGE

IN SE NATURE

NOTIONAL IN THOU-

SANDS

INTEREST RATE SWAP

(231) 55 (170) 41 - 46

Derivative hedging on the risk of oscillating interest rates

25,000

IRS PLAIN VANILLA

(55) 13 (43) 10 - 9


1,445

IRS PLAIN VANILLA

(55) 13 (43) 10 - 9


1,445

INTEREST RATE SWAP

34 (8) (24) 6 - (44)


8,500

CAP 36 - 8 - (28) -


10,000

EURO/USD EXCHANGE OPTIONS

(471) 113 806 (193) - 970

Hedging derivative on exchange rates for future transactions

39,075 USD

Total (742) 187 535 (126) (28) 991

The Group has the following financial derivative instruments of the “Cash flow hedge” type to hedge

financing transactions and for which the following hedging relationship is present:

notional 25,000 thousand Euro IRS maturing on 11/10/2021 with the frequency of half-yearly payment

to hedge the loan for the same amount. The fair value of the derivative was credited to the “Reserve

for hedging operations for expected financial flows” net of deferred taxation and offset in item B 3)

“Derivative financial liability instruments” for the amount of 231 thousand Euros;





102







to hedge the loan for the same amount. The fair value of the derivative was debited to the “Reserve

for hedging operations for expected financial flows” net of deferred taxation and offset in item B III)

4) “Derivative financial asset instruments” for the amount of 34 thousand Euros;

notional 10,000 thousand Euro interest rate cap maturing on 31/12/2021 with the frequency of

quarterly payment to hedge a loan for the same amount. The fair value of the derivative of 35,951

Euros was entered under item B III) 4) “Derivative financial asset instruments”;

Notional 39,075 thousand USD Euro/USD exchange rate options expiring on 30/06/2020 with a

frequency of half-yearly adjustment to hedge the capital contribution in USD that the Renco Group

will pay to finance the Yerevan Power Plant project. The fair value of the derivative was credited to

the “Reserve for hedging operations for expected financial flows” net of deferred taxation and offset

in item B 3) “Derivative financial liability instruments” for the amount of 471 thousand Euros

Related party transaction disclosure(Ref. Art. 38, first paragraph, lett. o-quinquies), Italian Legislative Decree No. 127/1991)

Transactions with related parties at normal market conditions were put in place. These transactions

relate to business activities carried out for long-standing clients, which have produced profitability in line

with corporate income parameters.

The table below summarises both commercial and financial transactions with related parties broken

down by category.

103


COMPANY REVENUES COSTS

FINANCE INCOME (EXPEN-

SES)TRADE RE-CEIVABLES

TRADE PAYABLES

OTHER PAYABLES

FINANCIAL RECEI-

VABLESFINANCIAL PAYABLES

Unconsolidated subsidiary companies

5,659 6 16 7,534 427 1,499 4,882 -

ARMPOWER 5,659 - 16 7,490 - 1,493 154 -

RENCO FOOD - - - 43 7 - 4,701 -

CONSORZIO RENCO LANCIA ITER

- 6 - - 24 - - -

REAL MOZ - - - - - 4 6 -

TRADEMARK - - - - - 0 - -

REN TRAVEL in liquidation

- - - - 396 - - -

NYASSA SANCTUARY

- - - - - - 12 -

ITALSEC MOZAMBICO

- - - - - 2 8 -

Associated companies

1,752 3,203 143 2,877 2,126 21,306

DARIN CONSTRUCTION

275 - 143 240 - - 12,783 -

VELOFIRMA 421 - - 917 - - 6,311 -

REAL ESTATE MANAGEMENT

289 - - 312 9 - 1,644 -

RENCO IREM COSTRUCOES

38 51 - 65 52 - 568 -

RENCO NIGERIA 613 - - 1,293 - - - -

TOLFA CARE SRL 115 - - 49 - - - -

RENCO QATAR - 3,152 - - 2,065 - - -

Other related parties

114 10 707 218 6,201

ISCO S.R.L. - 10 - 593 218 - - -

SHAREHOLDERS 114 - - 114 - - - 6,201

TOTAL 1,866 3,212 143 3,583 2,343 21,306 6,201

Information on significant events subsequent to the end of the financial year

Pursuant to art. 2427, no. 22-quater of the Italian Civil Code, the following significant events have occurred

in the period between the closing date of the financial year and today:

