Speech by Mr. Aloïs Michielsen
Chairman of the Board of Directors
Slide 0
Ladies and Gentlemen,
This is the first time it falls to me to chair this General Meeting. I promise to take on this responsibility to the best of my ability, and I will welcome your suggestions with interest. Please do not hesitate to share them with me. This is part of our Solvay culture. We want to improve our performance, all the time.
It may be that in another few years' time, people will speak of the first decade of the 21st century like we still speak of the “golden sixties” of the 20th century.
Slide 1: Growth of the world economy
Indeed, for the past four years – including 2006 – the world has experienced uninterrupted economic growth, in an environment of globally low inflation and interest rates, despite rising energy costs. The fastest growth is in Asia, though Europe has not fared too badly, despite the considerable appreciation of the euro against the dollar.
What has driven this attractive global growth? The levers of any economy are complex, but two items are worth spotlighting to explain the growth we have seen in recent years; the first is globalization, the second is technological and IT innovation.
These two levers are also inter-related: globalization would not have been possible without the innovative developments that have promoted trade. More than ever before, the magic combination of globalization and innovation has proved a success, without the economy blowing apart.
Slide 2: Inflation
A recipe for inflation, one might have thought, but this has been choked off at world level by, among other things, the low wage levels in countries entering the global economy, which have helped offset growing energy costs.
Also the huge thirst for capital caused by globalization has been offset by high savings levels in rapidly growing countries, which is why we continue to enjoy low interest rates.
Solvay has taken full advantage of the economic growth of recent years:
The Group has strengthened its positions in the countries where it is strong. Allow me to cite our initiatives in South America, Asia and, recently, in Russia. These initiatives do not always show at once in the figures - it takes time to build a production plant, but many projects have taken, or are in the process of taking, concrete form.
Solvay has also considerably increased its productivity and is exploiting to the maximum its advanced technologies and informatics tools. Plants have been become larger, services regrouped, and new financial management tools introduced.
New challenges await the world, including sustainable development and access to renewable energies. To meet them, we will need to invest in Research and Innovation a large portion of the added value derived from the remarkable growth we are currently witnessing.
Slide 3: Solvay’s position
Solvay is also well placed in these fields.
First of all let me say that, despite the structural changes we have seen in other companies comparable to our own, and despite comments from the financial services industry, we are convinced that our manufacturing model, based on Pharmaceuticals, Chemicals and Plastics, remains a good one, and will enable us to carry out an ambitious growth strategy.
I should also mention that the Group is spending considerable resources on sustainable development – the 2006 Annual Report devotes a major chapter to this subject. Solvay has also been running a specific innovation programme for several years now. In December, we awarded our innovation trophies for the fourth time. This Trophy competition was a success in terms both of the highly motivating atmosphere and the quality of the winning projects. And innovation is not an idle word at Solvay. Indeed, innovation is one of the performance criteria on which each Group manager and employee is regularly assessed.
We have also introduced a New Business Board, made up of outside personalities, a Board Member and senior Group managers, which is closely following our innovative projects.
Mr Jourquin will speak of all this later.
Slide 4: Long-term financial objectives:
I will now move on directly to the Solvay Group’s financial results. It is good to remind ourselves regularly of our long-term financial objectives. They are ambitious for an industrial group like our own.
We are determined to stick to them, but we are aware that there will also be less good years.
Slide 5: Net income
First of all we are aiming to grow our net income by at least 10% a year. Over the past ten years (1997-2006), we have achieved this with an average of 10.2 %.
Slide 6: Long-term financial objectives
We are also aiming for an RoE of 15%. In 2005 and 2006 we were well ahead of this with 21.8% and 19.4% respectively.
We are also seeking to ensure that our net debt to equity ratio does not exceed 45% on a permanent basis. At the end of 2006 we stood at 28%.
With regard to our dividend, given our policy of increasing our dividend whenever possible and, if possible, never reducing it, and the results for 2006, the Board is proposing to raise up the dividend by 5% from EUR 2.00 to EUR 2.10 net per share.
