Moving forward together Growth, Competitiveness and Innovation
Solvay Global Annual Report 2006
SOLVAY An international Chemical and Pharmaceutical Group Sales : 9.4 GEUR Operating result : 1.1 GEUR Cash flow : 1.3 GEUR Employing 29 258 people Present in 50 countries on every continent With 400 centres 95% of sales come from outside Belgium and 50% from outside the European Union Stable or rising dividends every year for 25 years Operates in three sectors: Pharmaceuticals, Chemicals and Plastics Listed on Euronext Brussels
Contents Group
Activities
02
01 Highlights 02 Innovation 04 Strategy – Mission, Vision, Values 06 Chairmen’s Message 08 Management Report 12 Information for Shareholders 14 Our Positions
16 16 28 38 48
Responsibilities
Management and Financial Statements
Pharmaceuticals Sector Chemicals Sector Plastics Sector New Business Development
52
52 Human Resources 56 Sustainable Development
60
60 Table of contents 61 Financial Statements 119 Corporate Governance 142 Executive Committee and General Managers 145 Shareholders’ Diary
Key figures – Solvay Group Financial data
2002
2003
2004
2005
2006
EUR million
EUR million
USD million5
Operating situation External sales
7 919
7 557
7 271
8 562
9 399
12 378
REBITDA1
1 284
1 101
1 146
1 338
1 568
2 065
844
673
741
912
1 099
1 447
11 %
9 %
10 %
11 %
12 %
12 %
Net income
494
430
541
816
817
1 076
Total depreciation and amortization3
554
429
449
464
522
687
1 048
859
990
1 280
1 339
1 763
645
555
564
1 930
858
1 130
REBIT 2
REBIT as % of sales
Cash flow Capital expenditure
399
404
408
472
563
741
Personnel costs
1 833
1 802
1 698
1 920
2 052
2 702
Added value
3 089
2 826
2 902
3 438
3 544
4 667
Shareholders’ equity
3 542
3 510
3 792
3 920
4 456
5 869
Net debt
1 318
1 120
795
1 680
1 258
1 657
Net debt/ shareholders’ equity
37 %
32 %
21 %
43 %
28 %
28 %
Return on Equity (ROE)
14 %
12 %
15 %
22 %
19 %
19 %
199
199
210
221
232
306
29 258
–
Research expenditure
Financial situation
Gross distribution to Solvay shareholders Persons employed Persons employed at January 14
30 302
30 139
26 926
28 730
1. REBITDA = REBIT before recurrent depreciation and amortization. 2. REBIT = recurrent EBIT. 3. Including impairment of 114 in 2002, 1 in 2003, 23 in 2004, 20 in 2005 and 48 in 2006. 4. In full-time equivalents at January 1 of the following year. 5. Exchange rate: 1 EUR : 1.3170 USD at 31/12/2006.
Expenditure for the future
Total Group capital expenditure, acquisitions and R&D 2006 = EUR 1 421 million [Including discontinued activities EUR 8 million] [EUR million]
2500
Total capital expenditure & acquisitions by Sector in 2006 [EUR million]
2 402
2250
[Excluding discontinued operations EUR 8 million]
472
12
2000 1750 1500 1250 1000 750 500
201
1 930
1 044 399 645
250
959
972
404
408
555
1 421
1 461
563
556
858
905
367 270
g g g g
Pharmaceuticals Chemicals Plastics Corporate
R&D by Sector in 2006 [EUR million] 18
564 88
0 2002
2003
2004
g Capital expenditure & acquisitions g R&D
2005
2006
2007 Budget
33 424
g g g g
Pharmaceuticals Chemicals Plastics Corporate
Activities
Group sales 2006 = EUR 9 399 million
Sales by Sector in 2006
3640 3 507
3120 2600
2 601
2080
2 270
1560
2 785
3 800 28 %
3 093
2 998
40 %
2 433
g Pharmaceuticals g Chemicals g Plastics
32 %
1 745
1040 g 2004 g 2005 g 2006
520 0 Pharmaceuticals
Chemicals
Plastics
Group REBIT 2006 = EUR 1 099 million
REBIT* by Sector in 2006
[Including “Corporate & Business Support” : EUR -76 million]
[*Excluding “Corporate & Business Support” : -76 millions EUR]
480 451
420
409
360
35 %
374
300
302
240
285
315
389
38 % g Pharmaceuticals g Chemicals g Plastics
27 %
236
180
180
120
g 2004 g 2005 g 2006
60 0 Pharmaceuticals
Chemicals
Employees by Sector in 2006 1 590
Plastics 10 088
8 889
Group employees at January 1, 2007: 29 258 people
g g g g
8 691
A global presence
Pharmaceuticals Chemicals Plastics Corporate
Group employees at January 1, 2007: 29 258 people
Group sales 2006 = EUR 9 399 million
48
2%
34 % 56 % 8%
g Europe 50 % European Union (25) 6 % Other European countries g Asia-Pacifc g The Americas 26 % Nafta 8 % Mercosur g Rest of world
6 517 2 142 20 551
Customer markets
Nafta 26 % Mercosul 8 %
Group sales 2006 = EUR 9 399 million
g Europe 19 671 European Union (25) 880 Other European countries g Asia-Pacific du monde g Reste The Americas 34% 967 Nafta 1 550 Mercosur g Rest of world 1 531
Les Amériques 34 %
Human health
30 %
Paper
Automobile industry
12 %
Consumer goods
Construction and architecture
11 %
Detergents, cleaning and
Chemical industry
10 %
Asie Pacifique hygiene product 8 %
Europe 55 %
Union Européenne (25) 50 % Autres 4 pays % européens 5%
3% 3%
Glass industry
6%
Packaging
3%
Water and the environment
5%
Human and animal food processing
1%
Electricity and electronics
4%
Other industries
8%
2006 Highlights
Highlights January
August
Solvay boosts high-performance-polymer portfolio by acquiring Mississippi Polymer Technologies (USA).
Solvay sets up partnership to produce hydrogen fluoride, an essential component of many fluorinated products, in the Shanghai (China) region.
February
Solvay Indupa
Mississippi Polymer Technologies
Epicerol™
Solvay builds new epichlorohydrin plant at Tavaux (France) to meet growing demand, using a new production process based on natural glycerine (EPICEROL™). March
Androgel®
Solvay Pharmaceuticals signs new agreement to secure maximum global expansion of ANDROGEL®. April
Renolit
Solvay completes sale of Industrial Foils activities to Renolit (Germany). May
DHHS
Hydrogen fluoride
Solvay Indupa announces ambitious plan to expand and upgrade vinyls production in Brazil.
Pangaea Ventures fund II
Solvay participates in Pangaea Ventures Fund II (Canada), investing in leading-edge materials for information and communication technologies (ICT).
e-billing
Solvay pioneers electronic billing in Europe.
BASF and Dow
BASF and Dow begin construction at Antwerp (Belgium) of a propylene oxide unit using Solvay-produced hydrogen peroxide.
Solvay Pharmaceuticals awarded USD 298 million subsidy from the US Department of Health and Human Services to develop flu vaccines and design a manufacturing unit.
October
Gharda
Ultra-polymer
Solvay concludes acquisition of plastics division of Gharda to expand in high-performance polymers in India.
Exeltium
Solvay co-founds Exeltium, a grouping of electro-intensive industries in France – a creative solution for long-term control of energy costs. June
Polymist®
Solvay decides to produce POLYMIST® specialty polymers at Changshu (China). July
Fenofibrate
Abbott and AstraZeneca sign agreement to develop for the USA a new combined total lipids regulation therapy incorporating a fenofibrate.
Egeplast
Egeplast (Germany) acquires innovative Solvay technology for fully recyclable high-pressure pipes.
SolviCore
Solvay and Umicore launch SolviCore (Germany) to develop and produce membrane electrode assemblies (MEA) for core fuel cell applications.
September
bifeprunox
Solvay Pharmaceuticals and Wyeth announce they have filed for US approval of their new bifeprunox schizophrenia drug.
Solvay expands and upgrades its ultra-polymer plant at Panoli (India). November
Nanovin™
SolVin launches its NANOVIN™ vinyl nanocomposite “smart material”.
Perestane®
Solvay launches environmentally-friendly PERESTANE® biocide against nosocomial diseases. December
SLV319
SLV319, the obesity drug Solvay is developing with Bristol-Myers Squibb, moves forward in phase II clinical trials.
bifeprunox
USA Food and Drug Administration registers the bifeprunox filing submitted in October 2006.
Solvay Innovation Trophy Solvay Innovation Trophy awarded to the eight most innovative of 96 competing projects.
Solvay Global Annual Report 2006
2006, a year of Innovation
The thrust for Innovation that lies at the heart of the Group’s strategy found concrete expression in 2006 in the fourth Solvay Innovation Trophy. Entries to the 2006 competition were impressively higher in number (312) and quality than in preceding competitions. 96 projects were presented to an international panel of judges, half of them from within the Group and half from outside.
Solvay Global Annual Report 2006
Innovation
In 2006 the Executive Committee awarded for the first time a special Executive Committee Prize to a previous Trophy winning winner that has since proved its worth in terms of improved Group performance and earnings. Prizes were presented to the winning teams by Executive Committee members and Trophy judges during the 2006 Innovation Days held in Brussels on 19 and 20 December 2006.
During these two days, Innovation was the focal point of attention at the Innovation fair, the working sessions and the official prize ceremony. The event finished with the launch of three new Innovation challenges for 2009, now that the Group has attained its 2006 objectives for growth, partnership and involvement of everyone.
Partnerships: 50%
“New Sales” ratio: 30%
For all our employees: everyone will come up with at least one formally accepted innovative idea a year. For managers this means that 100% of our executives will have defined their personal Innovation objective and have had occasion to evaluate it at least once with their superiors.
The “New Sales” ratio is raised from 20 to 30%. This means that 30% of Group income should be generated by products, applications, markets and technologies created less than five years ago. The concept of “new technologies” has been added to the challenge this time round.
Prize list of Innovation Trophy 2006 New Business Nanocomposite Tecnoflon® PFR for semiconductor applications – SBU Specialty Polymers Customer-Oriented Projects Sifren® 46: new compound for the semiconductor industry – SBU Specialty Polymers and SBU Fluor
At least one innovative project in two is to be realized with an outside partner: a customer, supplier, university, public authority, start-up, etc. This partnership must take the form of a structured cooperation agreement.
Involvement of everyone: 100%
Strategy
At the end of a rigorous selection process a single winner was chosen in each of the six Innovation categories. A special prize for projects with the highest “Partnership” element was divided between two projects.
Solar Impulse Our technological partnership with Solar Impulse is continuing. Solvay is making its competence in innovative materials available for the design and construction of the aircraft that will circumnavigate the world powered only by solar energy, with no other energy source and therefore no pollution. 2006 was spent designing the aircraft. A first prototype will be built in 2007.
