Salini Costruttori S.p.A. SALINI COSTRUTTORI S.P.A.

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1 SALINI COSTRUTTORI S.P.A. DIRECTORS' REPORT AND FINANCIAL STATEMENTS AS AT 31 DECEMBER 2012

2 MISSION The Salini Group is a general contractor specialising in the construction of major, complex works throughout the world. Inspired by the principles of sustainable development, the Group uses technological and organisational innovation as well as its extraordinary human and professional resources to develop construction solutions capable of enhancing the resources of communities and contributing to the economic and social improvement of nations. page 2

3 TABLE OF CONTENTS DIRECTORS REPORT... 4 CORPORATE BODIES... 5 GROUP SUMMARY... 8 Key income and financial position figures of the Group... 9 Macroeconomic scenario and reference markets Quality, safety and environment Corporate governance Human resources Creating a national champion Research and development OPERATING PERFORMANCE Analysis of the Group s income, financial position and cash flow Introduction The Group today: summary of consolidated information Group income and operating performance Financial results Reclassified consolidated statements Portfolio of work in hand Business performance by geographical area Abroad Italy Main Group companies Salini Costruttori S.p.A. (Parent Company) Salini S.p.A. (wholly owned subsidiary) Todini Costruzioni Generali S.p.A OTHER INFORMATION Treasury shares Management and coordination Statutory audit Alternative performance indicators Information on related-party transactions Exercise of the tax consolidation option for IRES (corporate income tax) Risk management in the Salini Group Subsequent events Business outlook Conclusions FINANCIAL STATEMENTS AS AT 31 DECEMBER NOTES TO THE FINANCIAL STATEMENTS ANNEXES TO THE NOTES TO THE FINANCIAL STATEMENTS page 3

4 DIRECTORS REPORT Directors' report Financial statements at 31 December 2012 page 4

5 CORPORATE BODIES Directors' report Financial statements at 31 December 2012 page 5

6 Corporate bodies (As at 31 December 2012) BOARD OF DIRECTORS Chairman Simonpietro Salini CEO Pietro Salini Directors Simon Pietro Salini Luisa Todini Alessandro Salini Francesco Perrini* David Morganti* Roberto Cera* Gianluca Piredda* *Independent EXECUTIVE COMMITTEE Committee Members Simonpietro Salini Pietro Salini Simon Pietro Salini INTERNAL CONTROL AND CORPORATE GOVERNANCE COMMITTEE Committee Members David Morganti Roberto Cera Gianluca Piredda Directors' report Financial statements at 31 December 2012 page 6

7 REMUNERATION COMMITTEE Committee Members Francesco Perrini David Morganti Gianluca Piredda BOARD OF STATUTORY AUDITORS Chairman Andrea Monorchio Statutory Auditors Claudio Valerio Gennaro Mariconda Alternate Auditors Claudio Volponi Roberto Parasassi INDEPENDENT AUDITORS Independent Auditors Reconta Ernst & Young Directors' report Financial statements at 31 December 2012 page 7

8 GROUP SUMMARY Key income and financial position figures Directors' report Financial statements at 31 December 2012 page 8

9 Key income and financial position figures of the Group ( /000) TOTAL INCOME 1,849,577 1,423,877 EBITDA 187, ,409 EBITDA Margin 10.1% 12.2% EBIT 91,954 91,360 EBIT Margin 5.0% 6.4% EBT (a) 357,995 74,680 EBT Margin 19.4% 5.2% NET PROFIT ATTRIBUTABLE TO THE GROUP 316,048 36,142 TOTAL FIXED ASSETS 998, ,461 OPERATING WORKING CAPITAL (139,371) (238,097) RESERVES (20,356) (30,292) Net Invested Capital 838, ,073 SHAREHOLDERS EQUITY (557,861) (245,121) NET FINANCIAL DEBT (280,665) 46,048 Funding (838,526) (199,073) Net Debt/Equity 0.50 (0.19) Net Debt/EBITDA 1.50 (0.27) ROS (Return on Sales) 5.0% 6.4% ROE (Return on Equity) 60.7% 16.5% ROI (Return on Investment) 11.0% 45.9% Current Asset Ratio (a) Profit was heavily impacted by the operating effect (of about 274 million) resulting from the application of the equity method in evaluating the investee company Impregilo S.p.A., which is held by the subsidiary Salini S.p.A. and became an associate during the year. Directors' report Financial statements at 31 December 2012 page 9

10 PORTFOLIO OF WORK IN HAND BY SECTOR ( /000) DEC 2012 DEC 2011 Dams and hydroelectric plants 50.8% 4,886, % 5,019,590 Railways and metro systems 31.7% 3,054, % 3,227,770 Civil buildings 10.7% 1,030, % 1,086,278 Roads and motorways 6.8% 652, % 1,047,483 9,623,995 10,381,121 PORTFOLIO OF WORK IN HAND BY GEOGRAPHICAL AREA ( /000) DEC 2012 DEC 2011 Africa 58.1% 5,588, % 5,735,072 EU 31.4% 3,024, % 3,230,291 Asia 7.5% 718, % 999,517 Non-EU 3.0% 292, % 416,241 9,623,995 10,381,121 Directors' report Financial statements at 31 December 2012 page 10