Slide7: dividend growth
We have introduced one change with respect to the interim dividend. The Board of Directors decided in October 2006 to change the way this is set. From 2006 onwards, the interim dividend will represent 40% of the dividend of the previous year, taking into account the income figures for the first nine months of the current year.
The decision on the interim dividend will from now on be taken by the Board in October each year, for payment in January of the following year.
Let’s now look at how the Solvay share has performed and the return it has provided. We have no reason to be ashamed at the way the Solvay share price developed in 2006, despite a slight dip in early 2007 along with most other quoted shares.
Slide 8: Solvay share price 1997-2007
After strong growth (+16%) in 2005, the Solvay share moved forward 25% in 2006, reaching a new all-time record of EUR 116.2, compared with a high of EUR 104.1 in 2005. Over the first 4 months of 2007, the share price has remained around EUR 116, despite a sharp market downturn from mid-February onward, based on uncertainties on Asian, and subsequently US and European markets.
Average daily trading volumes also increased to 181,000 shares, compared with 170 000 shares in 2005. This figure has since risen to 248 000 shares a day (figures at 30/04/2007) for the first four months of 2007.
Slide 9: annual return on the Solvay share: 1997 - 2006
In 2006, the return on the Solvay share, that is the sum of the dividend yield and the growth in the share price, amounted to 26.6 %.
Corporate Governance
This year we have again published our Corporate Governance rules in the form of a major document, which is included in our Annual Report. These rules explain the way we operate and how we ensure that the transparency and independence of our Board. Certain changes we made during 2006 merit being highlighted:
Slide 10: changes in senior Group management
Apart from the change in Chairmen of the Board and Executive Committee, Mr Denis Solvay has been appointed Vice-Chairman of the Board. The Vice-Chairman assists the Chairman in his functions, and in particular in his relations with family shareholders, and replaces him where necessary.
We also propose that you transfer the directorship of Mr Jacques Saverys, who is retiring at age 70 as the rules require and whom we thank very warmly,, to Mr Charles Casimir-Lambert, whose curriculum vitae is attached to the notices convening this Ordinary General Meeting.
In addition we propose that you renew for four years the term of office of Mr Whitson Sadler as Independent Director.
By way of conclusion, and before giving the floor to Christian Jourquin, let me share with you my view on certain subjects.
I believe that economic growth can be maintained during the coming quarters, because the economic levers I spoke about just now are continuing to function. I believe that after the French and UK elections, Europe – this extraordinary continent – can again find again the élan it needs to pursue its reforms, review its structures and so improve its competitiveness.
I also believe that, with its new team, its competitiveness and its creativity, Solvay is well equipped to benefit from globalization in a spirit of sustainable development.
Slide 11: Let’s maintain our spirit of enterprise
Let me thank our shareholders, on behalf of the Board of Directors, for their confidence, the Executive Committee for its initiatives, and our personnel for their hard work and adaptability.
Together, let’s maintain our spirit of enterprise.
oOOo
“Moving forward together”
Speech by Mr. Christian Jourquin
Chairman of the Executive Committee
Slide 1
1- Introduction
Ladies and Gentlemen,
I too thank you for coming in such large numbers to our General Meeting. It is true that today’s meeting is an important one.
2006 was a new record year for the Group, following the very good results we posted in 2004 and 2005. A dynamic business climate and high sales volumes enabled us to improve margins by raising prices and reducing costs. In particular we reaped the fruits of a strategy that gives top priority to sustainable and profitable growth that we defined a few years back and have rigorously applied since then. Our pharmaceuticals activities are developing as planned. With a mixture of internal development and outside acquisitions we have developed our chemicals and plastics portfolio increasingly in the direction of specialty products. We have pursued our expansion on high growth continents, whilst consolidating our historical European anchoring. We have also improved out competitiveness with wise choices of technology, of energy sourcing and of financial and administrative management.
Innovation was omnipresent at Solvay throughout 2006, with the fourth Solvay Innovation Trophy giving added visibility to a host of projects. We have all witnessed the acceleration of Innovation within our Group, in terms of both quality and quantity.
2- Results
Let me move straight to the results, which we will be asking you to approve. As we have said many times, 2006 was a new record year after the very good 2004 and 2005 results.