Performance Improvement “TAB” project: a new “green chemistry” for producing H2O2 more competitively than competing processes - SBU Hydrogen Peroxide Management Improvement Contractors help improve safety at Dombasle (France) – SBU Soda Ash Sustainable Development and Citizenship Epicerol™ Solvay accelerates with green biodiesel – SBU Electrochemistry and Derived Specialties Replicated Innovations A nanoparticle latex for PDVC – SBU Special Polymers Partnership Prize Developing partnerships to sell new applications based on BICAR® – SBU Soda Ash Essential chemistry – Competence Centre Communication & Public Affairs Executive Committee Prize High productivity H2O2 production process
Solvay Global Annual Report 2006
Strategy of sustainable and profitable growth confirmed
The June 2006 strategic review was intended to continue the work of the two earlier reviews, that of 2002, which confirmed the organization of our activities into Strategic Business Units and structured the support functions, and that of 2004, which set the Group on an unambiguous course towards sustainable, profitable growth by committing it to three fronts: – priority on growth – in selected pharmaceuticals, chemicals and plastics areas; – innovation, the key to growth and to constantly improving competitiveness; – expanded presence in Asia, the Americas and Eastern Europe. The June 2006 review confirmed these organizational and strategic choices. Solvay Global Annual Report 2006
– Scientific, technical and commercial competences – In chemistry and human health – Supplying innovative products and services – Creating constantly growing added value.
a Passion for Progress
Strategy
Our Mission
Mission, Vision, Values
– Independent industrial Group – Global vision – Balanced portfolio – Sustainable, profitable and constantly growing businesses.
Our Values
Our Vision
®
– Ethical behaviour – Respect for people – Customer care – Empowerment – Teamwork.
These ambitious objectives are entirely within reach. Aware that the success of its strategy is based on the men and women who work for Solvay, senior Group management devoted the 2006 review to “People as the means of our success”, defining major directions for Human Resources management and risk management. Two action programs were defined to optimize human resources and the processes necessary for generating growth through responsible management. Solvay Global Annual Report 2006
“ Moving forward together” Pursuing our strategy
2006: another year of record growth 2006 was a record year for Solvay, after the very good years of 2004 and 2005. We can all be very proud of the vigour and dynamism of a Group that is capable of such performance. This performance and these achievements should be measured against our declared strategic goals of growth, innovation and geographic expansion.
Our priority is growth. We have achieved it, with double-digit increases. The figures for 2006 are impressive: Sales were up 10% at EUR 9.4 billion. Each of our three Sectors contributed relatively equally, with a 15% increase in Pharmaceuticals, 8% in Chemicals and 8% in Plastics. REBIT rose by 21%, giving us an operating margin (REBIT/sales) of 12%, which is higher than that of 2005. Our net income of EUR 817 million is a new record, taking cash flow well past the EUR 1 billion mark to EUR 1 339 million. At 19.4%, Group ROE (Return on Equity) is well above our objective of 15%. We have at the same time maintained a very healthy financial situation, while significantly increasing our research efforts (+ 19%).
Solvay Global Annual Report 2006
Investors have reacted positively to this performance, with the Solvay share price setting a new record in 2006. While the general economic climate was certainly favorable, these very good results were achieved against a background of high energy costs. The earnings figures reflect expansions in our range of activities and our ongoing efforts to improve our competitiveness, consistent with the strategy we have pursued and will continue to pursue in order to assure sustainable, profitable growth.
Our evolving product portfolio Our product portfolio has changed significantly in recent years, with more and more specialty products, both internally developed and acquired, in each of our three Sectors. In Pharmaceuticals, we entered cardiometabolics by acquiring Fournier Pharma in 2005. In Chemicals, we have made major advances in bicarbonate and in ultra-pure hydrogen peroxide. In Plastics, the acquisitions of the past five years have given us the most complete portfolio of highand ultra-performance polymers of anyone in the market. In the process we have remodelled our portfolio, making it less sensitive to fluctuating energy and raw materials prices and to the cyclicality of commodities, and increasing its added value.
Geographic expansion in high-growth countries With globalization one of the biggest challenges of the future,
openness to the world is undeniably a key to our continued success. Without turning our back on Europe, where we continue to invest, we are developing more rapidly on other continents. Initiatives abound: – in Europe, we have made our established positions more competitive, we have successfully integrated Fournier, and begun construction of our hydrogen peroxide mega-plant at Antwerp (Belgium); – in North America, we now have Solvay Advanced Polymers and its ultra polymers and have contracted with the US Department of Health to develop a flu vaccine; – in South America, we are moving ahead in vinyls; – in Asia, and of course in China, where four new units 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
Chairmen’s message
Improving our competitiveness The economic climate may be favourable right now, but competition is no less fierce. Our good performance in 2006 was based on strong sales volumes, proving that our products are what our customers want and that we are competitive. This is true in each of our three Sectors, and in particular in the Pharmaceuticals Sector, which has developed its own INSPIRE project. This competitiveness is the result of everyone’s constant hard work, which will continue unabated in the coming years.
Innovation, the keystone of the Group’s growth and competitiveness The 2006 Solvay Innovation Trophy was an opportunity to evaluate our drive for innovation, now in its eighth year. These competitions have given greater visibility to a host of innovative projects, the quantity and quality of which have improved from one competition to the next. Today, thanks to everyone’s efforts, innovation is well-established, dynamic and very much alive within Solvay. We thank everyone in the Group for all they have done and the formidable dynamism they have imparted to the Group. Here too we are on the right path. Let us continue on it together.
major investments in Thailand to double our industrial electrolysis and VCM capacities; – in India, the Group already has over 1 000 employees after acquiring Gharda’s Specialty Polymers business; – and in Russia, our pharmaceuticals subsidiary is developing rapidly and we are continuing to examine a major industrial project in vinyls. Numerous projects have been launched, with more to follow.
Attachment to our employees The successful implementation of the strategy depends on the men and women who work for Solvay. We wish to further develop an entrepreneurial spirit, while maintaining and indeed strengthening the good relations we have built up with our social partners.
Chairmen’s message
materials at 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. Also of note are the new specialty fluorinated chemicals production unit we have built at Onsan in South Korea and
Our June 2006 strategic review was devoted mainly to “People as the means for our success.” We took major decisions, the first concrete results of which will be seen in 2007. Four fundamental processes were defined as critical and will be optimized: – personnel and competence planning, – career management, – international mobility, – training and development.
Human Resources will also be structured to reflect the overall Group organization. With our strong strategy, values and results, and now these latest steps, we are very confident that together we can make Solvay even more successful. We both thank you all very warmly for your faultless commitment and your loyalty to our Group.
Attachment to our Values As you know, we both attach great importance to our five corporate Values (ethical behaviour, respect for people, teamwork, empowerment and customer care). It is these Values that must daily guide each of our actions, and we are counting on everyone in the Group to put them into practice. Christian Jourquin Chairman of the Executive Committee
Aloïs Michielsen Chairman of the Board of Directors
Solvay Global Annual Report 2006
2006: another record year for Solvay due to strong growth in operating performance
+10% +21%
• Record sales (EUR 9.4 billion), operating results (REBIT1 of EUR 1.1 billion), net income of the Group (EUR 817 million) and cash flow (EUR 1.3 billion), surpassing the record levels achieved in 2005 • Significant improvement in all three Sectors: Pharmaceuticals, Chemicals and Plastics • Proposed net dividend of EUR 2.10, up 5%
in sales
in REBIT
Business progress Sales in 2006 were up 10%, reaching EUR 9.4 billion. All three sectors showed significant improvement. Net income of the Group (EUR 817 million) equalled the record set in 2005. Given that the 2006 figure includes EUR -40 million of non-operating2 items compared with EUR +119 million in 2005, this reflects further growth in operating performance. REBIT improved by 21% compared with 2005 and reached a record of EUR 1.1 billion. The operating margin (REBIT on sales) reached 12%, up from 11% in 2005. Operating results improved in all three Sectors. 1. Operating result, i.e. EBIT before non-recurring items. 2. Non-recurring items and results from discontinued operations.
Solvay Global Annual Report 2006
The strong growth in operating performance in 2006 illustrates the successful deployment of the Group’s policy of sustainable and profitable growth.
Net income of the Group (EUR million) 1000 800 600
494
400
816
817
2005
2006
541 430
200 0
2002
2003
2004
Progress by Sector
and Fluorinated Products” cluster trended downward, mainly in fluor chemical commodities.
1. Sales by Sector (EUR million)
In the first quarter of 2006 Solvay reached an agreement with the U.S. Department of Justice concerning the American anti-trust proceedings relating to peroxide activities prior to 2001, accepting to pay a fine of EUR 35 million, reserved for in the fourth quarter of 2005. Class actions under way since late 2005 continue, with adequate provisions taken in the first half of 2006 under “non-recurring items”. In July 2006 Solvay also appealed against the EUR 193 million fine imposed in April 2006 by the European Commission in the area of peroxides. This amount is covered by provisions established in 2004 and 2005.
Total 2006 sales = EUR 9 399 million 2005
2006
2006/2005
Pharmaceuticals
2 270
2 601
+15 %
Chemicals
2 785
2 998
+8 %
Plastics
3 507
3 800
+8 %
Total
8 562
9 399
+10 %
2. REBIT by Sector (EUR million) Total 2006 REBIT = EUR 1 099 million 2005
2006
2006/2005
Pharmaceuticals
302
451
+49 %
Chemicals
285
315
+11 %
Plastics
389
409
+5 %
Total *
912
1 099
+21 %
* including “corporate and support activities”: EUR -63 million in 2005; EUR -76 million in 2006
Pharmaceuticals Sector 3 sales increased by 15% in 2006 and operating results by 49% (EUR 451 million). The operating margin of 17%, compared with 13% in 2005, confirms the significant progress made by Solvay Pharmaceuticals and the successful integration of Fournier into the Group, in line with the objectives of the “INSPIRE”4 project. As well as the substantial growth of Cardiometabolic products, with EUR 413 million in revenues from the blockbuster drug fenofibrate, sales of other primary Solvay Pharmaceuticals products were up strongly. Research expenditure in 2006, at EUR 424 million (16% of sales), was up significantly (+21%) compared with 2005. Chemicals Sector sales improved by 8% in 2006. REBIT (EUR 315 million) increased by 11% compared with 2005. This performance reflects the continued favourable global balance between supply and demand, against a background of still very high energy costs. Results from the “Minerals” cluster showed strong growth. The “Oxygen” cluster made progress, as the positive trend which begun in the third quarter confirmed itself. The “Electrochemistry (caustic soda)
Plastics Sector sales increased by 8% in 2006. The increase in the “Specialties” cluster, sustained by Specialty Polymers, and the strong performance of the “Vinyls” cluster permitted the operating result (EUR 409 million) of the Plastics Sector to exceed (+ 5%) the already strong results of 2005.
