ezzsteel REPORTS CONSOLIDATED FULL YEAR 2010 RESULTS

Transcription

1 ezzsteel REPORTS CONSOLIDATED FULL YEAR 2010 RESULTS Cairo, 9 August 2011 ezzsteel (formerly: Al Ezz Steel Rebars S.A.E.) (EGX: ESRS; London Stock Exchange: AEZD), the largest independent producer of steel in the MENA region and market leader in Egypt, today announced its consolidated full year results for the period ending 31 December The audited results have been prepared in accordance with Egyptian Accounting Standards. Key highlights EGP YoY (+/-) Net sales 12.6bn 16.6bn +32% Gross profit 1,454mn 1,924mn +32% EBITDA* 1,643mn 2,111mn +29% Net profit before tax and minority interest 497mn 772mn +55% Net profit after tax and minority interests 88mn 252mn +186% Earnings per share % Net debt to Equity 0.99x 1.29x *EBITDA = sales cost of goods sold selling & marketing expense G&A expense + depreciation and amortisation

2 Comment Commenting on the results, Mr Paul Chekaiban, Chairman and Managing Director of ezzsteel, said: After a challenging 2009, ezzsteel has performed strongly in Our vertically integrated and flexible model has ensured improved profitability and mitigated the effects of volatility in global steel prices and demand during the period under review marked an all time record for ezzsteel in terms of annual production volumes; this was assisted by EFS returning to production at the start of Q Understandably, in early 2011, we have seen some minor production disruptions which have slowed production volumes. However, during the first six months of 2011 we have still delivered higher steel product volumes than during the same period in We are confident that ezzsteel s business model, together with the expansion projects which are already progressing, will once again deliver even more compelling results when the Egyptian economy recovers and a more stable political environment returns. For further information: Ezz Steel Tel Mobile Kamel Galal Ashraf El Ghannam Capital MSL Claire Maloney Hollie Vile About Al-Ezz Steel Rebars Co. S.A.E. Al Ezz Steel Rebars (ezzsteel) is the largest independent steel producer in the Middle East and North Africa, and the Egyptian market leader, with a total actual capacity of 5.8 million tonnes of finished steel. In 2010, the Company produced 3.4 million tonnes of long products (typically used in construction) and 1.5 million tonnes of flat products (typically used in consumer / industrial goods). ezzsteel's customer base is geographically diversified, with flat products mainly directed to export markets, whereas long products are sold in the domestic market. More than 50 per cent of its plants are less than 10 years old, using the latest in modern steel making technology.

3 Operational Review All of the below financial breakdowns are based on ezzsteel s consolidated financials which include the financial performance of ESR/ERM, EZDK and EFS. Sales & Production Consolidated net sales for 2010 were EGP 16.6 billion compared with EGP 12.6 billion during 2009, representing an increase of 32 per cent. This increase in sales has been the result of increased volumes with EFS returning to production from the second quarter of Sales ESR/ERM EZDK EFS Consolidated EGP Mn Long 5,295 6,282 11,577 Flat 3,505 1,329 4,834 Others Total 16,621 ezzsteel s exposure to the weaker global steel market is primarily through its flat steel products, with long steel products primarily directed to serving the buoyant domestic market. EGP Mn Domestic per cent Export per cent Long 11, Flat 2, , Long steel sales volume reached 3,393 thousand tonnes during 2010, which represents a 4 per cent increase over the 3,257 thousand tonnes sold during This increase over the previous year was to meet strong domestic demand for long products. Flat steel sales volumes also increased to 1,305 thousand tonnes in 2010 from 1,016 thousand tonnes in 2009, a rise of 28 per cent year-on year. This was due to the reopening of the EFS production facility in April Long steel products were 70 per cent of total sales in 2010, accounting for EGP 11,577 million, while flat steel products represented 29 per cent of sales at EGP 4,834 million. Long product exports accounted for only 2 per cent of total long sales, due to the continued strength of domestic market demand for long products in Conversely, flat product exports accounted for 58 per cent of total flat sales, primarily for exports. Long steel production volume reached 3,411 thousand tonnes during 2010 representing a 4 per cent increase over the 3,287 thousand tonnes produced during Flat steel production