Slide 2: Key figures and results
Sales for 2006 reached EUR 9.4 billion, which is up 10% up on 2005. Our sales continue to grow in each of our three Sectors, up 15% in Pharmaceuticals, 8% in Chemicals, 8% in Plastics.
Group REBIT moved ahead by 21% compared with 2005, with progress again in all three Sectors. REBIT reached EUR 1.1 billion, giving us an operating margin (REBIT/sales) of 12 %, which also higher than in earlier years.
Cash flow rose by 5 % to EUR 1.34 billion.
Finally, Group net income hit a new record of EUR 817 million, at a level comparable to 2005. This net income has improved in quality, with a significantly smaller non-operating component than in 2005.
Slide 3: Balance sheet items
Our income statement is accompanied by a very good balance sheet:
Equity stood at EUR 4 456 million at the end of 2006, which is EUR 536 million higher than at the end of 2005;
Return on Equity (ROE) was 19.4 %, well ahead of our goal of 15 %.
Slide 4: Healthy financial situation
The Group’s net debt, at EUR 1 258 million, stood EUR 422 million lower than at December 31, 2005. This gives a net debt to equity ratio of 28%.
As you can see for yourselves, our vigorous cash flow has enabled us to consolidate an already very healthy financial situation.
The Group also received in the first quarter of 2006 the EUR 330 million proceeds from the sale of Industrial Foils. This attractive operation, producing a positive gain of EUR 103 million, contributed to reducing the net debt to equity ratio which had peaked at 46% at the end of 2005 following the Fournier acquisition;
This favourable development of the Group’s balance sheet ensured confirmation of our excellent ratings (single A and A2).
3- Review of the Sectors
Slide 5
Let’s now take a brief look at the strategies and performances of our three Sectors of activity.
Our business model is not a left-over from the past, nor the fruit of chance.
Our growth in Pharmaceuticals reflects a conscious decision taken in the 1980s to develop high added value activities that are less sensitive to cyclical fluctuations and energy prices. This sector today contributes to the Group’s good performance.
The Solvay group is made up of three profitable Sectors, none of which serves to cover up weaknesses in another. This we proved again in 2006.
As I mentioned earlier, sales were up in every Sector: +15% in Pharmaceuticals, +8 % in Chemicals and +8 % in Plastics. REBIT too is up, by +49 %, +11 % and +5 % respectively.
Slide 6: Building the next Solvay Pharmaceuticals
The Pharmaceuticals Sector has continued working on its large-scale INSPIRE programme, aimed at creating the future Solvay Pharmaceuticals by 2010. The programme has three principal objectives:
to increase sales by at least 7% a year, and to reach a REBIT/sales margin of 20 % (we were at 13.3% in 2005 and reached 17% in 2006;),
to selectively reorganize our portfolio, with cardiometabolics and neurosciences as our primary fields;
to focus on achieving an effective, competitive global organization which will gradually enable us achieve cost savings of EUR 300 million a year by 2010. We are well on the way.
Slide 7: Growth in Pharma in 2006
The results of our Pharmaceuticals Sector (sales +15%, REBIT + 49%) include those of the cardiometabolics area, a major element of which is fenofibrate, which we acquired with Fournier, and which is meeting all our expectations.
All our main products are growing, bringing our REBIT/sales margin to 17%, well on the way to our objective of 20%.
Revenues have grown remarkably in North America, where sales of TRICOR® by Abbott have exceeded USD 1 billion, with a positive impact on our profits, as well as in Russia and emerging countries.
These very good results come after our increased Research expenditure (+21%), principally in neurosciences and fenofibrates.
R&D developments
Slide 8: R&D in the Pharmaceuticals Sector
The major efforts made in Research and Development bore fruit in 2006.
The FDA has officially ‘filed’ our application to market bifeprunox in the USA. This produced a USD 25 million progress payment from Wyeth, a partner with whom we have extended our cooperation in neuroscience.
The expansion of the fenofibrate franchise has seen us take into phase III of clinical testing the SLV348/ABT335 compound developed jointly with Abbott in the United States
In cell cultured flu vaccines, our Weesp unit has been approved and the first trail batches produced. Full scale commercial scale production is scheduled to begin in 2008.A USD 298 million subsidy has also been obtained from the U.S. Department of Health and Human Services to develop a similar vaccine in the USA and to build a production unit in the USA by 2011.