Management Report
Management Report
Energy context The Group is particularly attentive to the evolution of the energy situation, especially for the Chemicals Sector. Leadership in process technologies, efficient and flexible industrial infrastructures (including investments under way in Bulgaria and the conversion of lime ovens to coal firing that began in late 2006 in the USA), cogeneration units and medium-to-long term supply contracts help cushion the impact of rising energy prices. Participation by Solvay in the Exeltium consortium, a group of electricity-intensive industries in France, should assure reliable and competitive energy supplies to Solvay’s large production sites in France. A first agreement in principle was signed between Exeltium and the French national electricity company EDF at the beginning of 2007. In Belgium, a similar project is currently being studied. Depending on the specific market conditions of each SBU, price rises are negotiated to compensate the rise in energy costs. 2006 was characterized by high energy prices, despite a slight easing for gas. The Group’s specific energy policy enabled it to limit the rise in its energy bill to well below that of market prices. For 2006 energy costs represent around 8% of sales. In 2007 energy prices remain very high. 3. T he results for the Pharmaceuticals Sector include those of Fournier Pharma since August 1, 2005. 4. See also comments on page 19
Solvay Global Annual Report 2006
Comments on key figures
Income from investments represents the dividends paid by Fortis and Sofina in 2006.
Income statement Non-recurring items in 2006 showed a negative balance of EUR 143 million. This includes: – the capital gain of EUR 75 million on the second quarter sale of 49.6% in Financière Keyenveld S.A. (which holds Solvay’s participating interest in Sofina S.A.); – EUR 133 million of restructuring costs to meet the 2010 objectives of the Pharmaceuticals (“INSPIRE”5 project); – EUR 42 million of restructuring costs and additional provisions for miscellaneous litigation, primarily in the Chemicals Sector, and miscellaneous write-downs; – EUR 49 million for impairment and reorganization of barium and strontium carbonate activities, which face significant competitive pressures, as well as impairment of assets (the Zolip project) in the Pharmaceuticals Sector following reallocation of priorities to the United States for developing the fenofibrate/statin combination in the project led by AstraZeneca and Abbott.
Net income of the Group amounted to a record EUR 817 million compared with EUR 816 million in 2005 the latter figure including much higher non-operating items.
Cash flow Depreciation and amortization amounted to EUR 522 million, up 13% compared with 2005. Cash flow rose by 5% to a record EUR 1 339 million. REBITDA amounted to EUR 1 568 million, up by 17%, reflecting the strong growth in operating results.
1400
1 280
1200 1000
1 048
1 339
990 859
800 600 400 200
10
Charges on net indebtedness amounted to EUR 82 million. At the end of December 2006, financial debt was totally covered at fixed interest rates, following a EUR 500 million hybrid, non-dilutive security issue in May 2006, with a fixed interest rate for the first 10 years. This issue allowed the Group to reinforce its financial structure while at the same time benefiting from favorable conditions in the capital market. Income taxes amounted to EUR 179 million in 2006, or a rate of 20% taking into account the tax credits in the fourth quarter 2006, in addition to those recorded during the previous quarters, as well as the nontaxable capital gain on the second quarter sale of 49.6% of Financière Keyenveld S.A. In 2006, results from discontinued operations represented the net gain (EUR 103 million) on the sale of industrial foils to Renolit in March 2006. It should be recalled that, in 2005, the results from discontinued operations included a net capital gain (EUR 472 million) on the January 2005 sale to BP of Solvay’s American and European interests in the high-density polyethylene activities and the net income of the industrial foils activities.
5. See also comments on page 19.
Solvay Global Annual Report 2006
0
2002
2003
2004
2005
2006
Balance sheet Stockholders’ equity amounted to EUR 4 456 million at the end of December 2006, up by EUR 536 million from the end of 2005. Net debt of the Group at the end of 2006 (EUR 1 258 million) was down by EUR 422 million compared with December 31, 2005. The net debt to equity ratio was 28%, sharply down from 43% at the end of 2005, and back to the level reached before the purchase of Fournier. Moody’s and S&Ps confirmed the long- and short-term ratings for Solvay (A/A2 and A1/P1 respectively). This situation reflects the Group policy of maintaining a sound financial situation, in line with the objective of not continuously exceeding a net debt to equity ratio of 45%.
Management Report
Expenditure for the future: Capital expenditure and Research and Development
Management Report
Capital expenditure in 2006 amounted to EUR 858 million. Research and Development (R&D) costs in 2006 reached EUR 563 million. 75% of these were incurred in the Pharmaceuticals Sector. Research expenditure for the latter sector in 2006 amounted to EUR 424 million (16% of sales), up significantly (+21%) on 2005 and reflecting the integration of Fournier Pharma since August 1, 2005. The 2007 capital expenditure budget for the Group is EUR 905 million; the R&D budget is EUR 556 million, 75% of it for the Pharmaceuticals sector.
11
These figures demonstrate the Group’s determination to pursue its strategy of sustainable and profitable growth. In 2006 the Innovation drive that is central to the Group’s strategy was marked by the fourth Solvay Innovation Trophy. Eight innovation projects out of 96 competing entries, all developed within the Solvay Group, were recognized by a panel of judges composed of distinguished representatives from the world of research and innovation. The achievement, a year ahead of target, of the objectives set for growth, partnership and employee involvement, generated three new Innovation goals for 2009: a “new sales” ratio of 30%, 50% of innovative projects to consist of partnerships, and full participation by employees (100%).
Investments & acquisitions by the Group in 2006 = EUR 858 million
Group R&D in 2006 = EUR 563 million
(including EUR 8 million of discontinued operations)
12
18
201
88 33
367
270
Pharmaceuticals = 201 Chemicals = 270 Plastics = 367 Corporate = 12
424
Pharmaceuticals = 424 Chemicals = 33 Plastics = 88 Corporate = 18
Solvay Global Annual Report 2006
Financial Information per share Earnings per share Net Group income was EUR 817 million. Minority interests in this amount total EUR 26 million. Net profit per share in 2006 amounted to EUR 9.57, compared with EUR 9.51 in 2005. Under IFRS rules, net earnings per share is calculated by dividing net income (Solvay share) by the weighted average number of shares, less own shares bought in by the company to cover stock option programs.
Dividend
12
In 2006 an interim dividend of EUR 0.80 per share (EUR 1.0667 EUR gross before Belgian investment withholding tax of 25% in full discharge) was approved by the Board of Directors on October 26, 2006. This interim payment (coupon 79), paid on January 18, 2007, represents advance payment of the total dividend in respect of 2006 proposed by the Board of Directors on February 15, 2007.
The net dividend for 2006 proposed to the General Shareholders’ Meeting of May 8, 2007 is EUR 2.10 per share (EUR 2.80 gross per share), which is 5% higher than in 2005. Given the interim dividend of EUR 0.80 net per share (coupon no. 79) already paid on January 18, 2007, the balance of EUR 1.30 net per share will be paid on May 15, 2007 (coupon no. 80). This increase is in line with Group policy of increasing the dividend whenever possible and, as far as possible, not reducing it. Over the past 25 years the dividend has been steadily increased and never reduced.
Parent company results (Solvay S.A.) Current profit before taxes amounted to EUR 157 million, compared with a EUR 23 million loss in 2005. A net extraordinary gain of EUR 94 million was recorded compared with EUR 377 million in 2005. The reorganization of the Solvay group’s pharmaceutical activities, begun in 2005, continued in 2006 with
Gross and net dividend per share (in EUR) 3.0 2.5 2.0
2.40 1.80
2.40 1.80
1.90
2.80
2.67
2.53 2.00
2.10
1.5 1.0 0.5 0.0 2002
Net dividend
Solvay Global Annual Report 2006
2003
Gross dividend
2004
2005
2006
Information for shareholders
no changes in accounting principles. The resulting movements in shareholdings within Solvay S.A. have been recorded at market value as required by Belgian accounting law. However, so as not to excessively impact the parent company earnings with internal capital gains, the company has maintained its investment in Solvay Finance (Luxembourg) S.A. at its historical value. Taking into account a EUR 7 million tax credit (EUR 33 million in 2005), the net earnings of Solvay S.A. in 2006 amount to EUR 258 million, compared with EUR 387 million in 2005. In the absence of transfers to untaxed reserves, net income of EUR 258 million is available for distribution.
EUR million
2005
2006
Net profit for the year available for distribution
387
258
Carried forward
363
529
Total available to the General Shareholders’ Meeting
750
787
Gross dividend
221
237
Carried forward
529
550
Total
750
787
Allocations:
Information for shareholders
Appropriation of profits, Solvay S.A.
13 Consolidated data per share In EUR
2002
2003
2004
2005
2006
Capital and reserves after distribution
32.34
32.23
34.92
45.46
50.97
Cash flow
12.95
9.91
12.00
15.42
16.20
REBITDA
16.69
13.16
13.88
16.13
18.97
Net profit
5.59
4.78
5.92
9.51
9.57
Net income (excluding discontinued operations)
5.64
4.83
5.12
3.77
8.33
Number of shares (in thousands) at December 31
84 600
84 610
84 623
84 696
84 701
Average number of shares (in thousands) for calculating IFRS earnings per share
83 059
82 748
82 521
83 021
82 669
Diluted net income
5.58
4.78
5.90
9.46
9.52
Diluted net income (excluding discontinued operations)
5.63
4.82
5.11
3.75
8.28
83 208
82 776
82 751
83 491
83 106
Gross dividend
2.40
2.40
2.53
2.67
2.80
Net dividend
1.80
1.80
1.90
2.00
2.10
Highest price
78
69.3
83.9
104.1
116.2
Lowest price
58.7
47.6
64.1
79.95
83.1
Price at December 31
65.7
68.75
81
93.1
116.2
Price/earnings at December 31
11.9
14.4
13.7
9.8
12.1
Net dividend yield
2.7 %
2.6 %
2.3 %
2.1 %
1.8 %
Gross dividend yield
3.7 %
3.5 %
3.1 %
2.9 %
2.4 %
25 672
27 068
27 710
44 181
46 225
1 790
1 667
2 000
4 011
4 442
5.6
5.8
6.9
7.9
9.8
Velocity (%)
30.9
32.3
31.5
53.3
56.9
Velocity adjusted by Free Float (73%) (in %)
41.2
44.2
43 .1
71.1
81.2
Average number of shares (in thousands) for calculating IFRS diluted earnings per share
Annual volume (thousands of shares) Annual volume (EUR million) Market capitalization at December 31 (EUR billion)
Solvay Global Annual Report 2006
Pharmaceuticals
Group sales in 2006 = EUR 9 399 million Group 100
45 %
90
45 %
Solvay is one of the world’s 40 leading pharmaceuticals companies. It is particularly well placed in its selected therapeutic fields:
55 %
– Cardiometabolics – Neuroscience – Flu vaccines – Pancreatic enzymes – Gastroenterology – Women’s and men’s health
80 70 60 50
27 %
40 30 28 %
20 10
Research and Development activities are divided selectively between these different fields. In the first two (cardiometabolics and neuroscience) we shall continue to invest in every aspect, from research and development (R&D) through to worldwide marketing. Flu vaccines and pancreatic enzymes will be the subject of targeted investments, including R&D and licensing agreements. Gastroenterology and male and women’s and men’s health will be a downstream activity, focused on marketing.