11 OPERATING INCOME BY SECTOR ( /000) DEC 2012 DEC 2011 Dams and hydroelectric plants 33.0% 586, % 427,492 Railways and metro systems 19.1% 339, % 208,918 Civil buildings 4.1% 72, % 65,574 Roads and motorways 43.8% 780, % 687,719 1,779,494 1,389,703 OPERATING INCOME BY GEOGRAPHICAL AREA ( /000) DEC 2012 DEC 2011 EU 23.1% 411, % 369,058 Non-EU 18.7% 332, % 112,137 Asia 24.2% 431, % 384,175 Africa 34.0% 605, % 524,333 1,779,494 1,389,703 Directors' report Financial statements at 31 December 2012 page 11

12 Summary personnel figures PERSONNEL COSTS 197, ,930 NUMBER OF EMPLOYEES 19,531 15,508 Directors' report Financial statements at 31 December 2012 page 12

13 Macroeconomic scenario and reference markets Over the last decade, global demand for large, complex infrastructures has remained steady despite the slowdown in the global economy, which, especially in more economically developed countries, had significant repercussions on the construction sector. At the same time, civil engineering and construction companies operating at the global level participated in a consolidation process aimed at achieving a critical size and obtaining the specific expertise needed to carry out technologically complex projects with a higher value added ( megaprojects ). The Salini Group believes that in the period , the construction sector will return to 9% average annual growth levels with the value of the global reference market estimated at over 600 billion. The expected growth will be driven by emerging countries and especially Latin America (+17% on average per annum from ), Africa (+10% on average per annum from ), Asia (+10% on average per annum from ) and Oceania (+8% on average per annum from ), while more developed economies will have lower average annual growth rates: Western Europe and North America (+5%). In recent years the Salini Group was able to seize opportunities offered by the market by selectively focusing its commercial initiatives on business segments in which it had acquired the reputation and specific expertise enabling it to prevail in competitive markets and create value for the benefit of all stakeholders. The results achieved during the year fall within the scope of a long-term strategy that has allowed the Company to make the best use of the positive trend in the sector at the global level. The Company now has a strong presence in geographical areas such as Africa and Asia, but at the same time it has managed to extend its sphere of operations to new countries that offer interesting growth prospects such as Denmark and Latin America. In addition, the growth strategy has developed externally with the dual goal of achieving a size similar to that of major international groups in the construction sector and acquiring the additional specific expertise necessary to better compete in the global construction market. It was in this context that the strategic investment in Impregilo S.p.A. was made with the aim of creating a National Champion characterised by: a global presence with greater commercial strength; the scale of a market leader, due partly to significant commercial and cost synergies; the combination and optimisation of the existing managerial skills of the two groups by creating an integrated management team with the determination and experience required to compete in large-scale and complex infrastructure projects; a solid financial structure supported by a healthy credit standing. In September 2012, Salini Costruttori and Impregilo entered into a strategic agreement for commercial and organisational cooperation in order to launch a collaboration policy between the two groups aimed at seizing market opportunities while achieving cost savings as a result of related operational and industrial synergies. The strategic partnership relationship will be based on a general principle of equal sharing ( 50/50 ) of the benefits and costs connected with selected projects while respecting the individuality, structures and size of the individual companies, the effects of which began to materialise mainly in With regard to project management, from the time a project is brought in until it is completed and delivered, the Salini Group has always placed a particular emphasis on assessing risks with the development of a complex methodology that makes it possible to monitor and manage the various Directors' report Financial statements at 31 December 2012 page 13

14 aspects of country risk, especially political, economic and financial risk, as well as risks connected with the execution of work, including the safety of its personnel in the latter. As well as Italy, the Group works in politically stable and economically sound areas and countries, where it broadly enjoys good relations with local administrations and on-site management and is not particularly affected by late-payment issues. In 2012 Africa accounted for 34% of business, compared with 19% for the non-eu area and 24% for Asia. The value of the portfolio of work in hand as at 31 December 2012 was 9.6 billion, distributed in European, Asian and African areas and countries characterised by high expected growth rates. Hydroelectric plants and dams accounted for 48.4% of these projects; railways and metro systems for 31.7%; roads, motorways and bridges for 6.8% and other industrial and civil infrastructure for the remaining 10.7%. In Sub-Saharan Africa, which represents 53% of the Group s portfolio, there has been a steady and general improvement in many economic and socio-political indicators. In Ethiopia, the political situation is stable and the economy is recovering, thanks in particular to the agricultural and energy sectors where the Group is making a significant contribution to developing investments in production from renewable sources. The Ethiopian economy is predicted to grow by 5%, and the World Bank has 25 projects in the country with a total commitment value of $3.6 billion. In Nigeria the economy has benefited from political stability with a positive impact on expected economic development which is estimated to be over 7%, due mainly to oil exports. The authorities have restructured the banking industry and begun to invest in transport and energy infrastructure, sectors in which the World Bank is financing over 20 projects. The Group has a widespread presence in the CIS region, and the country where the most significant projects are located is Kazakhstan, which is rich in gas and hydrocarbons and has an expected growth rate of over 5%. The World Bank, the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB) are active there in the transport, energy and environmental sectors. Steel exports are the basis of predicted growth of 3% in Ukraine, which is benefiting from recent investment as a result of the European Football Championship as well as the presence of the World Bank and the EBRD. In Azerbaijan, which connects Europe and Asia through oil and gas pipelines, the construction and infrastructure sectors are expanding thanks to the government's public-investment programme and predicted GDP growth of about 3%. In Malaysia investment projects are progressing steadily as part of the government's economic transformation programme with strong support from the private sector. This significant level of commercial openness and a solid banking industry have contributed to a projected growth of 4.4%. Directors' report Financial statements at 31 December 2012 page 14