The SLV319 anti-obesity compound has moved into phase II clinical testing, releasing a USD progress payment from our partner Bristol-Myers Squibb.
Slide 9: Chemicals: earning the right to grow
The strategy of the Chemicals sector is to develop in four main directions:
intensifying its geographic expansion;
growth in Specialties;
consolidation in Essentials;
technological innovation.
Slide 10: Growth in Chemicals in 2006
Chemicals markets trended positively throughout the year. Price increases, higher sales volumes and strict cost control together enabled us to increase sales by +8 % and our REBIT by no less than +11 % compared with 2005.
We have advanced in two clusters: the Minerals cluster with soda ash and the Oxygen cluster with hydrogen peroxide, in which we are the or one of the world leaders, as also in caustic soda.
Our fluor commodities, on the other hand, have come under pressure from high energy prices in Europe and strong competition from Chinese products.
Among our achievements in Chemicals in 2006, let me cite two which, in my eyes, are remarkable:
in hydrogen peroxide, the contract to supply oxygenated water to BASF/Dow for producing propylene oxide. Together we launched the building of this new unit at Antwerp, including the first mega hydrogen peroxide production line, using a high productivity process innovated at Solvay.
In allylics, the production of epichlorohydrin by means of a revolutionary process employing natural glycerine as a raw material. A production unit has just started production in France, with larger ones to follow.
The strategy of our Plastics Sector is to extend the existing ranges of our Special Polymers portfolio, maintain product leadership, and geographic globalization.
In the Vinyls chain, we are continuing to boost our competitiveness and to capitalize on our strengths as we exercise regional leadership on three continents (Europe, Asia, Mercosur) and undertake targeted geographic diversification.
Slide 12: Growth in Plastics in 2006
In Plastics too our figures have grown: sales by +8 % and REBIT by +5 %, following excellent showings in both 2004 and 2005.
In Specialties, Specialty Polymers moved ahead by 6 %, which is a solid performance in markets like the oil industry, electronics, semiconductors, medical applications and pharmaceuticals packaging. This increase is reflected in the Sector's results, despite the start-up costs of new units, the higher cost of certain raw materials and the cost of integrating newly acquired companies. Prospects remain excellent.
Results from the Vinyls chain have exceeded the excellent levels of 2004 and 2005, thanks to rising sales volumes and prices, the good geographic distribution of our activities on three continents, and the productivity gains achieved by our common efforts.
The Plastics Sector is second to none with innovation and future-directed projects. Among these very many projects let me mention:
the opening our of new Technology Centre in Shanghai, bringing us closer to our Asian specialty polymer customers;
the doubling of our monomer vinyl chloride and caustic soda capacities in Thailand, the investments in Mercosur and the planned integrated vinyl unit in Russia;
the acquisitions of the polymer division of Gharda and Mississippi Polymer Technologies.
4- Pursuing our growth strategy
Slide 13
These good results take on additional value when measured against our declared strategic intentions.
They are the fruit of a good strategy in which the primary emphasis has been on leadership and competitiveness. More recently, this strategy has been enlarged to include sustainable, profitable growth and expanding our business, in particular in the world’s geographic growth zones of Asia, the Americas and Central Europe, all based on Innovation.
We have just commented on the growth of our Group, which is the first item of our strategy.
Let’s now examine our geographic expansion in high growth countries.