0 2006 g Pharmaceuticals
g Specialties
g Essentials
g Pharmaceuticals and Specialties
Group REBIT in 2006 = EUR 1 099 million [including “corporate & support activities”: EUR -76 million]
Group 100 90
40 %
40 %
22 %
60 %
80 70 60 50 40
14
38 %
30 20 10 0
2006 g Pharmaceuticals
g Specialties
g Essentials
g Pharmaceuticals and Specialties
Risk management An analysis of the risks inherent in Solvay’s business management is presented on pages 98 to 104 of this report. During its strategic review in June 2006, the Executive Committee highlighted risk management as a top priority, and decided to enhance the coherence of risk management measures across the Group. Solvay has defined ten categories of risk: Market & Growth – Strategic · Supply Chain and Property · Regulatory, Political and Legal · Corporate Governance and Internal Procedures · Financial · Product · Risks to People · Environmental · Information and IT · Reputation
Main products
Europe N.America
Cholesterol and triglycemia*
10
4
5
1
1
1
Antiemetics, antinauseants
–
4
4
Vertigo (Menière’s syndrome)
1
1
1
1
1
1
1
8
2
Women’s health
2
2
2
Men’s health
3
1
1
Fibrates* Neuroscience
Gastrointestinal enzymes Gastrointestinal enzymes Gastroenterology Antispasmodics/irritable bowel syndrome medication Women’s and men’s health
* including sales of Tricor® in the USA by Abbott.
Solvay Global Annual Report 2006
World
Cardiometabolics
Strategic and Competitive Positions Essentials
Solvay Specialties from the Chemicals and Plastics Sectors generally feature: – very specific, high value added and strongly growing markets; – lower sensitivity to economic cycles; – higher margins and returns than the average for Group products; – major Research and Development programmes, leading to regular launches of new products and grades.
Apart from Specialties, the Chemicals and Plastics Sectors are also active in Essentials. The success of Solvay’s Essentials lies both in their history and their specific features. Many of them are products on which Solvay was built and has grown to what it is today. All are an essential part of our everyday life. In each of these products the Group has a world leadership position, alone or in partnership, and major competitive advantages on which it intends to build further in a selective fashion.
Our Positions
Specialties
Solvay Specialties include in particular:
–C hemicals: fluorinated products, various innovative applications of sodium bicarbonate, ultra-pure barium and strontium carbonates, Advanced Functional Minerals, caprolactones and ultra-pure grades of hydrogen peroxide. To these will be added the products generated by the new “Molecular Solutions” Strategic Business Unit.
15
–P lastics: high performance Specialty Polymers such as fluorinated polymers, elastopolymers and fluids, barrier materials, polyarylamides, polysulfones, high performance polyamides, liquid crystal polymers and fuel systems (in partnership with Plastic Omnium). This area was reinforced in 2006 with acquisitions in very high performance polymers.
Solvay’s Essentials include:
– Chemicals: soda ash, caustic soda, hydrogen peroxide, persalts, technical grade barium and strontium carbonates, sodium hypochlorite, etc.
– Plastics: vinyls (SolVin in partnership with BASF in Europe, Vinythai in Thailand and Solvay Indupa in Mercosur) and pipes and fittings (in partnership with Wienerberger).
Main products
Europe
World
Chemicals Fluorinated products Advanced Functional Minerals Sodium bicarbonate Ultra-pure H2O2 Ultra-pure barium/strontium
Other Specialty Polymers Inergy (fuel systems)
Europe
World
Soda ash
1
1
Hydrogen peroxide
1
1
Persalts
1
1
Barium/strontium
1
1
Caustic soda
1
3
PVC
2
3
Pipelife (pipes and fittings)
4
–
Chemicals 1
2
amongst the world leaders
1
1
amongst the world leaders
1
1
–
3
Plastics Fluorinated polymers
Main products
Plastics
amongst the world leaders
1
1
Solvay Global Annual Report 2006
SĂŠbastien Bolze Manager A.D.M.E.
16 Lina Fossati Senior biology lab technician
Photograph taken on December 7, 2006 at Laboratoires Solvay Pharmaceuticals/Dijon, France Solvay Global Annual Report 2006
Building the future Solvay Pharmaceuticals... we are keeping our promises
Pharmaceuticals
Pharmaceuticals Sector
17
Performance objectives for 2010 – REBIT/sales above 20%; – Sales growth of at least 7% a year and above industry average; – Efficiency improvements generating savings of EUR 300 million a year.
Solvay Global Annual Report 2006
Key figures [EUR million] 2004 1 745 236 65 150 294 7 988
Sales REBIT Depreciation Capital expenditure R&D Headcount (FTE)1
2006 2005 2 601 2 270 451 302 113 87 201 1 346 424 351 10 004 10 088
1. Full-time equivalents at January 1, of are following year.
Khan Ou Researcher
Sales breakdown 2006: EUR 2 601 million By therapeutic field Cardiometabolics
686
Women’s and men’s health
Neuroscience
599
Flu vaccines
253
430 148
Others
253 686 599
Pancreatic enzymes
191 148
Gastroenterology
18
430
294
191
294
By geographic area
3%
44 %
g Europe 35 % European Union (25) 9 % Other European countries g Asia-Pacific g The Americas 44 % Nafta 2 % Mercosur g Rest of the world
7% 46 %
44 % 46 %
3%
7%
+15 % +49 % in sales
in REBIT
R&D expenditure 2006: EUR 424 million By therapeutic field Cardiometabolics
36 %
Neuroscience
32 %
Flu vaccines
5%
Women’s and men’s health
15 %
15 % 4%
36 %
8% 5%
Pancreatic enzymes
8%
Gastroenterology
4%
Solvay Global Annual Report 2006
32 %
Fenofibrates
In fenofibrates, Solvay Pharmaceuticals is speeding up development of new compounds alongside TRICOR®/LIPANTHYL®.
Solvay Pharmaceuticals is continuing the transformation it announced in late 2005 Initial achievements Inspire
In the fourth quarter of 2005, Solvay Pharmaceuticals: – Launched its “INSPIRE” strategic programme to : · integrate Fournier Pharma; and · transform itself into the “future Solvay Pharmaceuticals” organization by 2010. – Set itself clear and ambitious performance objectives for 2010: · REBIT/sales above 20%; · above-industry-average sales growth of at least 7% a year and above industry average; · efficiency improvements generating savings of EUR 300 million a year. – Decided to focus Research and Development primarily on cardiometabolics and neurosciences, with additional well-targeted investments in flu vaccines and pancreatic enzymes to meet still-unsatisfied medical needs. The Sector is on the way to achieving all these strategic objectives.
During 2006, the “INSPIRE” project focused on integrating national sales and marketing teams across the world, from Canada to Italy to Turkey to Vietnam. Despite certain difficulties, this exercise was completed rapidly, successfully and very professionally. Solvay and Fournier employees were trained in the new, more balanced and wider product range and everyone, from central and regional managements downwards, got used to the new teams, managers and structure. Parallel with this, the global functional organization of Solvay Pharmaceuticals was redefined, optimized and communicated to all personnel. The next step is to integrate and transform R&D, RESQS (Regulatory & External Affairs, Safety & Quality Strategies) and Manufacturing at the global level.
Pharmaceuticals Pharmaceutique
Pharmaceuticals Sector
19
performance of other products. Efficiency gains: full integration of commercial, executive and administrative functions, along with initial plant optimizations, have produced savings in line with the announced program.
Selective portfolio orientation Cardiometabolic and neuroscience specialities are our main areas of therapeutic interest. We continue to invest in every aspect of them, from research and development (R&D) to global marketing. We are also
Performance The operating margin for 2006 was above 17%, up from 13% in 2005 and well on the way to the target of 20%. Sales rose by 15%, reflecting both full-year sales of Fournier products (in 2005, these were consolidated beginning on August 1) and the good general
Solvay Global Annual Report 2006
Chantal Fouchet Senior biology lab technician
“ The USA remains our primary
20
market, with 37% of total sales. These were again up strongly in 2006 (+ 29%)
”
continuing our active search for licensing agreements in order to balance out and enrich these areas. Flu vaccines and pancreatic enzymes directly linked to unmet medical needs will be the subject of targeted investments, including R&D and licensing agreements. We will progressively reduce research in gastroenterology and male and female hormone therapy. These will become downstream activities, concentrated on marketing and supported by licence buy-ins and acquisitions. Efforts are concentrated on sales and marketing. The overall results in 2006 confirm Fournier’s successful integration into the Group and give Solvay Pharmaceuticals confidence as it works towards its strategic objectives for 2010.
Solvay Global Annual Report 2006
Development in individual therapeutic fields and geographic areas The 2006 results and margins of Solvay Pharmaceuticals in the USA show a significant improvement from 2005, despite: – more aggressive inventory management by our US distributors, which unfavorably affected fourth quarter results; and – the expiration of our Canadian sales rights for PANTOLOC® (gastroenterology) in May. These results reflect the very good performance of the fenofibrates range (LIPANTHYL®, TRICOR®), bearing out the expectations placed on it when we acquired Fournier. TRICOR® attained “blockbuster” status in 2006 with sales of over USD 1 billion in the US alone. They also include a capital gain on the sale of ESTROGEL®
in the USA, and an arbitration award concluding a legal dispute in the USA. These results also include a significant increase in research effort (+ 21%), reflecting the size and acceleration of certain cardiometabolic and neuroscience projects. Several important milestones have been reached as we develop new products in sound partnerships with other groups. The USA remains our primary market, with 37% of total sales. These were again up strongly in 2006 (+ 29%), owing in particular to the co-promotion agreements with Abbott. Against a background of price pressure, sales in Europe rose significantly. Sustained growth was recorded in emerging countries (South Africa, Middle East, Brazil) and in Russia in particular. With the exception of gastroenterology sales, which declined with the expiration of Canadian sales rights for PANTOLOC®, all therapeutic areas improved in 2006 compared with 2005.
Flagship products in 2006
The Group’s leading product is fenofibrate, marketed as TRICOR® in the United States and mainly as LIPANTHYL® in the rest of the world. ANDROGEN®, a hormone product for men, was the next best performer. CREON®, INFLUVAC®, SERC® and MARINOL® all produced remarkable growth figures of between 18 and 26%.
Therapeutic Products Markets field
2006 sales % of 2006 in EUR sales million
TriCor ®/Lipanthyl® Cardiometabolics Men’s health Androgel®
Global North America + Central, Eastern Europe, Middle East South Africa
413 275
16 % 11 %
Difference 2006/2005 % +123 % 1 +15 %
Pancreatic enzymes
Creon®
Global
191
7 %
+18 %
Neuroscience
Serc®
Europe + Export
146
6 %
+20 %
Flu vaccines
Influvac®
Europe + Export
118
5 %
+18 %
Neuroscience
Marinol®
USA
106
4 %
+26 %
Cardiometabolics
Teveten®
Global2
95
4 %
+4 %
Gastroenterology
Duphalac
Europe + Export
85
3 %
–
®
Neuroscience
Luvox
Japon + Export
81
3 %
+1 %
Women’s health
Prometrium®3
USA
76
3 %
+7 %
Women’s health
Estratest®
North America
75
3 %
-18 %
®
Women’s health
Duphaston
Europe + Export
74
3 %
+19 %
Gastroenterology
Pantoloc® 4
Canada
70
3 %
-58 %
Gastroenterology
Duspatal
Europe + Export
59
2 %
+2 %
Cardiometabolics
Physiotens®
Europe + Export
50
2 %
-4 %
®
®
Pharmaceuticals
Pharmaceuticals Sector
21
1. 5 months in 2005. 2. Rights transferred in the USA to Biovail. 3. A registered trade mark of Schering Corp. 4. A registered trade mark of Altana.