4 volumes were 49 per cent higher at 1,461 thousand tonnes in 2010 compared to 979 tonnes in 2009, again due to the restart of production at EFS. On a plant basis, ESR/ERM long steel production rose by 6 per cent year-on-year in comparison with 2009 to 1,563 thousand tonnes. EZDK long production rose by 2 per cent over the same period at 1,848 thousand tonnes and flat production by 4 per cent at 1,015 tonnes. Flat production at EFS was substantially increased at 445,649 tonnes, up from just 1,228 tonnes for the previous year when it was shutdown. Billet production at EFS has also started during Q3 2010, producing 211 thousand tonnes in Q The contributions of ESR/ERM, EZDK and EFS to the consolidated net sales for the period ending 31 December 2010 were 32 per cent, 60 per cent, and 8 per cent respectively. Cost of Goods Sold Consolidated cost of goods sold for the year ended 31 December 2010 represented 88 per cent of sales, and remains the same as during the preceding year. Standalone figures Consolidated EGP Mn ESR/ERM EZDK EFS ezzsteel Sales 6,236 9,853 1,355 16,621 COGS 6,023 8,171 1,373 14,698 COGS/Sales 97% 83% 101% 88% Gross profit Gross profit of EGP 1,924 million was recorded in 2010, an increase of 32 per cent from the EGP 1,454 million recorded in the same period in EBITDA EBITDA for the period reached EGP 2,111 million, up from EGP 1,643 million for 2009 representing an increase of 29 per cent over the previous year. Net profit after tax and minority interests For the year ending 31 December 2010, net profit after tax and minority interests was EGP 252 million, an increase of 186 per cent compared to the EGP 88 million reported for 2009.

5 Liquidity and capital resources At the end of the period, ezzsteel had cash on hand of EGP 1.4 billion and net debt of EGP 8.4 billion. The company has gearing of Net Debt / Equity 1.29 times. Outlook Understandably, in early 2011, we have seen some minor production disruptions which have slowed production volumes. However, during the first six months of 2011 we have still delivered higher steel product volumes than during the same period in As previously announced, ezzsteel has reorganized its Board of Directors following the resignation of Ahmed Ezz from his position as Chairman and appointed Paul Chekaiban as Chairman and Managing Director. Due to the momentous events that have been taking place in Egypt since the beginning of the year, we have encountered delays in the construction of our new DRI project. The banks financing the project are providing the required funds in order to finalise the construction and we expect that the project will be operational during the second half of next year.

6 Divisional Overview EZDK Performance Sales (EGP): Production: Volume: Long: Flat: Exports as % of Sales: Long: Flat: FY 2009 FY 2010 Value: Bn 1,799, ,328 1,816, ,320 3% 4% 52% 43% EBITDA: Bn Tonnes Tonnes Long Products: 1,806,025 1,847,866 Tonnes Flat Products: 977,645 1,015,495 Tonnes Billets: 2,020,289 1,931,053 Tonnes ESR/ERM Performance Sales (EGP): Value: Bn Volume: 1,466,391 1,557,117 Tonnes Exports as % of Sales: 0% 0% EBITDA: Mn Production: Long Products: 1,480,492 1,562,628 Tonnes Billets: 842, ,864 Tonnes EFS Sales (EGP): Production: Value: Bn Volume: 42, ,395 Tonnes Exports as % of Sales: 96% 95% EBITDA: Mn Flat Products: 1, ,649 Tonnes Billets: 0 211,133 Ends Disclaimer: This press release is issued by Ezzsteel (formerly: Al Ezz Steel Rebars S.A.E.) the Company, in connection with the disclosure of the Company s financial results for the 12 month period ending 31 December This press release includes forward-looking statements. These forwardlooking statements include all matters that are not historical facts. In particular, the statements regarding the Company's strategy, the expected strength of demand for long and flat products in