15 In Turkey, which is an important new market for the Group, significant investment is planned in transport and energy infrastructure, supported partly by an efficient banking system. The government recently approved a new investment incentive scheme. GDP growth is forecast at 2.3%. Finally, Denmark, where the Group has the privilege of executing one of the largest urban transport projects in Europe as leader of the Copenhagen Metro Team, has one of the most stable and solid economies, and one of the lowest public debts, in the EU. Directors' report Financial statements at 31 December 2012 page 15

16 Sustainable development Over the years, sustainable development has become an integral part of corporate strategy. Programmes have been developed to provide the instruments required to operate in a number of diverse areas while interpreting and respecting the expectations of institutions, clients, local communities, consumers and technical and operating counterparties with diverse histories and cultures. The Company strongly believes that proper sustainability management will make it possible to not only to mitigate operational, financial and reputational risks through an optimisation of non-financial variables, but to also create new opportunities and gain competitive advantages in a market that is increasingly more focused on matters concerning sustainability. The Group has translated these needs into a vision and a work style based on the value of people, on a focus on the environment, on the principles of social responsibility and corporate citizenship. The projects we carry out energy from renewable sources, infrastructures to reduce urban traffic congestion, public metro systems with a low environmental impact, development and upgrading of regional infrastructures to boost regional development create lasting value for the communities involved and are a catalyst for further growth. The Company has formalised its working philosophy in a coordinated set of policies, procedures and organisational structures aligned with major international benchmark standards. In particular, since 2010, the Group has been a member of the United Nations Global Compact, a worldwide initiative for sustainable development, which requires commitment to aligning strategies and operations with ten universal principles on human rights, labour, the environment and the fight against corruption. At a national level, the Group is also part of the Global Compact Network Italy, which involves working together with other member organisations and businesses to execute specific projects and initiatives aimed at advancing the priorities set forth in the Global Compact. The Group s sustainability strategy is implemented by maximising the benefits generated in the areas in which it operates, benefiting local stakeholders. Our priorities include creating new jobs, using on-site suppliers, investing and engaging in initiatives in favour of local communities, and rigorously conforming to high environmental standards. The commitment to use local workers and suppliers has a positive impact on the development of local economies, especially in emerging markets, by increasing workers skill levels and suppliers qualitative standards, while at the same time improving infrastructure and environmental conditions in the areas in which we execute our projects. Our complete dedication to human resources is especially focused in the areas of health, safety and human rights, through the adoption of standards and codes of conduct that are widely shared and supported by commitment to training and regular dialogue with employees. Directors' report Financial statements at 31 December 2012 page 16

17 The Company s commitment is also characterised by thorough consideration of the needs of local communities. The Head Office divisions, as well as on-site management, analyse and assess community requirements and develop investment projects in the areas of education, health, culture and recreation, often in partnership with institutions and other on-site organisations. In recent years, significant resources have been allocated to construct buildings, schools, hospitals and roads. Furthermore, energy and water distribution as well as health care have been provided for local communities. During projects, these local communities have been granted access to some work site facilities, such as medical clinics, classrooms, wells, roads and bridges, which are often turned over to the communities and institutions when the project is complete. Our daily commitment extends from people to the conservation of the environment and natural resources, which are crucial aspects of our business model. For this purpose, the Company structures and conducts its work while guaranteeing the best possible environmental protection, and is committed to continuously improving environmental services, considered an integral part of the Company s financial and operating performance. Our work sites are focused on reducing energy and water consumption by developing innovative projects to re-use and recycle natural resources and scrap generated while works are being conducted. Mitigating the impacts of work site activities on communities is another priority to which Salini Group dedicates the utmost attention, by monitoring and closely managing aspects relating to noise, vibrations, dust and road conditions. Since the environmental aspect includes strategic objectives within a globalised and extremely competitive market, besides human resources and in-house professionals, clients, suppliers, authorities and stakeholders are invited to take part in environmental processes and initiatives. The commitment to constantly maintaining an open dialogue with stakeholders, in order to understand their legitimate expectations and create opportunities for involvement and cooperation, is implemented through tools and highly diversified methods both at central level and at the individual work site, generating positive interactions with increasingly broader groups of internal and external stakeholders. Our commitment to transparency is demonstrated by the fact that the Group s Sustainability Report, which reports each year on the Group s sustainability practices and performance, achieved application level A+ of the GRI-G3. As a further guarantee to its stakeholders, the Company also voluntarily submits its Sustainability Report for external certification (KPMG). Please see the Report for further details. Directors' report Financial statements at 31 December 2012 page 17