Solvay Global Annual Report 2006
Cardiometabolics – our principal therapeutic area of interest Extending the fenofibrate franchise Cardiovascular disease remains a major world health problem. Our product range and our research portfolio focus include: – lipidic disorders like mixed dyslipidemia, characterized by abnormal fat levels, including cholesterol and triglycerides, in the blood stream; – obesity; – type 2 diabetes; – heart failure; – renal insufficiency; and – other exploratory platforms.
22
In fenofibrates, Solvay Pharmaceuticals is speeding up development of new compounds alongside TRICOR®/LIPANTHYL®, in particular the next generation fenofibrate SLV348/ABT335 that is being developed jointly with Abbott and is now in Phase III clinical trials. Several combinations of fenofibrates with other compounds are also being tested. In the USA, AstraZeneca and Abbott have announced the joint development and marketing of a fixed dose product combining CRESTOR® (AstraZeneca’s rosuvastatin) with either Solvay’s TRICOR® or SLV348/ABT335. It is planned to submit a registration application for this combined product in 2009. If approved, it will have a positive long-term impact on the value of the fenofibrate franchise in the USA. Solvay is developing a fixed dose fenofibrate-metformin combination, SYNORDIA®, for type 2 diabetes patients. A registration dossier for Europe was submitted in July 2006, and then withdrawn in December, as Solvay Pharmaceuticals was unable to
Solvay Global Annual Report 2006
respond within the available time to EMEA’s (European Agency for the Evaluation of Medical Products) requests for additional information. The withdrawal of an application does not prejudice the filing of a new application at a later date. The SLV319 anti-obesity compound we are developing with our partner Bristol-Myers Squibb has moved from phase I to phase II of its clinical trials, triggering a EUR 25 million milestone payment to Solvay from Bristol-Myers Squibb. PULZIUM® (tedisamil) for treating cardiac arrhythmia has completed its phase III trials, and a registration application has been filed with the FDA (Food and Drug Administration) in the United States. Fournier is contributing to our rich pipeline with six new compounds from its research department now at the pre-clinical stage.
Neuroscience This second main therapeutic area of focus covers: – schizophrenia; – bipolar disorders; – Parkinson’s disease; – cerebral trauma; and – other exploratory platforms.
Application to market bifeprunox in the USA officially filed by the FDA In December 2006 the FDA officially “filed” the registration dossier for bifeprunox submitted in October 2006. This means that the formal procedure and the examination of the application file are now under way. This decision triggered a milestone payment of USD 25 million from Wyeth, Solvay’s partner in co-developing and co-marketing this new schizophrenia treatment in the US. The submission is based on safety and efficacy tests on around
2 500 patients. Some of the results of these clinical trials were presented at the American College of Neuropsychopharmacology (ACNP) congress in December 2006. Solvay Pharmaceuticals and Wyeth have also decided to extend their existing agreement, covering the joint development and marketing of bifeprunox and SLV313 and SLV314 compounds, to include neuroscience research to identify new types of compounds for potential use as anti-psychosis drugs. Solvay is continuing to develop bifeprunox in Europe with Lundbeck, which plans to file for registration in 2009 at the earliest. Schizophrenia is a chronic and serious form of psychosis, characterized by severe mental and perception disorders, affecting around 1% of the world’s population. The onset of the disease is generally observed in late adolescence or early adulthood.
Parkinson’s disease DUODOPA® is confirming its advantage over oral treatments in the treatment of late-stage Parkinson’s disease. In 2006 the number of patients treated and the number of countries in which the treatment is available more than doubled, with further expansions planned in 2007. Elsewhere, SLV308 for the treatment of early and mid-stage Parkinson’s is continuing its phase III clinical trials, and we hope to be able to submit the first dossiers in 2008. With DUODOPA® and SLV308 we will then offer two separate products for sufferers from this neuro-degenerative disorder.
Pharmaceuticals Sector Marie-Christine Bret Senior biology lab technician
Bruno Loillier
Pharmaceuticals
Senior biology lab technician
23
is “ Fournier
contributing to our rich pipeline with six new compounds from its research department now at the pre-clinical stage
�
Solvay Global Annual Report 2006
Flu vaccines Cell-culture production of flu vaccines The new plant for producing cell-cultured flu vaccines is complete. Validation work took place throughout 2006. GMP (Good Manufacturing Practices) certification has been obtained. The cell-culture, mixing and formulation units are now approved. Batches of vaccines manufactured in this new plant are undergoing clinical trials, including in the USA. In 2007 the plant will produce pre-pandemic vaccines under contracts with various national governments, along with trial vaccines against seasonal influenza, which it is planned to market progressively beginning in 2008.
24
Arnaud Chapuis Purchasing assistant
Laurent Mounier Research assistant
In the USA, Solvay Pharmaceuticals has been granted a USD 298 million subsidy from the US Department of Health and Human Services (DHHS) to develop a
cell-cultured flu vaccine, and to design a production plant based on this technology for the American market by 2011. In Russia, Petrovax Pharm is building a new flu vaccine formulation unit close to Moscow with the assistance of Solvay Pharmaceuticals. Petrovax will formulate the vaccines by adding its polyoxidonium adjuvant to Solvay cell-cultured antigens. These formulated vaccines are intended for the Russian and CIS markets. Research in this activity is directly primarily at new administration systems (in particular nasal) and at adjuvants that can boost the effect of the antigen and better protect certain populations like the aged.
Solvay Global Annual Report 2006
Pancreatic enzymes Research in this therapeutic field is focused on biologically produced enzymes. A new commercial agreement has been signed with Japan EISAI to develop sales of CREON速. This product has performed very well in other markets.
Gastroenterology In accordance with our strategy, we no longer undertake research in gastroenterology, allocating our resources instead to other therapeutic fields. Our efforts remain focused on in-licensing and marketing our existing products. We called off licensing of our cilansetron compound in 2005 and are now looking for a third-party licensee.
Pharmaceuticals Sector
In the USA, Solvay Pharmaceuticals concluded litigation with the companies Watson and Par over their entry into the market for this indication in 2015.
Valérie Lepais Senior chemistry lab technician
Pharmaceuticals
Finally, Solvay Pharmaceuticals sold its ESTROGEL® product in the United States, in order to focus on its strategic cardiometabolic and neuroscience areas.
25 “ In the USA, Solvay
Women’s and men’s health
Pharmaceuticals has been granted a USD 298 million subsidy from the US Department of Health and Human Services (DHHS) to develop a cell-cultured flu vaccine
”
ANDROGEL® : already a success in the United States, Solvay obtains new territories ANDROGEL® is an odor-free topical gel, applied once daily, that meets unsatisfied clinical needs in the treatment of male hypogonadism (androgen deficiency). ANDROGEL® is already a success in North America, where sales reached EUR 275 million in 2006. We now have the product for the entire African continent, Central and Eastern Europe, the Middle East, Asia and Latin America and the key European countries France, Belgium, the UK, Spain and Greece.
Solvay Global Annual Report 2006
Laurent Mignon Research assistant
26
Solvay Global Annual Report 2006
Pharmaceuticals Sector
Cardiometabolics SLV316, SLV329, SLV335, SLV337, SLV338, SLV341, SLV342, SLV344, SLV345, SLV346
SLV319: zolip: PULZIUM® obesity (fenofibrate+statin) intravenous (US): odiparcil: SYNORDIA® EU: for atrial fibrillation for stroke (fenofibrate + metformin) prevention in atrial SLV348(hexa)/ABT335: fibrillation (next-generation daglutril: fenofibrate) for hypertension PULZIUM® and congestive intravenous (EU): heart failure for atrial fibrillation SLV320: for congestive heart failure and kidney disease
SLV314: MARINOL®: Neuroscience SLV326, SLV330, schizophrenia metered dose inhaler SLV334: (MDI) SLV347, SLV338 traumatic SLV313: brain injury schizophrenia anatibant: for traumatic brain injury
bifeprunox EU: bifeprunox US: schizophrenia schizophrenia DUODOPA® US: severe Parkinson’s disease SLV308: mild/moderate Parkinson’s disease MARINOL® EU: for anorexia in HIV/AIDS patients
Flu vaccines
INFLUVAC® TC US: cell-culture derived flu vaccine Pandemic vaccine (H5N1 model dossier)
Pancreatic enzymes
SLV339: pancreatic insufficency
SLV340: pancreatic insufficency
Filed/Approved
CREON® JPN: for pancreatic insufficency
27
INFLUVAC®: flu vaccine INVIVAC®: virosomal flu vaccine INFLUVAC® TC: cell-culture-derived flu vaccine CREON® US: for pancreatic insufficency
Gastroenterology Being Being phased out phased out
cilansetron: (available for licensing) for irritable bowel syndrome
ESTRATEST®: Women’s and Being Being men’s health phased out phased out low dose esterified estrogen + methyltestosterone
ANDROGEL®: male hormone therapy
FEMOSTON® low dose: female hormone therapy cetrorelix: for endometriosis ANDROGEL®: for pediatric indications ANDROGEL® “low volume”: for hypogonadism
Pharmaceuticals
Therapeutic field Preclinical Phase I Phase II Phase III
Solvay Global Annual Report 2006
28
Jacques Bouillier Daytime foreman, solid caustic soda
Jean-Paul Attencourt Superintendant SCS Concentration Unit
Photograph taken on December 8, 2006 at Solvay, Tavaux, France site. Solvay Global Annual Report 2006
Chemicals Sector
Chemicals
Earning the right to growth 29 Strategy • Strengthening our geographic expansion • Growing in Specialties • Consolidating in Essentials • Pursuing technological innovation Eric Ardiot Shift foreman solid caustic soda unit
Solvay Global Annual Report 2006
Key figures [EUR million] 2004 2 433 180 174 165 27 8 594
Sales REBIT Depreciation Capital Expenditure R&D Headcount1
2005 2 785 285 173 261 27 8 721
2006 2 998 315 201 270 33 8 691
1. Full-time equivalents at January 1, of the following year.
Sales breakdown 2006: EUR 2 998 million By cluster and SBU
2%
44 %
Minerals cluster 37 % Carbonates 4 % Barium Strontium 3 % Advanced Functional Minerals
lectrochemicals and E Fluorinated Products cluster 24 % Electrochemicals 14 % Fluorinated Products Oxygen cluster 11 % Hydrogen peroxide 3 % Detergents 2 % Caprolactones
30
16 % 44 %
38 % 38 %
16 % 2%
Organic cluster
By geographic area
3%
64 %
g Europe 58 % European Union (25) 6 % Other European countries g Asia-Pacific g The Americas 19 % Nafta 7 % Mercosur g Rest of the world
in sales
26 %
7% 26 %
64 %
7%
3%
in REBIT
Sales by customer segment 2006: EUR 2 998 million By customer segment Glass industry Chemical industry Detergents, cleaning and hygiene products Paper Construction and architecture Human health Water and environment Automobile industry Human and animal food processing Electricity and electronics Other industries
Solvay Global Annual Report 2006
19 % 18 % 11 % 11 % 5% 4% 4% 3% 3% 2% 20 %
+8 % +11 %
20 %
19 %
2% 3% 3% 4% 4% 5%
18 %
11 %
11 %
Chemicals Sector
Strategy
The rewards of partnership
New Bicarbonate applications, in particular in the “wellness” sector, have been developed and introduced to the retail market at a rapid pace, each time with the help of specialist partners.