7 Egypt and in regional and international markets, and other future events or prospects are forwardlooking statements. Recipients of this document should not place undue reliance on forwardlooking statements because they involve known and unknown risks, uncertainties and other factors that are in many cases beyond the control of the Company. By their nature, forwardlooking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance and the Company's actual results of operations, financial condition and liquidity, and the development of the industry in which the Company operates may differ materially from those expressed in or implied by the forward-looking statements contained in this document. The cautionary statements set forth above should be considered in connection with any subsequent written or oral forward-looking statements that the Company, or persons acting on its behalf, may issue. Various factors could cause actual results to differ materially from those expressed or implied by the forward-looking statements in this document including worldwide economic trends, global and regional trends in the steel industry, the economic and political climate of Egypt and the Middle East and changes in the business strategy of the Company and various other factors. These forward-looking statements reflect the Company's judgment at the date of this document and are not intended to give any assurances as to future results. The Company undertakes no obligation to update these forward-looking statements, and it will not publicly release any revisions it may make to these forward-looking statements that may result from events or circumstances arising after the date of this document. None of Ezzsteel, any of its directors, officers or employees or any other person can give any assurance regarding the future accuracy of the information set forth herein or as to the actual occurrence of any predicted developments. Furthermore, none of such parties shall assume, and each of them expressly disclaims, any obligation (except as required by law or the rules of the ESE, the LSE or the FSA) to update any forward-looking statements or to conform these forward-looking statements to Ezzsteel's actual results.

8 (An Egyptian Joint Stock Company) Consolidated Financial Statements For the Financial Year Ended December 31, 2010 & Auditor s Report

9 AUDITOR'S REPORT To The Shareholders of Ezz Steel Company Report on the consolidated Financial Statements We have audited the accompanying consolidated financial statements of Ezz Steel Company "An Egyptian Joint Stock Company", which comprise the consolidated balance sheet as of December 31, 2010 and the consolidated statements of income, cash flows and changes in equity for the financial year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the consolidated Financial Statements These consolidated financial statements are the responsibility of Company s management. Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the Egyptian Accounting Standards and in the light of the prevailing Egyptian laws, management responsibility includes, designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; management responsibility also includes selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the Egyptian Standards on Auditing and in the light of the prevailing Egyptian laws. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error../

10 In making those risk assessments, the auditor considers internal control relevant to the company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ezz Steel Company as of December 31, 2010 and of its financial performance and its cash flows for the year then ended in accordance with the Egyptian Accounting Standards and the Egyptian laws and regulations relating to the preparation of these consolidated financial statements. Emphasis of Matter Without qualifying our opinion, we draw attention to the following: 1- As detailed in Note No. (31-3-1) of the notes to the consolidated financial statements. The tax claims due from Al Ezz El Dekheila for Steel Alexandria company a subsidiary company amounted to LE 217 million according to the forms received from the Tax Authority on February 17, 2011 concerning the tax imposed on the flat steel project which has previously enjoyed a tax exemption for the years The company s management opinion is that the tax inspection was previously made for the company pertaining to these years, and an agreement was reached in the Internal Committee, while the disputed point pertaining to the cancellation of the development duty on the exempted movable tax base was referred to the Appeal Committee which issued a resolution on June 12, 2010 to the effect of cancelling the development duty imposed on the exempted movable tax base, while the other tax bases shall remain exempted for the disputed years. The due tax was paid in full as per the resolution of the Internal Committee; accordingly the dispute amicably came to an end and became final and decisive. The company s management and its legal advisor are of the opinion that the company s tax position is stable as the resolution of the Appeal Committee supported the company and the company s position became indisputable from the legal point of view. Subsequently, the Tax Authority cannot dispute with the company about these years once again. The company filed a lawsuit of discharge from any indebtedness before the court under No. 405 of the year 2011, and it has not been considered up to this date