On 14 February 2019 Armpower and the pool of banks dedicated to the project signed the financing

agreements for the Yerevan power plant.

The financial closing with the disbursement of the loan is expected in May 2019.

Pending the financial closure, on 18 March 2019 Armpower and Renco signed the EPC contract for

construction and works began.

104


On 14 February 2019 Renco Power and its lender banks signed a contract for a commitment to capitalise

and retain ownership of the Armpower project company for the construction of the Yerevan power plant.

On 15 February 2019, Renco S.p.A. and Simest renewed and amended the investment agreement on Renco

Power Cjsc signed on 27 December 2017.

In 2019, Renco S.p.A. paid into Renco Power Cjsc’s account on the basis of the aforementioned contracts,

an amount equal to USD 43,187,992 as a share capital increase.

On the basis of the investment contract signed with Renco Spa, on 4 March 2019 Simest S.p.A. (Cdp

Group) paid € 11,000,000 as a share capital increase of Renco Power Cjsc.

As a result of the capitalisations made by Renco and Simest, Renco Power Cjsc has a total share capital of

US$ 56,070,000 equivalent and has therefore reached the capitalisation envisaged by the project for the

construction of the Yerevan power plant, as approved by the lending banks.

In March 2019 the Renco Group inaugurated the hotel in the city of Pointe Noire, in the Republic of Congo.

The structure is the second “Double Tree By Hilton” Hotel, after the positive experience of opening the first

Hilton, built in the city of Yerevan, capital of Armenia.

The hotel owned by Renco Gestion Immobiliere was designed, developed and built by Renco, which fully

financed it, and it will be managed directly like the other hotels of the Group. The property is affiliated with

the Hilton Worldwide Group category and consists of 121 rooms.

Off balance sheet commitments, guarantees and contingencies

Below is the total amount of commitments, guarantees and potential liabilities not shown in the balance

sheet, with indication of the nature of the collateral provided; the existing commitments on retirement

and similar commitments, as well as the commitments entered into with subsidiary companies, associated

companies, parent companies and companies subject to the control of the latter are indicated separately:

DESCRIPTION 31.12.2017 31.12.2018 CHANGES

Memorandum accounts of third-party risks 262,650 265,182 2,532

Memorandum accounts of commitments undertaken 198 185 (13)

Total 262,848 265,367 2,519

The following section provides information on the composition and nature of commitments and other

memorandum accounts, knowledge of which is useful for assessing the financial position of the company,

with specific indication of those relating to subsidiary companies, associated companies, parent companies

and partner companies.

The total amount of sureties issued by the Group at 31 December 2018 was 265.2 million Euros (262 million

Euros in 2017). The detail of sureties is provided below:

79.3 million Euros (90.2 million Euros in 2017), guarantees issued by Renco S.p.A. to clients, against the

commitments assumed by Group companies for the proper execution of acquisitions. The item consists

of performance bonds of 42.1 million Euros (47.9 million Euros in 2017), advance payment bonds of 29.2

105


million Euros (38.4 million Euros in 2017), bid bonds and stand by letters of 4.3 million Euros (2.7 million

Euros in 2017) and other guarantees of 3.8 million Euros (1.2 million Euros in 2017);

12.9 million Euros relate to the insurance guarantee issued by Residence Viserba S.r.l. to the city of

Rimini to guarantee the subsequent free transfer to the latter of the urbanisation works in the Viserba

area.