With globalization one of the biggest challenges of the future, our openness to the world is undeniably a key to our future successes. Without denying our anchoring in Europe, where we continue to invest, we are developing more rapidly on other continents. In 2006 numerous projects took concrete form here:
Slide 14: Geographic expansion: Europe, North and South America:
in Europe we have made our historical positions more competitive, successfully integrated Fournier, and begun construction of our hydrogen peroxide mega-plant at Antwerp (Belgium);
in North America, we have focused on Solvay Advanced Polymers and its ultra polymers, and in Pharmaceuticals we have signed a new contract with the U.S. Department of Health to develop a flu vaccine and build a production unit by 2011;
in South America we are expanding our vinyls activities;
Slide 15: Geographic expansion: Asia
in Asia, and more specifically in China, four new facilities received the green light in the space of one year: the ultra pure hydrogen peroxide unit at Suzhou, the Technical and Marketing Center for polymers and advanced materials in Shanghai, a new micronized fluorinated polymers production unit at Changshu, and a joint venture with Zhejiang Lantian to produce hydrogen fluoride, an essential component of many high added value fluorinated products. Not forgetting the new specialty fluorinated chemicals production unit we have built at Onsan in South Korea and major investments in Thailand to double our industrial electrolysis and VCM capacities;
Slide 16: Geographic expansion: India and Russia
in India, the group already has over 1 000 employees after acquiring Gharda’s Specialty Polymers business and expanding our pharmaceuticals activities;
in Russia, our pharmaceuticals subsidiary is developing rapidly and our vinyls manufacturing project is taking concrete shape step by step.
Numerous projects have been launched, with more to follow.
The third point of our strategy is Innovation. 2006 produced a rich harvest of innovations, as shown by our 4th Solvay Innovation Trophy. This drive for Innovation is vital to our corporate future, helping us model the Solvay of tomorrow, resolutely directed towards technologies and products that respond to the criteria of sustainable development.
2006 is also the year in which our New Business Development department was structured into strategic platforms in order better to meet the challenges of the future.
Slide 17: New Business Development
The “Sustainable Energies” platform consists of two programmes, fuel cells and organic photovoltaic molecules.
In fuel cells and related hydrogen technologies, Solvay and Umicore have created a joint venture, SolviCore, to develop MEAs (Membrane-Electrode Assemblies), which form the core of the fuel cells of the future.
In the “Organic Electronics” platform, aimed at developing flat screens and new light sources, research contracts have been concluded with leading universities in the USA, Europe and Asia. Here I would mention especially our collaboration with COPE (Center for Organics Photonics and Electronics) of the Georgia Institute of Technology at Atlanta, in the USA, and our partnership in the PANGAEA Ventures Fund, in Vancouver (Canada).
Other development platforms, in Nutrition, Environmental Technologies, and Renewable Resources Chemistry, are still at the gestation stage.
This ensemble of new projects is actively followed by the Executive Committee, assisted by a New Business Board made up of Solvay managers and outside personalities.
5- Strategy review
In 2006 we held our third strategy review.
This continues the work of the two previous reviews: that of 2002, which put the final seal to the organization of our activities into Business Units and structured the support functions by creating the Office of the Comex, the Competence Centers and Business Support Centers; and the 2004 review, which unambiguously directed Group strategy towards sustainable, profitable growth and towards high growth zones (Asia, Americas, Eastern Europe), with innovation as the means par excellence of achieving it.
The third strategy review confirmed these organizational and strategic choices and examined how to assure the availability of the human and material resources needed to implement them.
The economic, legal and political environment in which we are evolving presents greater risks than in the past. Also, our organization has in certain cases produced a compartmentalization which prevents us making optimal use of our resources.
Slide 18: Strategy review
Let me comment on two subjects that we examined in depth at the latest review:
HR strategy and the new HR organization
risk management.
Our strategic declaration fully summarizes our ambitions in terms of people management:
“Growing People to grow our Group”. A whole new set of measures are being implemented this year already to achieve this:
a single system for forecasting our future people needs in terms of both numbers and skills;
a “Solvay Corporate University” which will better prepare our managers for their responsibilities;
competence “round tables” for managing talent;
all this facilitated by harmonized operational management, on a single IT tool.
Risk management is the subject of a new chapter in our annual report, which I invite you to discover. Ten risk categories have been identified and made explicit, with appropriate preventive measures adopted for each.
6 – How has 2007 begun?
Let’s look first of all at the first quarter 2007 results, which are published today, and which you are the first to know of. They are good! The Group recorded a new growth in operating earnings in the first quarter of 2007.
Slide 19: First quarter 2007 results
Sales reached EUR 2.4 billion in the 1st quarter of 2007. They are stable (+1%) but would have increased by 3% at constant exchange rates.