11 2- As detailed in Note No. ( ) of the notes to the consolidated financial statements there are several lawsuits referred to the criminal court according to the referral order issued by the Supreme Public Fund Prosecution with respect to a number of former and current officials working for Al Ezz El Dekheila for Steel - Alexandria company a subsidiary company. Currently, it is difficult to determine the final consequences which may result from such lawsuits which were filed against Al Ezz El Dekheila for Steel - Alexandria company until a final judgment is issued by the legal bodies in their regard. 3- As detailed in Note No. (34-2-1) of the notes to the consolidated financial statements. In August 2008, Al-Ezz Flat Steel Company a subsidiary company obtained a free production capacity license from the Industrial Development Authority to increase the annual production capacity thereof, and this issue shall be subjected to consideration by the Criminal Court to claim the payment of fees related to this license in addition to any penalties that may be imposed by the court, and until the date of issuing these financial statements, the court has not issued a final judgment in this regard whereas it is postponed to the session dated 15/9/2011 for issuing a ruling to this effect. The company s management and its external legal consultants are of the opinion that a ruling may be issued whether objecting to obliging the company to settle the fees imposed on this license as a prior approval was granted to the company for the issuance of such free license to be on equal footing with similar companies (other than El-Ezz Group companies), or a ruling may be issued obliging the company to settle the license s fees estimated by the Industrial Development Authority, and in such case the company shall have the option either to pay the estimated license s fees or not to pay the fees and waive this license. Currently, it is difficult to determine the final outcome arising from such lawsuit until a final ruling is issued by the court. 4- As detailed in Note No. (34-1) of the notes to the consolidated financial statements the company was unable to obtain the appropriate data, which could enable it to disclose the effect of the subsequent events on the values of the assets, liabilities and the results of operations in the foreseeable future, since these amounts and results may differ significantly when reliable indicators and signs become available, which enable the use of those indicators and signs in determining the extent and the impact of the subsequent events on the carrying amount of the assets and liabilities included in the financial statements. Cairo, August 8, 2011 KPMG Hazem Hassan Public Accountants & Consultants - 3 -

12 (An Egyptian Joint Stock Company) Consolidated Balance Sheet As of December 31, 2010 Note 31/12/ /12/2009 No. LE(000) LE(000) Long Term Assets Fixed assets (net) (4) Projects under construction (5) Financial investments in associates (6-1) Financial investments available-for-sale (6-2) Payment under purchase of investments (6-3) Long term lending to others (7) Sales tax installments (8) Long term saving certificates Long term trade and notes receivable Goodwill (3-7) Total long term assets Current Assets Inventory (9) Trade and notes receivable (10) Debtors and other debit balances (11) Suppliers - advance payments Investments in treasury bills (3-6) Cash and cash equivalents (13) Total current assets Current Liabilities Banks - overdrafts (14) Loan installments and facilities due within one year (15) Bonds loan due within one year (24) Trade and notes payable (16) Trade receivables - advance payments Creditors and other credit balances (17) Provisions (18) Total current liabilities (Increase) Decrease of current liabilities over current assets ( ) Total investment Financed as follows: Shareholders' Equity Issued and paid - up capital (21-2) Reserves (22) Retained earnings Net profit for the year Treasury stocks (23) ( ) ( ) Translation difference adjustments The difference resulting from the acquisition of additional percentage in subsidiaries' capital (2-5) ( ) ( ) Total holding company shareholders' equity Non-controlling interest Total Shareholders' equity Long Term Liabilities Loans and credit facilities (15) Other liabilities (19) Bonds loan (24) Deferred tax liabilities (25) Total long term liabilities Total equity and long term liabilities The accompanying notes from No. (1) to No. (35) form an integral part of these financial statements. Chairman & Managing Director Paul Philipe Chekaiban Auditor's Report "attached"

13 (An Egyptian Joint Stock Company) Consolidated Statement of Income For the Financial Year Ended December 31, 2010 Note No. LE(000) LE(000) Sales (net) (3-18) Less : Cost of sales (26) Gross profit Less: Selling and marketing expenses (27) General and administrative expenses (28) Impairment loss on assets (12) Provisions (18) Total expenses Results from operating activities Add (Less): Net finance cost Interest & finance expenses ( ) ( ) Interest income Amortization of bonds issuance expenses ( 2 200) ( 2 200) Foreign exchange differences ( ) ( ) Add : Reversal of impairment loss on assets (12) Provision no longer required Other revenues Income from sale of investments Income from investments 241 Capital gain ( ) ( ) Net profit for the year before income tax Less: Current income tax for the year (3-20) ( ) ( ) Deferred tax (25) ( ) ( ) Net profit for the year Attributable to: Equity holders of the holding company Non-controlling interest Net profit for the year Earnings per share for the year (LE/share) (33) The accompanying notes from No. (1) to No. (35) form an integral part of these financial statements