185.9 million Euros (159.7 million Euros in 2017) relate to parent company guarantees issued by Renco

Group to guarantee the obligations undertaken by Renco S.p.A with financial institutions, relating to

credit lines and loans granted by said institutions.

With reference to the commitments taken, it should be noted that 185 thousand Euros refer to the

commitment taken by the subsidiary Joint Green Srl, with the acquisition of the fixed-term (22 years) rights

on the Fossombrone area, to pay an annual instalment until the expiry of the right of the same.

Disclosure regarding off balance sheet agreements

(Ref. Art. 38, first paragraph, letter o-sexies), Italian Legislative Decree No. 127/1991)

The Group has no agreements in place not resulting from the Balance Sheet.

Information on the fees due to the independent auditor

(Ref. Art. 38, first paragraph, lett. o-septies), Italian Legislative Decree No. 127/1991)

In accordance with the law, please note the fees for the year for services provided by the statutory

independent auditing firm and entities belonging to its network to the Group:

fees due for the statutory audit of the consolidated accounts: 162.1 thousand Euros.

Other information

In accordance with the law, please note the total fees due to the directors, the members of the Board

of Auditors of the parent company including those due for the performance of these tasks also in other

businesses included in the consolidation.

OFFICE RENCO GROUP S.P.A. RENCO S.P.A. FEE

Directors 145.6 85.1 230.7

Board of auditors 17.5 72.8 90.3

Total 163.1 157.9 321.0

These consolidated financial statements, comprising the balance sheet, income statement and explanatory

notes, provide a true and fair view of the equity and financial situation as well as the economic result,

and are consistent with the underlying accounting records of the parent company, and the information

provided by the companies included in the consolidation.

106


Attachments to the consolidated financial statements:

list of companies included in the consolidation using the line-by-line method in accordance with Art. 26

of Italian Legislative Decree 127/91;

list of companies included in the consolidation using the proportional method in accordance with Art.

37 of Italian Legislative Decree 127/91

list of other equity investments in subsidiary and associated companies not consolidated;

list of other equity investments;

reconciliation table between the financial statements of the parent company and the consolidated

financial statements;

statement of changes in consolidated shareholders’ equity accounts.

Pesaro 20.04.2019

On behalf of the Board of Directors

The Chairman

Giovanni Gasparini

107


A T T A C H M E N T 1 T O T H E C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A S O F 3 1 / 1 2 / 2 0 1 8

List of companies included in consolidation using the line-by-line method in accordance with Art. 26 of Italian Legislative Decree 127/91 as of 31/12/2018

COMPANY NAME

REGISTERED OFFICE CURRENCY

SHARE CAPITAL SHAREHOLDERS SHARE PROP. SHARE CONS.

RENCO S.P.A. ITALY EUROS 60,000,000RENCO GROUP S.P.A.

99.51% 99.51%

RENCO REAL ESTATE S.R.L.

ITALY EUROS 100,000 RENCO S.P.A. 100.00% 99.51%

RENCO HEALTH CARE S.R.L.


JOINT GREEN SRL


RENCO CAPITAL S.R.L.

ITALY EUROS 100,000RENCO GROUP S.P.A.

99.99% 99.99%

RESIDENCE VISERBA S.R.L.

ITALY EUROS 1,425,420 RENCO S.P.A. 100.00% 99.51%

ARENGEST S.R.L. ITALY EUROS 10,000RENCO REAL ESTATE S.R.L.

100.00% 99.51%

ITALSEC S.R.L. ITALY EUROS 100,000 RENCO S.P.A. 90.00% 89.56%

RENCO ARMESTATE LTD

ARMENIA DRAM 500,992,000 RENCO S.P.A. 100.00% 99.51%

ARMENIA GESTIONE

ARMENIA DRAM 50,000RENCO REAL ESTATE S.R.L.

100.00% 99.51%

PIAZZA GRANDE LLC

ARMENIA DRAM 500,000,000RENCO REAL ESTATE S.R.L.