Since all its Strategic Business Units (SBUs) are major consumers of energy, the Chemicals Sector is particularly attentive to the global energy environment, marked by high gas and electricity prices. Leadership in process technologies, efficient and flexible industrial infrastructures, cogeneration units and medium-term supply contracts help cushion the impact of this situation.
New initiatives were taken in 2006 – Solvay joined the Exeltium consortium of major electricity consuming companies in France, and this, with a similar “Blue Sky” project in Belgium, should secure long-term energy supplies at competitive prices for Solvay’s major production sites in these two countries. Depending on each SBU’s specific market conditions, price increases were negotiated with customers to provide a secure base for the development of our activities and offset the impact of higher energy prices.
Chemicals
Good results in an environment of high energy costs
31
– Strengthening our geographic expansion by: – Investing in our primary products in high growth areas.
– Growing in Specialties by: – extending our product ranges and developing new applications and markets; and – boosting our organic chemistry skills through partnership with major customers and first-class scientists.
Alain Fort Foreman UE-Hg unit
Franck Grenot Superintendant UE-Hg & UEM
– Consolidating in Essentials by: – maintaining our policy of continuous improvement; and – managing our product portfolio.
– Pursuing technological innovation.
Solvay Global Annual Report 2006
Raphael Kowalski Superintendant UE-membrane
Hervé Klein Daytime foreman UE
32
The “Minerals” cluster: soda ash and derivatives, barium and strontium carbonates, Advanced Functional Minerals 2006 saw growing market demand for Soda Ash, particularly in China, Latin America, Eastern Europe and Russia, and to a lesser degree in Western Europe and the Unites States. With increasing production capacity absorbed by growing domestic demand, Chinese exports grew only slightly. The dynamism of this region justifies our continuing to seek to develop our presence there. Facilities in other production regions therefore operated at near maximum capacity, with the Solvay Sodi (Bulgaria) and Póvoa (Portugal) plants setting new production records. Sales prices
Solvay Global Annual Report 2006
rose, in particular in Europe and the USA. Profitability improved compared with 2005, despite rising energy costs. For 2007 demand remains strong.
was specially created for the fourth Innovation Trophy to bring out the “openness to the outside” dimension necessary to every Innovation effort.
Our soda ash derivatives continue to expand. Our Bicarbonate activity in particular continues to grow, including the successful rollout of a new 100kt/year production unit at Bernburg (Germany) in early 2006. A new unit manufacturing Calcium Chloride pearls is to be built at Rosignano (Italy). Part of its production will be distributed by Zyrax, which already produces this product in Russia.
New bicarbonate applications, in particular in the “wellness” sector, have been developed and introduced to the retail market at a rapid pace, each time with the help of specialist partners.
Innovation remains at the top of the agenda. SBU Soda Ash actively participated in the Solvay Innovation Trophy 2006, winning two prizes: – in the “Management Improvement” category (see under “Sustainable Development”); and – in the “Partnership” category with its “Sodium Bicarbonate, a partner for each application” project. This partnership prize
tional rationalization will boost synergies, in particular in researching and developing new high-added-value specialties.
The Barium and Strontium and Advanced Functional Minerals (AFM) entities have been combined into a single SBU, now known as
Advanced Functional Minerals (AFM). This organiza-
In Barium and Strontium, we are continuing to restructure our manufacturing facilities. In 2006 we reduced capacity at our Bad Hönningen (Germany) site.
Chemicals Sector
Caustic Soda prices remained relatively firm in 2006, with excellent global demand, in particular from the paper, aluminium and chemical sectors. Price prospects for early 2007 are good. Since late 2005, in a tight global market for epichlorohydrin, our Allyls activities have produced satisfactory returns. In parallel with this, Solvay has developed an original epichlorohydrin production process, the EPICEROL™ process, offering many advantages over the traditional process: – significantly lower volume of by-products and waste;
An initial 10 kt/year industrial unit is under construction at Tavaux (France), and Solvay is planning further investments in a 10 kt/year unit in Germany and 100 kt/year unit in Asia, in response to rapidly growing demand for epichlorohydrin, in particular in Asia. The EPICEROL™ process won the Solvay Innovation Trophy 2006 in the “Sustainable Development and Citizenship” category. This honors an initiative in “green chemistry” using a renewable raw material from the agricultural industry.
Chemicals
The “Electrochemistry and Fluorinated Products” cluster
33
2006 was a difficult year for
Fluorinated Products, with rising energy prices in Europe and significant price erosion in the second half in the refrigerants market with new HFC 134a capacities coming on line in China.
“ The EPICEROL
process won the Solvay Innovation Trophy 2006 in the ‘Sustainable Development and Citizenship’ category ™
”
the electrical engineering, semiconductor and liquid-crystal display markets.
– use of natural glycerine as a raw material in place of propylene, which is derived from oil; – helping the biodiesel industry by making good use of its glycerine by-product; – protection by 20 patent applications world-wide.
Strong production of Solkane® 365 mfc and intensified marketing campaigns bore fruit in the foams and solvents markets, in particular in the Asia-Pacific region. Fluorinated specialties and Inorganic Fluorinated products did well, with substantially higher sales to
Construction began in 2006 on our new Fluorinated Specialties plant at Onsan in South Korea. Hydrofluoric acid will be sourced from our Chinese unit, operated in a joint venture with Zhejiang Lantian Environmental Hi-Tech Co. This new 20 kt/year plant should also start production in 2007, to meet Solvay’s and Lantian’s downstream product needs. SBU Fluor participated fully in the Group’s geographic expansion, in particular in Asia. It remains
Solvay Global Annual Report 2006
an active innovator and together with Solvay Solexis carried off the Innovation Trophy 2006 prize for Customer-Oriented Products with its SIFREN® 46 gas for electrical circuit engraving.
The “Oxygen” cluster: Hydrogen Peroxide, Detergents and Caprolactones The Hydrogen Peroxide market continued to grow across the world and more especially in Europe, South America and Southeast Asia. Energy prices, however, put pressure on margins.
34
The partnership between BASF and Dow to produce propylene oxide using a new zero byproduct process (HPPO), based on hydrogen peroxide supplied by Solvay, took concrete form with the groundbreaking ceremony at the BASF site at Antwerp (Belgium), led by the Belgian prime minister and the Chairmen of BASF, Dow and Solvay. Construction of the first megaplant ever using this process is progressing well. The new plant will be able to produce 230 kt/year of hydrogen peroxide on a single
line. Commercial production is scheduled to start in 2008. The Specialties area too has lost none of its dynamism. In the very important paper market, SOLV-X™, a second-generation stabilizer for bleaching mechanical paper pulp with hydrogen peroxide, was launched, offering a technically efficient and economic substitute for sodium silicate. The new INTEROX® AG 35S and DUAL food and drink packaging products launched last year have already achieved good market penetration, with customers recognizing their performance and operating-cost advantages. In the Chinese electronics market the INTEROX SEM Co Ltd production unit, built with our local partner SEM Co Ltd, was officially inaugurated. Our production of ultra-pure hydrogen peroxide there opens the gates to a large and promising market. SBU Hydrogen Peroxide’s contribution was recognized with two prizes in the Solvay Innovation Trophy 2006:
– in the “Performance Improvement” category, for its “Green chemistry for TAB production” project (TAB - tert-amyl benzene - is an intermediate product for the production of hydrogen peroxide); – the new Executive Committee Prize, rewarding an earlier prizewinning project that has since proved its performance and value-creating potential, went to the “High Productivity Hydrogen Peroxide” process, winner of an Innovation Trophy in 2003. As well as expanding capacity at Deer Park (USA) and Voikka (Finland), this process has made possible the construction of the giant line at Antwerp (Belgium), in partnership with BASF and Dow that confirms Solvay’s uncontested leadership in this product. In Persalts, the detergents market remained under price pressure. This sector continued to be a dynamic innovator of sustainable solutions, with potential openings for organic products based on renewable resources and/or using biotechnologies. In Specialties, promising advances were achieved with P.A.P. peracid (EURECO®) in certain detergents applications. Two innovations have won market recognition: – the active detergent ingredient for a new dishwasher tablet (QUANTUM®), cited by RECKITT BENCKISER as an exemplary partnership with a supplier; – the active ingredient for the new liquid detergent in a double chamber bottle, launched by MIGROS in Switzerland. 2006 was another very good year for Caprolactones, with new customers and new niche specialties taking growth above 10%. Faster growth in higher added value markets and the creation of customized grades improved prices and margins.
Solvay Global Annual Report 2006
Jean-Paul Attencourt Superintendant SCS Concentration Unit
Chemicals
Chemicals Sector
35
Solvay Global Annual Report 2006
“ T he new Executive Committee
Prize, rewarding an earlier prizewinning project that has since proved its performance and valuecreating potential, went to the ‘High Productivity Hydrogen Peroxide’ process, winner of an Innovation Trophy in 2003
”
36
Solvay Global Annual Report 2006
Chemicals Sector
2006 was the first year of operations for the Molecular Solutions SBU, set up to develop new, high added value product lines that capitalize on the group’s knowhow in organic molecule synthesis and architecture. In 2006 the SBU consolidated its organization and activities, consisting of the majority shareholding in Girindus (Germany and USA), Solvay’s peptides activities grouped in Peptisyntha (Belgium and USA), its fluorinated organic products activities at Bad Wimpfen (Germany), and its fine chemicals activities at Giraud (France). The SBU also began strengthening its position in the sophisticated peptides and oligo-nucleotides markets. Girindus made significant progress in developing and marketing its unique, patented process
for synthesizing oligo-nucleotides in a solvent environment. These oligo-nucleotides are used as active ingredients in treating genetic diseases and in certain cosmetics niches. Solid-phase synthesis of oligo-nucleotides was successfully extended, leading to a new investment in production capacity at Girindus’ Cincinnati (USA) site. The SBUs existing competences in the organic chemistry of “small molecules” will help it make rapid progress in niche applications in functional cosmetics, for a variety of customers. The SBU is continuing to in-licence molecules, in order to maintain a wellbalanced portfolio, with products at different stages of commercial development.
ted molecular chains. A glance at products at the development stage shows that this trend is set to increase. Molecular Solutions has successfully begun producing and marketing ETFBO (EthoxyTriFluoroButenone), a new product in its range of fluorinated chains. Looking beyond its traditional product lines, Molecular Solutions’ mission includes working on new technological and commercial options in the emerging field of organic products for electronics. For this, the SBU is collaborating closely with the New Business Development (NBD) teams to structure and guide external cooperation to complement its own know-how.