14 (An Egyptian Joint Stock Company) Note No. LE(000) LE(000) Cash flows from operating activities Net profit for the year before income tax Adjustments to reconcile net profit to net cash from operating activities Consolidated Statement of cash flows For the Financial Year Ended December 31, 2010 Depreciation (4) Amortization of bond issuance costs Financing income ( ) ( 65) Capital gain ( 673) ( 218) Amortization of accrued interest ( 5 351) ( 1 776) Deferred revenues for accrued sold units installments ( 22) ( 377) Reversal of impairment loss on assets (12) ( 100) ( ) Impairment loss on assets (12) Interest & finance expenses Provisions (18) Provision no longer required ( ) Income from investments ( 241) Income from sale of investments ( ) Foreign currency exchange differences ( ) Changes in working capital - Inventory ( ) Trade receivables, debtors and other debit balances ( ) - Creditors and other credit balances ( ) - Provisions used (18) ( ) ( 1 819) Cash flows generated from operating activities Interest paid ( ) ( ) Income tax paid ( ) ( ) Net cash flows from operating activities Cash flows from investing activities Payments for purchase of fixed assets and projects under construction ( ) ( ) Proceeds from reclaim of financial investments (treasury bills) Payments for purchase of financial investment (treasury bills) ( ) ( ) Proceeds from sale of fixed assets Payments for fixed assets creditors ( ) Payments to decrease non-controlling interest ( ) ( ) Payments for purchase of investments (6-3) ( ) Payments for lending others ( 7 648) ( 7 610) Proceeds from lending others Net cash used in investing activities ( ) ( ) Cash flows from financing activities Changes in credit facilities ( ) Change in blocked time-deposits and current accounts ( ) Payments for loans ( ) ( ) Proceeds from loans Change in other long term liabilities ( 34) ( 14) Change in non-controlling interest ( ) Proceeds from non-controlling interest for capital increase in a subsidary's capital Payments for bonds loan ( ) Dividends paid ( ) ( ) Net cash from (used in) financing activities ( ) Net change in cash and cash equivalents during the year ( ) Cash and cash equivalents at beginning of the year (13) ( ) Translation differences Cash and cash equivalents at the end of the year (13) ( ) ( ) The accompanying notes from No. (1) to No. (35) form an integral part of these financial statements

15 (An Egyptian Joint Stock Company) Consolidated Statement of Changes in Shareholders' Equity For the Financial Year Ended December 31, 2010 The Difference resulting from Employees and the acquisition board of Total of subsidiaries Translation directors' share Holding Non- Total within the Retained difference Treasury Net in interim Interim company controlling Shareholders' Capital Reserves group earnings adjustments stocks profit distributions dividends Shareholders Interest Equity LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) Balance as of 1/1/ ( ) ( ) ( ) ( ) Transferred to legal reserve ( ) Company's share & non-controlling interest in employees and ( ) ( ) ( ) ( ) the board of directors' share in EZDK interim dividends of 2008 Setting - off inetrim dividends of year 2008 ( ) Payments to decrease non-controlling interest ( ) ( ) ( 1 085) ( ) Translation difference adjustments ( ) ( ) ( 145) ( ) Dividends for the year 2008 ( ) ( ) ( ) ( ) ( ) Setting off rest of year 2008 profits in retained rearnings ( ) Retained earnings increase due to the decrease of participation percentage in EFS Non-controlling interest's participation in payments for capital increase in ERM Difference resulting from EZDK's acquisition of EFS ( ) ( ) ( ) ( ) Setting off ESR's share in reserves of EZDK's subsidiaries ( 1 102) ( 1 102) ( 961) ( 2 063) Non-controlling interest's share in increase in participation percentage in EFS Net profit for year Balance as of 31/12/ ( ) ( ) The accompanying notes from No. (1) to No. (35) form an integral part of these financial statements