18 Quality, safety and environment Senior management created the Quality, Health, Safety and Environment (QHSE) System to ensure that relevant activities are planned, developed and improved consistently and to the full satisfaction of all stakeholders. The three-year renewal of the ISO 9001, ISO and BS certifications is confirmation of the effectiveness and efficiency of the measures implemented. The review of the QHSE System, which was carried out during 2012 on the basis of the 2011 results of the Salini Costruttori Group, identified quantifiable goals to be pursued with the help of central and on-site Business Units. In outlying areas, systems have been defined that are in line with the new requirements of the Dubai and Abu Dhabi branches and of the newly established Salini Australia Pty Ltd company, with the latter obtaining ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 certifications. Key personnel, notably managers and executives, were guaranteed the required training, organised by the Health, Safety and Environment (HSE) Department together with Human Resources, in compliance with applicable regulations, and with special reference to Legislative Decree 81/08. The performance of the Quality, Health, Safety and Environment System was assessed through internal checks and by analysing site reports, and it was found that the activities specified by the system were applied satisfactorily. The QHSE System of the newly formed Salini S.p.A. complies with the highest international standards. Finally, there are plans to develop and integrate certain operating procedures, with the dual aim of standardising certain executive aspects of projects and further improving the overall service of the System concerned. Directors' report Financial statements at 31 December 2012 page 18

19 Corporate governance Salini Group has approached the issue of Corporate Governance with a wide-ranging vision and scope. Although it is not listed on the Stock Exchange, it has adopted a dynamic model compliant with the principles enshrined in the Code of Conduct for Listed Companies, Consob recommendations and best practice at national and international level. Its corporate governance policies are continually updated and documented in its Annual Corporate Governance Report. That document describes the corporate governance model in detail. It defines the Company s organisation, specifying the roles and responsibilities of each Corporate Body and of senior management, and provides information on the implementation of the provisions of the Code of Conduct. The Internal Control System monitors the practical implementation of governance policies and works effectively to promote their actual and constant execution. The Board of Directors of the Company was re-elected at the Board meeting of 16 October At that time, the number of directors was increased from seven to nine, of whom three have particular duties, and six are non-executive directors (including four independent directors). The Board will remain in office until approval of the financial statements for the year ending 31 December The Board met nine times during the year just ended, and its major deliberations concerned Corporate Governance and the examination and/or approval of: the Company s or the Group s interim reports; the acquisition of strategic equity investments; the remuneration policies of senior management; economic forecasts. With regard to the Internal Control System, the Internal Audit Department conducted the audits set forth in the Audit Plan defined at the beginning of the year in order to monitor the suitability of the applicable procedures, as well as the compliance of processes with local and international regulations. The inspections requested by the Supervisory Body, were carried out at Italian and foreign operating divisions in the course of the year, with a view to assessing the effectiveness of the Organisational, Management and Control Model. Following the incorporation of Salini S.p.A. on 6 December 2011, the new Company's Supervisory Body was appointed and the relative Code of Ethics and Organisational, Management and Control Model were drawn up pursuant to Legislative Decree 231/2001. The Board of Directors approved the documents on 21 December The recent issue of Legislative Decree 109/2012 and Law 190/2012 introduced new categories of offences into Italian jurisdiction, extending the prerequisites of Legislative Decree 231/2001. The Company has undertaking updating activities to bring the Models into line with the new regulatory provisions. At the same time, training in this area has continued for all Group personnel. During the period, the Company also brought itself into line with current IT data security regulations (pursuant to Legislative Decree 196/2003) and updated its Data Security Policy as required by current regulations. Directors' report Financial statements at 31 December 2012 page 19

20 Human resources As at 31 December 2012, Salini Group has 19,531 employees, of whom 2.6% are located in Italy and the remaining 97.3% abroad. The Company s multinational and multi-ethnic characteristics are emphasised by its presence in 47 countries and its employment of 82 different nationalities, distributed as follows based on continent of origin: Africa 14,004 (71.71%) Europe 1,598 (8.18%) Asia 3,868 (19.80%) Americas 60 (0.30%) Oceania 1 (0.001%) The workforce increased by 25.9% (+4,023) during the year, boosted in particular by the consolidation of Ethiopian projects and the Ulu Jelai project in Malaysia becoming fully operational. The number of female employees continues to grow, rising by 28% compared with 1 January 2012, and women now represent 8.1% of the total workforce. < 30 years old 8,461 (equal to 43.32%) years old 9,291 (equal to 47.58%) > 50 years old 1,779 (equal to 9.10%) Directors' report Financial statements at 31 December 2012 page 20

21 Using the period as a reference, it is clear that the company's personnel has grown both in the youngest age range, with an increase of 7,303 employees, and in terms of employees with expertise (30-50 years) where there was an increase of 39%. This serves as confirmation of the Group's strong attraction to new generations of workers, and at the same time reflects the success of the process to recruit and hire highly professional employees who are able to enhance the critical expertise of technical and service areas thereby ensuring an appropriate gradual generation shift. Directors' report Financial statements at 31 December 2012 page 21