Chemicals
The “Organic” cluster: Molecular Solutions
37
In 2006 the organic fluorinated products activity grew particularly rapidly. Around 20% of all pharmaceutical and agrochemical active principles contain fluorina-
Patrick Delaine Shift foreman fluorinated products
J. Ginet Superintendant 2CPe
Solvay Global Annual Report 2006
Jacques Lebrun
38
Alessandro Ghielmi Ionomer & Membranes R&D Manager
Photograph taken on February 7, 2007 at Solvay Solexis, Bollate, Italy. Solvay Global Annual Report 2006
Plastics Sector
Plastics
Building on our strong points, expanding our portfolio
39 Strategy Developing our Specialties: • Product and technological leadership and key market positions; • Constant search for new opportunities. Expanding the Vinyls cluster: • Strong leadership in Europe, South-East Asia and South America; • Continuously boosting competitiveness with technological innovation; • Targeted geographic growth and diversification.
Solvay Global Annual Report 2006
Key figures [EUR million] 20042 3 093 374 171 217 70 8 702
Sales REBIT Depreciation Capital Expenditure R&D Headcount1
20052 3 507 389 174 293 79 8 474
1. Time equivalents at January 1, of the following year. 2. Industrial Foils are included in “discontinued activities”.
2006 2 3 800 409 192 367 88 8 889 Diego Guerra
Melt Processable Fluoropolymers Development
Sales breakdown 2006: EUR 3 800 million By cluster and SBU
45 %
10 %
Specialties 28 % Specialty Polymers 17 % Inergy Automotive Systems
28 %
55 %
Vinyls cluster 45 % Vinyls 10 % Pipelife (pipes and fittings)
45 % 17 %
40
1%
By geographic area
58 %
gE urope 54 % European Union (25) 4 % Other European countries g Asia-Pacific g The Americas 19 % Nafta 13 % Mercosur
9% 32 %
g Rest of the world
1%
+8 % +5 % in sales
32 % 58 % 9%
in REBIT
Sales by customer segment 2006: EUR 3 800 million 2%
By customer segment Automobile industry Construction and architecture Chemical industry Electricity and electronics Water and environment Packaging Consumer goods Human health Other industries
Solvay Global Annual Report 2006
27 % 25 % 10 % 9% 9% 8% 6% 2% 4%
4%
6% 27 %
8% 9% 9% 10 %
25 %
Plastics Sector
Strategy SBU Specialty Polymers and SBU Inergy Automotive Systems, a 50/50 joint venture with Plastic Omnium in fuel systems Innovation
Innovation was also centre stage in 2006. More than 30% of the SBU’s specialties sales consisted of products introduced within the past 5 years.
– Developing our Specialties: – product and technological leadership and key market positions from continuously strengthening competitiveness, R&D and customer proximity; – constant search for new opportunities in high growth markets, and globalization of operations.
With strongly increasing demand in high added value markets like retail electronics, medical applications, pharmaceuticals packaging, new automotive applications and oil drilling, 2006 was a year of strong growth for Specialty Polymers. Sales rose vigorously in Asia, where we have increased our activities. Earnings also were up substantially from 2005, despite continuing high raw-materials costs, the increase in R&D efforts, already at a high level, needed to respond to sustained demand from these
markets and the cost of integrating recently acquired companies. The major strategic decisions taken in 2005 and 2006 – expansion of our production capacities, penetration in Asia, and enrichment of the product portfolio – are gradually bearing fruit. With its own ranges of specialty polymers complemented by judicious acquisitions, Solvay today offers customers the widest choice of high and very high performance polymers available anywhere on the market.
Plastics
Specialties
41
In China, the Group opened its new Technical Center at Shanghai to support local customers and decided to build, in 2007, a world class plant to produce micronized polytetrafluoroethylene (PTFE) powder (POLYMIST®), in response to strongly growing local demand. Andrea Capelli Melt Processable Fluoropolymers Development
– Expanding the Vinyls cluster: – strong leadership in Europe, South-East Asia and South America; world scale and presence; – continuously boosting competitiveness with technological innovation; – targeted geographic growth and diversification.
Simone Merelli Melt Processable Fluoropolymers Development
Solvay Global Annual Report 2006
Stolano Morelli Pilot Plants Technician
42
Advanced Polymers “ Solvay (USA) also launched its new SOLVASPIRE® range of ultra polymers
”
Solvay Global Annual Report 2006
Plastics Sector
Solvay Advanced Polymers (USA) also launched its new SOLVASPIRE® range of ultra polymers during 2006, placing Solvay among world leaders in the very high performance polymers used in electronics, aerospace and in medical and automotive applications. Solvay Solexis (Italy) and Umicore (Belgium) have joined forces to create a 50/50 joint venture, SolviCore, to research, produce and market membraneelectrode assemblies (MEAs) for fuel cell applications. Solvay is contributing its membrane knowhow, Umicore its competence in metallic catalysts. VDC-PVDC (polyvinylidene chloride, produced by a 75/25 Solvay BASF joint venture), which is used mainly for gas and humidity-resistant barrier packaging in the food and pharmaceuticals sector, has made considerable progress in the latter segment. The transfer of production from the BASF site at Ludwigshafen (Germany) to Tavaux (France) went ahead successfully and on schedule. Polyolefin compounds fared variously in their different markets: – Solvay Engineered Polymers (USA), which operates in polypropylene and elastomer
compounds, was hit by the downturn in the US automobile market and difficulties in passing on higher polypropylene prices; while; – Padanaplast’s (Italy) polyethylene compounds made good progress, thanks to significant volume increases, in particular in the pipes market (as a substitute for copper). Innovation was also centre stage in 2006. More than 30% of the SBU’s sales consisted of products introduced within the past 5 years. The SBU also carried off three prizes in the Solvay Innovation Trophy 2006: – in the New Business category, the TECNOFLON® PFR project, which came up with an original means of dispersing a charge of nanoparticles in a polymeric matrix to give the ensemble unequalled purity and chemical resistance properties; – in the “Customer Oriented Projects” category, the newly developed “SIFREN® 46” gas offers optimal behaviour for engraving electronic circuits. This prize was won jointly by SBU Specialty Polymers and SBU Fluor; and – in the “Replicated Innovations” category, the project concerning “PVDC latex seeded with polymeric nanoparticles”. This technology, known to and exploited by our partner BASF in other types of polymers, has been successfully adapted to PVDC latexes, giving them mechanical stability properties that are essential for developing pharmaceutical blister applications. Sales at Inergy Automotive Systems (a 50/50 joint venture with Plastic Omnium), the world’s leading manufacturer of fuel systems for the automobile industry, which produces almost 13 million fuel tanks from 23 plants across the world, dipped (-4%) for the first
time since the joint venture was set up in 2000. Rising sales in Mercosur, Eastern Europe, Asia and South Africa were unable to offset falls in Nafta and Western Europe. Overall, earnings held up well. Competitiveness-boosting programs and manufacturing redeployments were successfully carried out, with one plant closed in Spain and a second in Japan, following the closing of two plants in France and one in Great Britain in 2005.
Plastics
Two acquisitions were also completed in 2006. The first, the Plastics division of Gharda in India, gives Solvay among other things access to the very-high-performance PEEK (Polyetheretherketone) polymer. Construction of a commercialscale production unit is to start shortly at Panoli (India). The second was Mississippi Polymer Technologies, a start-up whose newly-launched PARMAX® family of materials offers a unique combination of mechanical and chemical resistance and transparency.
“ Solvay today offers customers
43
the widest choice of high and very high performance polymers available anywhere on the market
”
In terms of growth, 22 new models were launched in 2006, representing three million fuel systems a year. Inergy obtained award letters from Audi, BMW, DaimlerChrysler, General Motors, Mitsubishi, Nissan, Renault and Toyota for an estimated 3.5 million fuel systems. The year was rich in innovations with three projects short-listed as finalists for the Solvay Innovation Trophy 2006. A German manufacturer also commissioned Inergy to produce prototype selective catalytic reducers (SCR), which cut down on diesel engine NOx emissions by injecting urea solution into exhaust gases. Inergy also obtained an order for fuel tanks produced with its new Twin Sheet Blow Molding (TSBM) technology, which combines the best of blow extrusion and thermoforming technologies.
Solvay Global Annual Report 2006
The Vinyls cluster
Electrolysis chain, monomer vinyl chloride, polyvinyl chloride, PVC compounds and Pipelife, a 50/50 joint venture with Wienerberger in pipes and fittings 2006 saw world demand for PVC rise by an estimated 6.4% to 33 million tonnes, reflecting the significantly higher needs of emerging countries in the building construction and infrastructure segments. China again stands out with growth of around 13% and consumption of nearly 8.7 million tonnes in 2006, more than the combined consumption of Western Europe and North America. Strong growth was also recorded in Western Europe (+ 6%), Eastern Europe (+ 13%) and Latin America (+ 8%).
44
Demand for Western Europe production was boosted by strongly rising imports of semi-finished products into Eastern Europe (profiles, floor coverings, pipes and fittings) and the resin shortage on the rapidly growing Russian PVC market. Despite considerable capacity increases, in particular in China, global supply remains tight in Europe and Mercosur across the entire vinyls chain, including raw materials (ethylene, EDC, VCM, etc.). PVC prices have developed unevenly from one region to the next as a function of supply and demand, as well as raw materials and utility prices. On average over the year and thanks to the good geographic diversification of our activities, the vinyls chain has been able to maintain profitability at the excellent levels of 2004 and 2005.
Solvay Global Annual Report 2006
Davide Paleari Mechanical Testing Specialist
Plastics Sector
SolVin enjoys an excellent competitive position in Europe, strengthened in 2006 by the closing of operations at Ludwigshafen (Germany) at the end of 2005, a move offset by the new capacities which came on line in December 2005 at the Jemeppe (Belgium) and Rheinberg (Germany) sites. In so doing the joint venture has strengthened its competitive position, which it intends to preserve in the energy arena by participating in the Exeltium project in France and supporting the Blue Sky project in Belgium. SolVin continued its feasibility study for an integrated 330 kt PVC/year unit in Russia, expandable later to 500 kt PVC/year, in order to consolidate its leadership in Europe and pursue its geographic diversification in Russia, where PVC demand is growing vigorously, and raw materials and utilities are competitively priced.
The new installations should come into operation in mid-2008.