16 (An Egyptian Joint Stock Company) Consolidated Statement of Changes in Shareholders' Equity (Continued) For the Financial Year Ended December 31, 2010 The Difference resulting from the acquisition Total of subsidiaries Translation holding Non- Total within the Retained difference Treasury Net company controlling shareholders' Note Capital Reserves group earnings adjustments stocks profit shareholders interest equity No. LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) LE (000) Balance as of 1/1/ ( ) ( ) Setting off profit of year 2009 in retained earnings ( ) Setting off company's share & non-controlling interst in employees and ( ) ( ) ( ) ( ) the board of directors' share in EZDK dividends of 2009 Transferred to legal reserve ( ) Dividends for the year 2009 to non-controling interest ( ) ( ) Adjustments on EZDK reatined earnings ( 852) ( 852) ( 709) ( 1 561) Increase in non-controling interest as a result of change in percentage of ( 70) ( 70) 70 participation in a subsidiary Reduction in non-controling interest as a result of ERM 's treasury stock redemption ( 3 697) The difference resulting from the acquisition of additional percentage (2-5) ( ) ( ) ( ) ( ) Translation difference adjustments Non-controling interest's participation in ERM's capital increase Net profit for year Balance as of 31/12/ ( ) ( ) The accompanying notes from No. (1) to No. (35) form an integral part of these financial statements

17 (An Egyptian Joint Stock Company) For the Financial Year Ended December 31, BACKGROUND - Al Ezz Steel Rebars Company an Egyptian Joint Stock Company was established under the provisions of Law No. 159 of 1981, and was registered in the Commercial Register in Menofia Governorate under No. 472 on 2 April The Company is located in Sadat City. The preliminary establishment contract and the Company's statute were published in the Companies Gazette, issue No. 231 of April The Extra-ordinary General Assembly in its meeting dated October 3, 2009 approved to change the Company s name to Ezz Steel, this amendment was registered in the Commercial Registry on November 1, Subsidiaries Al Ezz Rolling Mills Company (ERM) previously named Al Ezz Steel Mills Company (ESM) an Egyptian joint Stock Company - was established in 1986 under Law No. 43 of 1974, which was replaced by law No. 8 of Ezz Steel Algeria Company S.P.A - was established in 2008 under the Algerian law. Al Ezz El Dekheila for Steel - Alexandria (EZDK) - an Egyptian Joint Stock Company was established in 1982 as a joint Investment Company under law No. 43 of 1974 which was replaced by law No. 8 of Al Ezz El Dekheila for Steel - Alexandria (EZDK) has the following subsidiaries: Al Ezz Flat Steel Company (EFS) - an Egyptian Joint Stock Company - was established in 1998 under the provisions of the Investment Guarantees and Incentives law No. 8 of Iron for Industrial, Trading and Constructing Steel Company (Contra Steel) was established according to the decree of the specialized committee in the ministry of economy and foreign trade (corporate fine) under the provisions of law No. 159 of Misr for Pipes & Casting Industry Company was established in August 29, 1992 under the provisions of law No. 159 of

18 The Purpose of the Company & Its Subsidiaries The Company and its subsidiaries purpose is manufacturing, trading and distribution of iron and steel products of all kinds and associated products and services. The following is an analysis of investments in the subsidiary Companies of Ezz Steel Company which are included in the consolidated financial statements: 31/12/ /12/2009 Percentage Share % Percentage Share % Al Ezz Rolling Mills Company (ERM) Al Ezz Steel Algeria Al Ezz El Dekheila For Steel - Alexandria (EZDK) Al Ezz Flat Steel (EFS) (Direct & Indirect) (Direct & Indirect) And the following is an analysis of investments in the subsidiary Companies of Al Ezz El Dekheila For Steel - Alexandria (EZDK) which are included in the consolidated financial statements: 31/12/ /12/2009 Percentage Percentage Share % Share % Al Ezz Flat Steel (EFS) Iron for Industrial, Trading and Constructing Steel Company (Contra Steel) Misr for Pipes & Casting Industry Company 87 (Indirect) 87 (Indirect) 2. BASIS FOR THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS 2.1 Statement of compliance This consolidated financial statement has been prepared in accordance with Egyptian Accounting Standard. 2.2 Basis of measurement These financial statements are prepared on the historical cost convention, except for assets and liabilities which are measured at fair value in profit and loss. 2.3 Functional and presentation currency These consolidated financial statements are presented in thousands of Egyptian pound