22 Creating a national champion In 2012, Salini Costruttori, through its subsidiary Salini S.p.A., consolidated its strategic investment in Impregilo S.p.A. ( Impregilo ), a company listed on the Italian Stock Exchange, within the scope of the project to create a national champion i.e. world leader with the expertise, skills, track record and scale required to compete in the global construction industry through more efficient and effective business management. The project is a unique opportunity for both Salini and Impregilo to increase their scale and make the most out of their complementary specific areas of expertise and reputations acquired by building complex, large-scale works in their respective geographical markets. Although prolonged global economic instability is severely affecting some segments of the construction industry (particularly residential and commercial construction), large-scale infrastructure continues to be a priority for the growth of national economies, especially in highgrowth areas. Competition among the main market players increasingly hinges on testimonials, qualified expertise and adequate funding. The ability to attract new resources and talent, through acquisitions if necessary, is therefore becoming a critical factor for success. In this environment, creating a national champions (Impregilo and Salini) adds greater value by creating significant additional advantages such as: a broader geographical presence, founded on expert knowledge of the individual countries where the two groups have been successfully operating for decades; scale on a par with global industry leaders, providing possible access to large-scale and technologically complex infrastructure projects; a solid financial structure supported by a healthy credit standing; commercial and cost synergies that can be achieved by pooling specific expertise and reputations acquired in other market segments, and by striving for greater efficiency through integrated resource management; the creation of value for all shareholders and stakeholders by significantly increasing value of production and operating margins. In light of the above, therefore, on 17 July 2012, based on the proposal of shareholder Salini S.p.A. ( Salini ), Impregilo's Ordinary Shareholders' Meeting approved with a majority, and the attendance of over 80% of share capital, to remove all current directors and appoint a new Board of Directors consisting of 15 directors including 14 taken from the list submitted by Salini. Furthermore, on 27 September 2012 Impregilo and Salini Costruttori S.p.A. (the Parent Company of Salini) signed a strategic agreement for organisational and commercial cooperation between the Impregilo Group and the Salini Group in order to launch a collaboration strategy aimed at seizing market opportunities and increasing value for both Groups, and at achieving cost savings as a result of operational and industrial synergies with due respect for the individuality, structures and size of the individual companies. Directors' report Financial statements at 31 December 2012 page 22

23 After the end of financial year 2012, on 6 February 2013, the subsidiary Salini S.p.A. gave official notice pursuant to Article 102, paragraph I of Legislative Decree 98/58 (TUF) and Article 37 of Consob Regulation 11971/99 (Issuers Regulation) to launch a voluntary public tender offer, pursuant to Article 106, paragraph 4 of the TUF, having as its object all ordinary shares of Impregilo S.p.A. not held by Salini S.p.A. at a price of 4.00 per share. Subsequently, on 16 March 2013 the Offer Document was published as required by law, together with related support documentation including, in particular, the Announcement of the Issuer (Impregilo) prepared pursuant to Article 103 of the TUF and Article 39 of the Issuers Regulation. Taking into account the shares contributed during the subscription period (from 18 March to 12 April 2013) and the subsequent reopening of the terms stage (from 18 to 24 April 2013), on 2 May 2013 Salini S.p.A. held a total of 370,575,589 ordinary shares, equal to approximately 92.08% of the total ordinary shares of Impregilo S.p.A. The success of the transaction was also achieved thanks to the support of the banking sector and of the advisors. In light of the outcome of the offer, and since the same was not aimed at removing Impregilo shares from listing, Salini S.p.A. announced its decision to restore a float sufficient to ensure regular trading of the shares. On 16 May 2013 the subsidiary completed the transactions in order to bring its equity investment in the ordinary share capital to less than 90%, down to 89.7% Following the success of the above public tender offer on Impregilo S.p.A., on 14 May 2013 the Board of Directors of Salini S.p.A. carried out a preliminary investigation into the merger by incorporation of Salini S.p.A. into Impregilo S.p.A. In this regard, in order to launch all the preliminary activities to implement the above corporate integration in a short space of time, the Company s Board of Directors resolved to: a) appoint Vitale & Associates as the independent expert producing the expert appraisal supporting the Board of Directors in determining the share exchange ratio for the merger between Salini S.p.A. and Impregilo S.p.A., as well as BancaIMI and Natixis as advisors to help the Company with all aspects of the transaction; b) appoint PricewaterhouseCoopers S.p.A., Impregilo s independent auditors, to conduct the statutory audit of the accounts for the preparation of the report pursuant to Article 2501-bis, paragraph 5 of the Italian Civil Code; c) provide the CEO with a mandate to file a request with the Court of Milan for the appointment of the expert who will prepare the report on the adequacy of the exchange ratio pursuant to Articles 2501-sexies of the Italian Civil Code. Directors' report Financial statements at 31 December 2012 page 23

24 Research and development Research, development and technological innovation have always been essential to the Company s success in the realisation of large-scale projects. If, today, the Group is one of the most advanced in terms of technologies used, project and work site management procedures and security measures adopted, it is thanks to the continuous and increasing commitment of the economic and human resources invested in research and development. In close partnership with qualified professionals and engineering companies at an international level, highly innovative techniques and solutions have been developed to be used on projects of any type, size and complexity. This approach is one of the strengths that make the Group competitive worldwide, even in the most demanding working conditions. The constant bid for innovation has made a significant contribution to the evolution of the entire construction and plant engineering sector, with the Fast Track Implementation method specifically designed to construct large-scale turnkey hydroelectric power plants. This method, which is based on the concurrent start-up of all the most significant operating phases, allows for a drastic reduction (at least 50%) in the project completion period. Therefore, a hydroelectric plant begins to generate benefits and revenue streams much sooner than it would with a traditional organisation, delivering a faster return on investment. The Fast Track Implementation method, which Salini has already successfully applied to various large-scale hydroelectric plants, can be used for many project types that require swift completion times, anywhere in the world. Directors' report Financial statements at 31 December 2012 page 24