REBIT improved 11% compared to the 1st quarter of 2006 and reached EUR 325 million. The operating margin (REBIT on sales) was 13.7% compared to 12.4% in the 1st quarter of 2006.
The net income of the Group amounted to EUR 218 million (compared to EUR 238 million in the 1st quarter of 2006). It reflects the improvement in operating performance and includes a negative balance of EUR 8 million in non-operating items for the 1st quarter of 2007, while the 1st quarter of 2006 included a net positive balance of EUR 15 million.
Cash flow for the 1st quarter of 2007 amounted to EUR 342 million the net debt to equity ratio reached 33% at the end of the 1st quarter of 2007, compared to 37% at the end of the 1st quarter of 2006 and 28% at the end of 2006.
Slide 20: First quarter 2007 results
Pharmaceuticals Sector sales (EUR 625 million, -7%) reflected the unfavorable impact of the expiration of marketing rights for Pantoloc® (-7%) as well as the effect of the USD/EUR exchange rate on American sales (-3%), partially offset by an increase in sales from other products. Operating results (EUR 124 million) were stable compared to the 1st quarter of 2006. Research & Development costs dropped temporarily to 14.6% of sales for the 1st quarter of 2007 compared to the 1st quarter of 2006 figure of 16.1%, which is in line with our full year estimate. Thus, the operating margin for the Pharmaceuticals Sector was particularly high (19.8%) in the 1st quarter of 2007. The implementation of the plan to improve costs by EUR 300 million by 2010 continued as announced. For all of 2007, Solvay Pharmaceuticals is anticipating stabilization of sales, in view of the impact of the USD to EUR exchange rate on American sales and the loss of marketing rights for Pantoloc®. Taking into account those elements, the continued research efforts and the preparation for the launch of bifeprunox, savings realized in the context of the Inspire project will permit sector results to be sustained.
Chemicals Sector sales (EUR 755 million) were comparable to those of the 1st quarter of 2006; REBIT (EUR 93 million) increased 6%. This performance was due to the persistence of a continued favorable global balance between supply and demand, characterized by stable volumes and prices trending upward, at a time when energy costs remained at very high levels. Results from the “Minerals” and “Oxygen” clusters increased. The “electrochemistry and fluorinated products” activities were down, mainly in fluor chemical commodities.
Plastics Sector sales (EUR 992 million) and results (REBIT of EUR 120 million) improved by 6% and 15% respectively from the 1st quarter of 2006. These results were due to continued growth of Specialty Polymers and strong growth in “Vinyls” cluster.
Slide 21
Prognostication of annual results is ever a perilous exercise.
2007 began with a generally favorable business climate. Our strategy of sustainable and profitable growth as well as enrichment of the portfolio of activities and continued efforts to improve competitiveness are positioning us favorably. Overall for 2007, we are confident that we can achieve the excellent operating results of last year. Obviously, we remain attentive to the evolution of worldwide macroeconomic conditions, energy costs and the EUR/USD exchange rate.
2007 is also a year of anniversaries. Between now and the end of the year we shall be celebrating
10 years of Solvay Sodi in Bulgaria
10 years of our Moscow offices
the centenary of our Rheinberg plant.
50 years ago Solvay consisted solely of soda works, electrolysis, nascent PVC and chloromethane activities, no peroxides, no processing, no pharmaceuticals, no USA, no Asia... What a long we have come … and what a long way we still have to go ….
7 - Conclusions
Let me conclude this presentation with a few messages.
We have a very clear and ambitious strategy.
We have a very clearly defined organization which has proved its effectiveness.
We have a set of five Values, which we seek to respect.
We have posted very good results in 2005 and 2006.
You will have gathered that Solvay is a 144 year story of continuous change. It is this which has always enabled us to adapt to the changing world around us. Our ambition should be to prepare the future of our Group even better, within a concern for humanity as a whole.
A large number of initiatives have been launched with this in mind.
I am personally deeply convinced that by mustering our combined strengths, and working together beyond the borders of our own countries, regions and organizations, we will sustain this success-bringing dynamic.
“Let’s move forward together”
And thank you, every one of you, for your loyalty to Solvay.