19 2.4 Use of estimates and judgments - The preparation of the financial statements in conformity with Egyptian Accounting Standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an going basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements are described in the following notes: Impairment loss on assets. Recognition of deferred tax assets. Provisions and Contingencies. 2.5 Basis of consolidation - The consolidated financial statements include assets, liabilities and result of operations of Ezz Steel Company (Holding Company) and all subsidiary companies which are controlled by the holding company, this control is determined by the ability to control the financial and operational policies of the subsidiary with the objective of acquiring benefits from its operations. Future voting rights in the ability of control are also taken into consideration, a subsidiary company is not included in the consolidated financial statements if the holding company loses it s control over the financial and operational policies in this subsidiary. - All inter-company balances, transactions and unrealized profits were eliminated. - Non-controlling interest in the net equity and in net earnings of subsidiary companies are included in a separate item non controlling interest in the consolidated financial statements, and is calculated to be equivalent to their share in the carrying amount of the subsidiaries net assets at the date of the consolidated financial statements. Non controlling share in profits and losses of the subsidiary companies are included in a separate line item in the income statement

20 - The difference resulting from the acquisition of additional percentage in subsidiaries capital is represented in the following: LE (000) Represent the difference between the cost of acquiring an additional percentage in Al Ezz El Dekheila for Steel Alexandria capital on February 2006 (represents 29.39% from its capital) and the net carrying amount of these shares since this difference was internally generated as a result from transactions under common control from companies within the same group. Represent the difference between the cost of acquiring 55% of Al Ezz Flat Steel (EFS) capital subsidiary on July 2009 through Al Ezz El Dekheila for Steel Alexandria and the net carrying amount of these shares since this difference was internally generated as a result from transactions under common control from companies within the same group Represent the difference between the cost of acquiring additional percentage in Al Ezz El Dekheila for Steel Alexandria capital subsidiary on April 2010 (which represents 1.35% from its capital) and the net carrying amount of these shares since this transaction was made in the presence of the company s control over the subsidiary. the company has purchased these shares from shareholders outside Ezz group ============= - 9 -

21 3. SIGNIFICANT ACCOUNTING POLICIES 3.1 Foreign currency translation The Company maintains its books of account in Egyptian pound. Transactions denominated in foreign currencies are recorded at the prevailing exchange rates at the date of transactions. At the balance sheet date, balances of monetary assets and liabilities denominated in foreign currencies are retranslated at the declared exchange rates at that date thereof. The exchange differences resulting from the value of transactions carried during the year and the value of retranslation at the balance sheet date are recorded in the statement of income. Financial statements of Al Ezz Flat Steel (EFS) EFS maintains its accounting records in US Dollar. For the purpose of preparation of the consolidated financial statements, the assets and liabilities are translated into Egyptian Pound at the closing exchange rate ruling at the financial statements date. The income statement items are translated into Egyptian Pound at the average exchange rate for the year. Exchange differences arising from the translation are recorded in the shareholders equity. Financial statements of Ezz Steel Algeria Company S.P.A Ezz Algeria company maintains its accounting records in Algeria Dinar For the purpose of preparation of the consolidated financial statements, the assets and liabilities are translated into Egyptian Pound at the closing exchange rate ruling at the financial statements date. The income statement items are translated into Egyptian Pound at the average exchange rate for the year. Exchange differences arising from the translation are recorded in the shareholders equity. 3.2 Fixed assets and depreciation Fixed assets are stated at historical cost less accumulated depreciation and accumulated impairment losses. Depreciation - except rolling rings - is charged to the income statement on straight-line basis over the estimated useful lives of assets

22 The estimated useful life for each type of assets is as follows: Estimated useful life Asset Years Buildings and constructions Other buildings 8 Central air conditioning and fixtures 8 Machinery and equipment 5 25 Vehicles 2 5 Furniture and office equipment 3 10 Tools and appliances 4 5 Rolling rings According to actual use (ERM 5.5) Improvements on leased buildings The lower of lease term or assets useful lives 3.3 Projects under construction Projects under construction are recognized initially at cost. Cost includes all expenditures directly attributable to bringing the asset to a working condition for its intended use. Projects under construction are transferred to fixed assets at its cost when they are completed and are ready for their intended use. 3.4 Investments in associates Investments in associates are stated at cost less impairment. At each balance sheet date, management assesses the investments recoverable amount and in case that the recoverable amount is less than the carrying amount then an impairment loss is recognized in the profit or loss. Dividends income is recognized in the profit or loss on the date the Company s right to receive payments is established. 3.5 Available-for-sale investments Available-for-sale investments are initially measured at fair value and as of the reporting date, the change in the fair value whether gain or loss is recognized directly in equity, except for impairment losses which are transferred to profit or loss. When an investment is derecognized, the cumulative gain or loss in equity is transferred to profit or loss. The fair value for available-for-sale investments is identified based on the quoted price of the exchange market at the balance sheet date, except for investments which are not quoted in a stock exchange in an active market, in this case they are measured at cost