100.00% 99.51%

NUOVO VELODROMO

ARMENIA DRAM 50,000RENCO REAL ESTATE S.R.L.

100.00% 99.51%

ITALSEC ARMENIA

ARMENIA DRAM 100,000 ITALSEC S.R.L. 100.00% 89.56%

RENCO POWER CJSC

ARMENIA DRAM 100,000 RENCO S.P.A. 100.00% 99.51%

RENCO-KAT S.R.L.

KAZAKHSTANTENGE KAZAKHSTAN

74,600,000 RENCO S.P.A. 50.00% 49.76%

RENCO PROPERTY LLP


74,600,000 RENCO S.P.A. 100.00% 99.51%

INTERRENKO LTD.

RUSSIARUSSIAN RUBLE

134,500 RENCO S.P.A. 100.00% 99.51%

SOUTHERN CROSS LLC

RUSSIARUSSIAN RUBLE

37,256,408GRAPEVINE INVESTIMENTOS E SERICOS LDA

100.00% 49.76%

RENCO SAKH LLP

RUSSIARUSSIAN RUBLE

233,278,000RENCO REAL ESTATE S.P.A.

100.00% 99.51%

BAYTREE INVESTIMENTOS E SERVICOS LDA

PORTUGAL EUROS 5,000 RENCO S.P.A. 100.00% 99.51%

GRAPEVINE INVESTIMENTOS E SERICOS LDA

PORTUGAL EUROS 5,000BAYTREE INVESTIMENTOS E SERVICOS LDA

50.00% 49.76%

108


RENCO ZANZIBAR LTD

TANZANIA SHILLING RENCO S.P.A. 100.00% 99.51%

RENCO TANZANIA LTD

TANZANIA SHILLING 20,000,000 RENCO S.P.A. 99.00% 98.52%

RENCO MOZAMBICO LTP

MOZAMBIQUE METICAL250,000

RENCO S.P.A.


94.50% 96.53%

2.50% 96.53%

RENCOTEK MOZAMBIQUE METICAL10,000,000


RENCO S.P.A. 99.00% 99.51%

1.00% 99.51%

RENCO ENERGIA LDA

MOZAMBIQUE METICAL 250,000 RENCO S.P.A. 62.50% 62.19%

RENCO GESTION IMMOBILIERE

CONGOAFRICAN FRANC

10,000,000RENCO REAL ESTATE S.R.L.

70.00% 69.66%

ITALSEC CONGO CONGOAFRICAN FRANC

10,000,000 ITALSEC S.R.L. 100.00% 89.56%

ANGORENCO LDA

ANGOLAREADJUSTADO KWANZA

750,000RENCO S.P.A.

RENCO GROUP S.P.A.

1.00% 99.52%

99.00% 99.52%

RENCO MAR MOROCCOMOROCCAN DIRHAM

1,000,000 RENCO S.P.A. 97.00% 96.53%

RENCO ENERGIES SA

MOROCCOMOROCCAN DIRHAM

300,000 RENCO MAR 59.70% 57.63%

RENCO ALGERIA ALGERIAALGERIAN DINAR

1,000,000 RENCO S.P.A. 100.00% 99.51%

BAYTREE LLCUNITED STATES OF AMERICA

US DOLLAR 12,482BAYTREE INVESTIMENTOS E SERVICOS LDA

100.00% 99.51%

VILLA SOLIGO SRL

ITALY EUROS 93,080RENCO REAL ESTATE S.R.L.

100.00% 99.51%

RENCO CANADA CANADACANADIAN DOLLAR

100 RENCO S.P.A. 100.00% 99.51%

List of companies included in consolidation using the net equity method in accordance with Art. 26 of

Italian Legislative Decree 127/91 as of 31/12/2018

COMPANY NAMEREGISTERED OFFICE CURRENCY

SHARE CAPITAL

SHAREHOL-DERS SHARE PROP. SHARE CONS.