25 OPERATING PERFORMANCE Analysis of Group results Directors' report Financial statements at 31 December 2012 page 25

26 Analysis of the Group s income, financial position and cash flow Introduction The Company prepared its statutory financial statements in accordance with the provisions of the Italian Civil Code and the Accounting Standards provided by the Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri (National Council of Chartered Accountants), while the Group s consolidated financial statements were drawn up in accordance with the International Financial Reporting Standards adopted by the European Union. Article 40 of Legislative Decree 127/91 (Implementing Directives 78/660/EEC and 83/349/EEC on companies annual and consolidated accounts), as amended by Legislative Decree 32 of 2 February 2007, allows companies drawing up consolidated financial statements to submit the directors report on the consolidated financial statements and the statutory financial statements of the Parent Company in a single document, giving greater prominence, where necessary, to matters that are significant for the enterprises included in the consolidation as a whole. Bearing in mind the significance of the production activities carried out through its subsidiaries and given the requirement to evaluate these in the separate financial statements, Salini Costruttori S.p.A. has opted to make a presentation in a single document. Thus, we report below an analysis of the operations of the entire Salini Costruttori S.p.A. group whose figures are prepared in accordance with International Financial Reporting Standards. Reference is made to the section below on Main Group Companies for an analysis of statutory data on the Parent Company and main subsidiaries prepared in accordance with current provisions of the Italian Civil Code and the Accounting Standards prepared by the Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri (National Council of Chartered Accountants). The Group today: summary of consolidated information The consolidated financial statements for the year ended 31 December 2012 show a pre-tax profit of million and net profit of million, with income of 1,849.6 million. The change in the value of production, which rose by million over the same period in 2011 (+29.9%), is concrete evidence of the structural strength of the Group, which despite the domestic and international environment of continuing economic contraction, has managed to maintain a strong upward trend in production in accordance with the objectives stated in the business plans of its subsidiaries. This performance also reflected an improvement in absolute terms of EBITDA, which rose by 8.1% on an annual basis to million. EBIT remained largely unchanged at 91.9 million as a reflection of the excellent performance in the previous year. Strong revenue growth combined with the gradual improvement in profit margins is confirmation of the Group's ability to quickly seize growth opportunities in international markets supported by its well-established ability to carry out complex projects, and maximise cost synergies while emphasising its technical expertise. Directors' report Financial statements at 31 December 2012 page 26

27 Pre-tax profit was greatly affected by net financial operations, which not only reflected the costs necessary to support investments and production activities and reflected the results of the foreignexchange component, but also the positive impact of 274 million from using the equity method to record the investee company Impregilo S.p.A., which became an associate during the year (for additional details see the section on equity investments in the notes to the financial statements). Despite the significant increase in the value of production activities during the year, the portfolio of work in hand reached a level of 9.6 billion which represents over five years of future production if the typical income volumes reported in the income statement of 2012 are held constant. After making investments in the shares of Impregilo S.p.A. in an amount totalling 174 million, the consolidated net financial position ( (280.7) million) improved substantially compared with the level seen in the first half of the year ( million) and in keeping with expectations in the business plan. Finally, the Group's employment level has risen, and as a direct result of the increase in industrial operations, staff levels have risen by 4,024 employees (+25.9%) to a level of 19,531 employees. Group income and operating performance Key consolidated income figures / Change % Total Income 1,849,577 1,423, % EBITDA 187, , % EBIT 91,954 91, % EBT 357,995 74, % Net Profit attributable to the Group 316,048 36, % Net Profit attributable to the Group/Total Income 17.1% 2.5% Production In 2012, income rose sharply (29.9% on an annual basis) to a level of 1,849.6 million. Total Income ( /000) % % Income Italy 227,635 12% 320,446 23% Income abroad 1,621,941 88% 1,103,431 77% 1,849, % 1,423, % Income from projects being completed abroad, which represent 88% of the total for the period (77% at 31 December 2011), rose by 47%, which more than offset the 29% decline in the Italian market. The continued growth of international activities is confirmation of the Group's strong competitive position in high-potential geographical areas such as Africa and Asia, which represent 58% of total value of production. Operating income amounted to 1,779.5 million, accounting for 96.2% of turnover (+28% over the same amount reported as at 31 December 2011). Directors' report Financial statements at 31 December 2012 page 27