23 3.6 Investments in treasury bills Investments in treasury bills are stated in the financial statements at cost, the difference between acquiring cost and the realizable value during the year from acquiring date to maturity date stated by straight line method using actual interest rate and the related income of these investments are realized in accordance with accrual basis. 3.7 Goodwill Goodwill represents the difference between the acquisition cost and the company share in the fair value of the assets and liabilities of the Al Ezz El Dekheila for Steel Alexandria a subsidiary company. Goodwill is tested for impairment annually. If events or changes in circumstances indicate that the goodwill might be impaired, impairment loss If any is charged to the consolidated income statement for the year. 3.8 Inventory Inventory is valued at cost or net realizable value whichever is lower. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is determined as follows: - Raw materials: is valued at its cost up to bringing them to warehouses, using the first in first out method. - Spare parts, materials, and supplies: are valued at cost up to bringing them to warehouses, using the weighted average method. - Work in process: according to the actual manufacturing cost which includes direct materials and labor cost in addition to share of indirect manufacturing cost incurred until the last production stage reached. - Finished products: according to the actual manufacturing cost. 3.9 Trade and notes receivables and debtors & other debit balances Trade and notes receivable and debtors & other debit balances are initially stated at their fair value and subsequently measured by depreciated cost using the effective interest rate and reduced by estimated impairment losses from its value

24 3.10 Cash and cash equivalents The Company considers all cash on hand, bank current accounts, short-term deposits with banks and other short-term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value with original maturities of three months or less as cash and cash equivalents. The statement of cash flows is prepared according to the indirect method Trade and notes payable and creditors & other credit balances Trade and notes payable and creditors & other credit balances are primary stated at fair value and subsequently measured by depreciated cost using the actual interest rate Impairment A- Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognized in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognized previously in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost and available-for-sale financial assets that are debt securities, the reversal is recognized in income statement. For available-for-sale financial assets that are equity securities, the reversal is recognized directly in equity

25 B- Non-financial assets The carrying amounts of the Company s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Impairment losses are recognized in the profit or loss. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reviewed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized Interest-bearing borrowings - Interest-bearing borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the year of the borrowings on an effective interest basis. - Borrowing costs of financing fixed assets are capitalized during the construction year till the asset is ready for use from the economical view Provisions Provisions are recognized when the Company has a legal or constructive obligation as a result of a past event and it is probable that a flow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability. The provisions balances are reviewed on a going basis at the reporting date to disclose the best estimate on the current year

26 3.15 Reserves Legal reserve: 5% of net profit should be appropriated to form legal reserve; the Company will stop appropriation once the legal reserve balance reaches 50% of the Company s issued capital; in case the reserve balance becomes less than stated percentage, appropriation will continue. The legal reserve may be used for the benefit of the company based on a proposal by the Board of Directors after approval by the general assembly. Other reserves: the general assembly may form other reserves based on the Board of Directors recommendation Share capital Repurchase of share capital When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity Leased assets The leased assets are classified as fixed assets and stated at the acquisition value as determined in the lease agreements and depreciated over its estimated useful lives according to policies applied for similar assets. Lease obligations are recorded as longterm liability; amounts falling due within 12 months are included in current liabilities Revenues a) Sales revenues Sales revenues are recognized when the risks and benefits of goods are transferred to the purchaser at delivering the goods. b) Dividends Dividends income is recognized in the profit or loss on the date the Company s right to receive payments is established. c) Interest income Interest income is recognized in the profit or loss as it accrues using the effective interest rate method Earnings per share The Group presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year

27 3.20 Income Tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income, using tax rates enacted or substantially enacted at the balance sheet date. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized during the upcoming years