ARMPOWER CJSC ARMENIA DRAM 100,000 RENCO S.P.A. 60.00% 59.71%

RENCO CAPITAL S.R.L. ITALY EUROS 100,000 RENCO S.P.A. 100.00% 99.51%

TOLFA CARE S.R.L. ITALY EUROS 825,000RENCO HEALTH CARE S.R.L.

47.50% 42.54%

Chairman of the Board of Directors

Giovanni Gasparini

COMPANY NAME

REGISTERED OFFICE CURRENCY

SHARE CAPITAL SHAREHOLDERS SHARE PROP. SHARE CONS.

109



List of companies included in consolidation using the proportional method in accordance with Art. 37 of Italian Legislative Decree 127/91 as of 31/12/2018

COMPANY NAMEREGISTERED OFFICE SHARE CAPITAL SHAREHOLDERS

PROP. HOLDING

CONS. HOLDING

Currency Amount % %

TERNA GREECE JV GREECE EUROS 0 RENCO S.P.A. 50.000 50.000

110



List of other equity investments in subsidiary companies (not consolidated) and associated companies

COMPANY NAMEREGISTERED OFFICE CURRENCY

SHARE CAPITAL SHAREHOLDERS

SHARE PROP.

SHARE CONS.

VELOFIRMA (1) ARMENIA DRAM 4,100,000NUOVO VELODROMO

58.00% 57.72%

CONSORZIO STABILE RENCO LANCIA GAMMA (3)


TOLFA CARE S.R.L. ITALY EUROS 825,000RENCO HEALTH CARE S.R.L.

47.50% 42.54%

REAL ESTATE MANAGEMENT S.R.L.

ITALY EUROS 10,000RENCO REAL ESTATE S.R.L.

30.00% 29.85%

RENCO QATAR QATAR RYAL QATAR 200,000 RENCO S.P.A. 49.00% 48.76%

DARIN CONSTRUCTION


3,500,000RENCO REAL ESTATE S.R.L.

25.00% 24.88%

RENCO NIGERIA NIGERIANIGERIAN NAIRA

15,977 RENCO S.P.A. 49.00% 48.76%

NIASSA SANCTUARY LTD (3)

MOZAMBIQUE METICAL

100,000 REAL MOZ 50.00% 49.76%

ITALSEC MOZAMBICO (3)

MOZAMBIQUE METICAL

250,000 ITALSEC S.R.L. 100.00% 89.56%

REAL MOZ LDA (3) MOZAMBIQUE METICAL250,000

RENCO S.P.A.


99.00% 98.52%

1.00% 1.00%

TRADEMARK ITALY LLP (3)


240,500 RENCO S.P.A. 50.00% 49.76%

RENTRAVEL S.R.L. (2) ITALY EUROS 10,000RENCO GROUP S.P.A.

99.99% 99.99%

RENCO IREM CONSTRUCOES LDA

MOZAMBIQUE METICAL 10,000,000 RENCO S.P.A. 31.25% 31.10%

REASONS FOR EXCLUSION

Company exempt from consolidation since not controlled based on contractual agreements

Company exempt from consolidation because it is in liquidation

Company excluded since insignificant


Giovanni Gasparini

111



Figures are given in thousands of Euros

Statement reconciling the net result and shareholders’ equity of the consolidating company with the respective values resulting from the consolidated financial statements

The group consolidated shareholders’ equity and consolidated economic results as of 31/12/2018 are

reconciled with those of the parent company as follows:

SHAREHOLDERS’

EQUITY RESULT

Shareholders’ equity and period result as recorded in the financial year of the parent company 79,617 1,721

Effect of adjustments made in application of the accounting standards 10 312

a) Adoption of IAS 17 (44) (168)

b) Valuation of non-consolidated associated and subsidiary companies using the equity method 53 480