28 There was a significant contribution from the Gibe III and Grand Ethiopian Renaissance Dam hydroelectric projects in Ethiopia, the Zhytomyr and Kyzylorda road projects in Ukraine and Kazakhstan respectively, and the Copenhagen metro system project in Denmark. Operating income by geographical area ( /000) % % Italy 214,218 12% 307,233 22% EU (excluding Italy) 196,844 11% 61,826 4% Non-EU 332,172 19% 112,137 8% Asia 431,143 24% 384,175 28% Africa 605,118 34% 524,333 38% TOTAL OPERATING INCOME 1,779, % 1,389, % The roads and motorways segment is the driving market, accounting for 44% of operating income for the year ( million compared with 31 December 2011, with a percentage increase of 13.4%), mainly as a result of the operations of the road lots relating to the reconstruction of the Western Europe - Western China International Transit Corridor in Kazakhstan and the works to rehabilitate the Kiev-Zhytomyr motorway section along the Kiev- Chop route in Ukraine. In addition to representing approximately half of the portfolio of work in hand, the dams and hydroelectric plants sector is an important part of operating income, recording an increase of approximately 159 million over the same period in the previous year (+37%), particularly due to the contribution of the Ethiopian Gibe III and Grand Ethiopian Renaissance Dam projects, as well as the Ulu Jelai project in Malaysia. In the area of transport infrastructures (+ 131 million compared with 31 December 2011, a percentage increase of 63%) production volumes mainly consist of construction activities for the B1 line of the Rome metro system, and of the new Cityringen city circle metro line in Copenhagen. Civil building income came almost exclusively from projects in the completion phase located in Italy. Operating income by sector ( /000) % % Dams and hydroelectric plants 586,656 33% 427,492 31% Railways and metro systems 339,828 19% 208,918 15% Civil buildings 72,951 4% 65,574 5% Roads and motorways 780,059 44% 687,719 49% TOTAL OPERATING INCOME 1,779, % 1,389, % Directors' report Financial statements at 31 December 2012 page 28

29 Other non-operating income, equal to 70.1 million, essentially relates to items which, by their very nature, do not fall under core activities (e.g. recovery of costs incurred on behalf of subsidiaries and recouped from them, technical and administrative services provided to third parties, sale of materials, insurance reimbursements). Costs Direct costs of production totalled 1,454.5 million, an increase of million over the previous year, as a direct result of increased production volumes in the period. Although personnel costs, totalling million, increased in absolute value ( million), they absorbed just 10.7% of total income against the 11.4% recorded in the same period in the previous year, which confirms the Group s policy of creating a highly professional and efficient structure in terms of both skilled workers and management. Results of operations Operating margins confirm the major income-earning capacity of pending projects as well as the selective quality of the project portfolio. Economic and financial indicators, such as ROI (11%) and net invested capital turnover (2.2), confirm the positive performance of return on invested capital, both in terms of profitability and the capacity to generate sales income. At million, EBITDA also showed impressive performance with an increase of 14 million over the same period of the previous year (+8.1%) with an EBITDA margin of 10.1%. EBIT reached a level of 92 million, representing an annual increase of 0.6 million and an ROS of 5%. Period results EBT (earnings before tax) stood at 358 million, representing 19.4% of income, due in large measure to the effects (+ 274 million) of the valuation of the shareholders equity of Impregilo S.p.A., held by the subsidiary Salini S.p.A., and which became an associate in the course of The provision for taxes for the year ( 33.5 million) includes a provision for current taxes of 13.8 million and a provision for deferred taxes of 13.9 million and charges incurred in previous financial years of 5.8 million. For additional information on the calculation of taxes, see the section on Income taxes in the notes to the financial statements. Directors' report Financial statements at 31 December 2012 page 29

30 Financial results Key consolidated financial position figures ( /000) DEC 2012 DEC 2011 Fixed assets 998, ,461 Working capital (139,371) (238,097) Reserves (20,356) (30,292) Net invested capital 838, ,073 Shareholders equity 557, ,121 Net financial position (280,665) 46,048 The statement of financial position as at 31 December 2012 reflects the impressive trend of production volumes in the period, the important growth of which is instrumental for a balanced use of investments and careful management of working capital. Total net fixed assets of million consist mainly of technical equipment assigned to operating work sites and of the value of the equity investment in Impregilo S.p.A, held by the subsidiary Salini S.p.A. and valued at around 570 million. Tangible fixed assets, including leased machinery, reached a figure of million, a year-onyear change of 23.3%, and represents 68% of the total investments recorded in Specifically, the value of the new technical investments made in the year, including the relevant accumulated depreciation and disposal provisions, totals 78.2 million and is an expression of equipment that is kept constantly in line with new production needs. DEC 2012 DEC 2011 change ( /000) Dec Dec 2011 NET INVESTMENTS 338, , % Plant and equipment 670, , % Accumulated depreciation (332,127) (286,477) Operating working capital of (139.4) million, reflects the result of the significant growth in production income, which has affected commitments proportionally, with specific reference to inventories for work in progress, certification for clients and supplier exposure. Net financial position The net financial position as at 31 December 2012 was (280.6) million and, in line with management forecasts, shows a considerable improvement over the figures recorded at the end of the first half of the year. This trend takes on greater significance in terms of the strength of the financial structure if looked at in conjunction with the strategic investment involving the purchase of Impregilo S.p.A. shares, for a value of approximately 174 million in 2012 alone, and the sustained use of resources to support current production volumes, which grew by approximately 29% in the last 12 months. Financial structure and liquidity ratios, especially concerning leverage and the coverage of financial expenses, remained balanced. Directors' report Financial statements at 31 December 2012 page 30