Elimination of the book value of consolidated investments: 86,457 5,030

a) Net effect of elimination of the book value of the consolidated shareholdings with the relative shareholders’ equity and results

29,336 14,311

b) Reversal of write-downs/revaluations of equity investments 31,791 10,828

c) Reversal of intercompany dividends, investee companies - (12,010)

d) Value of net capital gains attributions at the acquisition date of investee companies net of the related tax effect

25,331 (785)

e) Elimination of capital gains from disposal of equity net of the related tax effect - (7,314)

Other consolidation entries net of the related tax effect (5,442) (962)

a) Elimination of intercompany profits net of the related tax effect (6,306) (1,217)

b) Other consolidation entries net of the related tax effect 864 255

Consolidated shareholders’ equity and period result 160,642 6,100


Giovanni Gasparini

112



Amounts are shown in Euros.

Consolidated group statement of changes in shareholders’ equity

SH

AR

E C

AP

ITA

L

SH

AR

E P

RE

MIU

M R

ES

ER

VE

RE

VA

LU

AT

ION

RE

SE

RV

E

LE

GA

L R

ES

ER

VE

EX

TR

AO

RD

INA

RY

RE

SE

RV

E

CA

PIT

AL

CO

NT

RIB

UT

ION

S

NE

GA

TIV

E R

ES

ER

VE

FO

R T

RE

A-

SU

RY

SH

AR

ES

IN

PO

RT

FO

LIO

RE

SE

RV

E F

OR

HE

DG

ING

OP

ER

A-

TIO

NS

FO

R F

INA

NC

IAL

FL

OW

S

CO

NS

OL

IDA

TIO

N R

ES

ER

VE

TR

AN

SL

AT

ION

DIF

FE

RE

NC

ES

PR

OF

IT (

LO

SS

) C

AR

RIE

D

FO

RW

AR

D

PE

RIO

D R

ES

UL

T

TO

TA

L

MIN

OR

ITY

IN

TE

RE

ST

S

TO

TA

L S

HA

RE

HO

LD

ER

S’

EQ

UIT

Y

Balance as of 31.12.2016

9,013 25,988 4,802 1,029 15,415 25,026 (3,609) (429) 5,910 (18,862) 78,194 10,240 152,717 3,418 156,135

Allocation of net income for the year

- - - 139 2,643 - - - - - 7,458 (10,240) - - -

Dividends paid - - - - - - - - - - - - - (19) (19)

Fair value measurement of reserve to hedge expected financial flows

- - - - - - - (162) - - - - (162) - (162)

Other changes - - - - - - - - - (6,866) 1,892 - (4,974) (73) (5,047)

Result for the current year

- - - - - - - - - - - 707 707 798 1,505


9,013 25,988 4,802 1,168 18,058 25,026 (3,609) (591) 5,910 (25,728) 87,544 707 148,288 4,124 152,412

Allocation of net income for the year

- - - 113 2,140 - - - - - (1,546) (707) - - -

Dividends paid - - - - - - - - - - - - - (19) (19)

Fair value measurement of reserve to hedge expected financial flows

- - - - - - - 986 - - - - 986 5 991

Other changes - - (106) - - - - 3 (1,597) 1,786 965 - 1,049 108 1,158

Result for the current year

- - - - - - - - - - - 8,755 8,755 (2,655) 6,100


9,013 25,988 4,696 1,281 20,198 25,026 (3,609) 398 4,313 (23,942) 86,963 8,755 159,078 1,563 160,642


Giovanni Gasparini

113


114

115

Management Report accompanying the consolidated

financial statements as of 31/12/2018

Concept design and layout by

Studio grafico Agostini, Rome

Published in July 2019

© Renco Group S.p.A.

Date post:	29-May-2020
Category:	Documents
Upload:	others
View:	2 times
Download:	0 times

MANAGEMENT REPORT ON THE FINANCIAL STATEMENTS 2018 › wp-content › uploads ›...

Documents