31 (Values in /000) Cash and cash equivalents 414, ,998 Current financial assets 0 14 Current financial liabilities (328,233) (293,338) NET FINANCIAL DEBT, short-term 86, ,674 Non-current financial assets 25,086 24,295 Non-current financial liabilities (391,835) (227,921) NET FINANCIAL DEBT, medium-/long-term (366,748) (203,626) NET FINANCIAL DEBT (280,665) 46,048 Net Debt/Equity 0.50 (0.19) Net Debt/EBITDA 1.50 (0.27) 0 Directors' report Financial statements at 31 December 2012 page 31

32 Reclassified consolidated statements Reclassified income statement (Values in /000) Change % Income 1,779, % 1,389, % 28.0% Other income 70, % 34, % 105.1% Total Income 1,849, % 1,423, % 29.9% Cost of production (1,454,457) 78.6% (1,073,582) 75.4% 35.5% Value added 395, % 350, % 12.8% Personnel costs (197,161) 10.7% (163,001) 11.4% 21.0% Other operating costs (10,577) 0.6% (13,885) 1.0% -23.8% EBITDA 187, % 173, % 8.1% Depreciation and amortisation (84,353) 4.6% (65,781) 4.6% 28.2% Allocation to provisions (5,678) 0.3% (13,314) 0.9% -57.4% Write-downs (5,677) 0.3% (2,953) 0.2% 92.2% (Capitalised costs) % (0) 0.0% n.s. EBIT 91, % 91, % 0.7% Financial income and expenses (net) 266, % (16,680) -1.2% n.s. Pre-tax profit/(loss) 357, % 74, % 379.4% Taxes (33,553) 1.8% (34,606) 2.4% -3.0% Net Profit 324, % 40, % 709.6% Profit/(loss) attributable to minority interests 8, % 3, % 113.5% Profit/(loss) attributable to the Group 316, % 36, % 774.5% Directors' report Financial statements at 31 December 2012 page 32

33 Reclassified statement of financial position (Values in /000) Change Intangible fixed assets 2,706 2, Tangible fixed assets 401, ,065 78,248 Equity investments 589, , ,623 Other fixed assets 4,738 3,105 1,634 Total fixed assets (A) 998, , ,793 Inventories 213, ,730 27,336 Amounts due from clients 625, , ,178 Amounts due to clients (1,098,254) (1,159,992) 61,738 Trade receivables 492, ,635 (82,042) Other assets 206, ,573 (17,524) Tax receivables 110,944 83,157 27,787 subtotal 549, , ,474 Trade payables (576,243) (490,066) (86,177) Other liabilities (112,541) (92,969) (19,572) subtotal (688,785) (583,036) (105,749) Operating Working Capital (B) (139,371) (238,097) 98,725 Employee benefits (4,963) (4,271) (692) Provisions for risks and charges (15,393) (26,021) 10,628 Total reserves (C) (20,356) (30,292) 9,935 Net invested capital (D = A+B+C) 838, , ,453 Cash and cash equivalents 414, ,998 (128,682) Current financial assets 0 14 (13) Non-current financial assets 25,086 24, Current financial liabilities (328,233) (293,338) (34,896) Non-current financial liabilities (391,835) (227,921) (163,914) Net financial payables/receivables (280,665) 46,048 (326,714) Shareholders equity 521, , ,724 Minority interests 36,852 25,836 11,016 Shareholders equity 557, , ,740 Total funding 838, , ,453 Directors' report Financial statements at 31 December 2012 page 33

34 Portfolio of work in hand As at 31 December 2012, the consolidated portfolio of work in hand stands at approximately 9.6 billion, an excellent figure for the Group in terms of market presence, especially if the considerable increase in production volumes achieved during the year is taken into account. The new business secured in the last 12 months, which stands at 607 million, came mainly from the Roads and motorways and Hydroelectric plants segments, with notable developments in countries such as Nigeria, Ukraine, Tunisia and Georgia. The size and trends of the backlog, together with the new acquisitions made in the first months of 2013, confirm the high growth potential of the value of production expected in the coming years, as well as the Group s strategic ability to operate in markets which are less exposed to the economic downturn, by dedicating itself to competitive sectors of excellence such as dams, hydroelectric plants and transport infrastructures. Overall, 17% of the portfolio of work in hand consists of domestic projects ( 1.6 billion) with the remaining 83% consisting of initiatives abroad, with Europe representing 21% ( 1.7 billion), Africa 70% ( 5.6 billion) and Asia 9% ( 0.7 billion). Led by Ethiopia and Nigeria, Africa confirmed its positive trend of recent years, establishing itself as the Group's major market, particularly for dams and hydroelectric plants. The growth of the European business is also of considerable interest, with new acquisitions representing 29% of orders generated in the last 12 months. Portfolio of work in hand by geographical area The dams and hydroelectric plants sector ( 4,886 million) accounts for 51% and is therefore the Group s core business, although the impact of railway and metro system initiatives is increasing: with a value of 3,055 million, these initiatives represent 31.7% of the total work to be completed. Directors' report Financial statements at 31 December 2012 page 34

35 Portfolio of work in hand by sector Directors' report Financial statements at 31 December 2012 page 35