Vinythai (a Thai listed company in which Solvay holds a significant stake) put up a good resistance to pressure from new Chinese units, thanks to its excellent competitiveness, reliable plants and ability to react rapidly to market volatility. The capacity expansions there of VCM from 200 to 400 kt/year and of caustic soda from 130 to 260 kt/year - were carried out on schedule and within budget, with the new units progressively brought into operation in December 2006.
Plastics
In a highly competitive European situation, SolVin (75/25 joint venture between Solvay and BASF) used the reliability of its plants and its high degree of industrial integration to strengthen its market position.
45
“ SolVin enjoys an excellent competitive position in Europe, wich it strengthened in 2006
�
In Mercosur, Solvay Indupa, a listed Argentine company in which Solvay has a majority shareholding, also enjoyed very favorable conditions in the Brazilian and Argentine markets. Improved competitiveness in Brazil with the new VCM expansion and wellfunctioning plants have been key factors in record results throughout the vinyls chain. In July 2006, a USD 150 million investment to modernize and extend chlorine, NaOH, VCM and PVC capacities in Brazil was approved, with the aim of responding to rising demand in the region and further consolidating the competitiveness of the Elclor site.
Solvay Global Annual Report 2006
This investment will further consolidate Vinythai’s competitiveness. Vinythai has also decided to invest EUR 20 million in expanding its PVC capacity by 80 kt/year. This addition capacity should come on stream in mid-2008 and serve to consume the VCM surplus. The sixth report of Vinyl 2010, the voluntary accord of the PVC industry, published in May 2006, showed the industry to be on schedule towards achieving its objectives. The Vinyloop® unit at Ferrara (Italy) continues to develop in terms of production levels, new technology and applications for recycled PVC, despite the fact that the European economic environment remains unattractive for recycling projects.
46
After an additional investment of EUR 8 million, approved in 2006, the quality of recycled PVC obtained with the Vinyloop® process will come close to that of virgin PVC. This improved technology will permit treatment of a wider variety of PVC waste and enable recycled products to be used in higher grade applications. Solvay is also participating, as a shareholder, in a Vinyloop® project in Japan in partnership with Kobe Steel. This unit started up successfully and on schedule in May 2006, with a production capacity of 20 kt/year of recycled compounds. Earnings from PVC compounds reflected concurrent efforts to reduce costs and improve productivity together with the launch of new products. Sales from European plants to eastern countries increased, in particular in the building-construction area. The manufacturing and commercial activities of Soligran, a joint venture with the Nikos group, inaugurated in 2003 at Tver in Russia, made good progress in a growing market.
Solvay Global Annual Report 2006
Pipelife (a 50/50 joint venture with Wienerberger in pipes and fittings), benefited from favorable demand coming after the many measures taken in recent years to strengthen its competitiveness (strategic refocus, cost reduction) and its innovative capacities (R&D initiatives and new product launches). Sales volumes (other than in China, where it is divesting) are 7% higher
than in 2005, due in particular to excellent growth in Eastern Europe. The favorable volume effect, extended and improved product mix and certain innovative specialties produced high earnings, comparable to those of 2005, despite rising raw materials prices.
Industrial foils On April 3, 2006 Solvay concluded the sale of its Industrial Foils activity to Renolit AG, a familyowned German company, for EUR 330 million. The results of the Industrial Foils activity have been included in “discontinued activities” since 2004 and therefore are not included in the Plastics Sector results described and commented on in this chapter.
Plastics
Plastics Sector
Simone Di Paolo
47
Pilot Plants Technician
Alice Molino Special Polymerization Technician
Solvay Global Annual Report 2006
Partnerships on strategic platforms
48
Photograph taken on December 20, 2006 at the “Solvay Innovation Trophy� meeting in Brussels. Solvay Global Annual Report 2006
New Business Development
New Business Development
49 NBD strategic platforms NBD teams are developing advanced materials for application in two strategic areas, sustainable energy and organic electronics.
Solvay Global Annual Report 2006
Sustainable Energy and Organic Electronics NBD (New Business Development) expresses the Group’s commitment to Sustainable Development and the ability of the chemicals industry to find realistic and economically feasible solutions to the major challenges of promoting people’s well-being and development, and safeguarding the planet and its environment.
50
NBD’s mission is to contribute to the sustainable growth of the Group in promising areas for the future. This it does by exploring new technologies and developing new products and related markets, based on the Group’s own competences and with the help of complementary external partners. The NBD teams are developing advanced materials for application in two strategic areas, sustainable energy and organic electronics. The Sustainable Energy platform consists of two programs, fuel cells and organic photovoltaic molecules. The challenge is to develop medium and long-term alternatives to fossil resources in the form of hydrogen (fuel cells, storage technologies) and solar energy (organic photovoltaics). The use of hydrogen, a nonpolluting potential fuel with a high energy capacity, represents a formidable economic and social challenge. The Organic Electronics platform currently consists of a program to develop OLED (Organic Light Emitting Diode) light sources.
Solvay Global Annual Report 2006
The Nutrition and
Environmental Technologies platform are already at an advanced research stage, whilst Nanotechnologies and
Renewable Resources Chemistry are still at an exploratory stage.
Energies of the future: (hydrogen) fuel cells Solvay’s development work centers on “PEMFCs” (proton exchange membrane fuel cells), more especially on the MEA (“membrane electrode assembly”) cell core, and more generally on all the polymers in the system. The big challenges of the moment are to increase reliability and bring down costs. A wide range of ionic membranes are at different stages of development: – industrial-scale production of Hyflon Ion perfluorinated membranes (Solvay Solexis): these serve as a vanguard product for the automobile market (hydrogen fuel cell); – investigation of membrane variants for fuel cells using alternatives to molecular hydrogen, like methanol, ethanol and hydrides (mini-batteries for portable computers); – exploration of new polymers for high-temperature batteries with low sensitivity to impurities (stationary applications). Our objective is to become a
leading world producer of MEAs by 2011. To achieve this, in July 2006 we created SolviCore,
a 50/50 joint company between Solvay and Umicore. Umicore brings in its advanced expertise in catalysts, Solvay its membrane technology. In the venture context, the two partners are uniting their forces and allying with major industrial fuel-cell customers. At the same time, NBD is exploring radically new fuel-cell concepts, joining hands with excellent partners in this field like CEA (France), CMR Fuel Cells Ltd (U.K.), Forschungszentrum Jülich (Germany), and the European MOREPOWER consortium. Our investment in the venture capital company Conduit Ventures is confirming the industrial potential of fuel cells.
Electronics and Organic Photovoltaics: a radiant future For the technologically adjacent fields of organic photovoltaic cells and OLEDs, new research programs got under way in 2006 aimed at positioning Solvay as a key player in this field. The market for silicon-based photovoltaic cells is growing strongly (around 30% a year), but is limited by manufacturing costs and rawmaterial availability. Cells produced
New Business Development
New Business Development
51 at low cost and on a continuous basis from organic materials on flexible supports, using print technologies, could serve as energy sources, for example, in so-called nomad applications. OLEDs are also being developed in various ways in two application fields: – flat screens, which already combine the advantages of a traditional TV set (angle of vision, colour range) and the low space requirements of LCDs; – lighting, where they offer diffused – and why not flexible – sources of light. It is this second type of application we are particularly interested in. Several research contracts have been concluded with leading US, European and Asian universities. In particular we would mention the partnership signed with COPE (the Center for Organic Photonics and Electronics) at the Georgia Institute of Technology at Atlanta, in the USA. A particular feature of this prestigious center is the way it combines molecular modelling, organic synthesis and
systems design in the fields of OLED and photovoltaics. Parallel with the Research activities aimed at filling our portfolio of patents and know-how, major initiatives have been launched to find partnerships and take participating interests in start-ups that will give us a rapid foothold in this high-potential market. To this end, Solvay has continued its policy of investing in venture capital funds: today we are active partners in the PANGAEA Ventures Fund II in Vancouver (Canada).
– s caling up for industrial production.
In the Nutrition platform, our SOLACTIS™ program is already well advanced.
HexelOne™ produces hard cash
This project, developed in a partnership among NBD, the Pharmaceuticals Sector and an outside manufacturing partner and focused on developing and marketing a food ingredient, made decisive advances in 2006: – development of a new nutritional ingredient: the GalactoFructose SOLACTIS™ supported by two intestinal health “claims”; and
In 2006 we were able in particular to begin partnership with a European-scale food group,
Lactalis Industrie (France).
In 2007 we are looking to a unique combination of the scientific, technological and commercial strengths of Solvay and its partners to penetrate the rapidly growing market of nutritional ingredients.
The HexelOne™ technology for producing reinforced plastic piping, developed by a team from New Business Development, was sold in 2006 to German polyethylene piping producer Egeplast Werner Strumann GmbH & Co. KG. Using the HexelOne™ process, large diameter, high-pressure pipes with much-improved environmental performance can be produced for gas and water distribution.
Solvay Global Annual Report 2006
Thomas Petit (Brussels/Belgium)
Robert Grinwis (Thorofare/USA)
Alain FĂŠnĂŠon (Suresnes/France)
52
Developing our people to develop our Group Photograph taken on February 1, 2007 at the International HR Conference at Ostend (Belgium). Solvay Global Annual Report 2006
Human Resources Jan-Eric Zandbergen (Olst/The Netherlands)
Mirna Bartilotti
Human Resources
Sao Paulo/Brazil)
53
The six strategic objectives: – Mapping out our Human Resources needs in qualitative and quantitative terms, – Creating a “Solvay Corporate University” to train all managerial staff, – Integrating the five Solvay values in all HR activities, – Having all managers use HR tools and models, – Managing HR processes and providing pertinent information on a single information management system, and – Excellence of the HR function
Solvay Global Annual Report 2006
The June 2006 strategic review was largely devoted to Human Resources management. For the Group, the success of its strategy is based on the men and women working for it. The Group wants to further develop an entrepreneurial spirit while maintaining and improving the good relations it has established with its social partners. Finally, Human Resources must be organized in a way that matches as closely as possible the overall organization of the Group.
Newly formulated HR strategy The Group’s Human Resources Strategy has been formalized, in line with Group strategy, as:
Developing our people to develop our Group
54
Mapping out our Human Resources needs in qualitative and quantitative terms. Preparing the Group for tomorrow’s issues and challenges and ensuring its sustainable development consists, for Human Resources, of making sure that everyone’s competences are optimally deployed in the functions best suited to them. To do this, it is vital to define the Group’s future needs for skills and expertise. Comparing today’s resources and skills with future needs will enable HR departments to anticipate and plan long-term initiatives (training, relocations, etc.). Using a single HR planning system in the Group will provide the best guarantee of results and permit a common definition of needs. The adopting of cross-departmental criteria will enable Solvay to make better use of the HR potential throughout the Group on a sustainable basis.
Solvay Global Annual Report 2006
Creating a “Solvay Corporate University” as part of the training for all managerial staff The Solvay Corporate University will be an essential breeding ground for the Solvay culture, contributing to the success of the Group’s strategy by including in employees’ training pathways the development of key expertise and skills like risk management, communication and technical training. All Solvay managerial staff will attend the University at various stages of their careers, learning the skills necessary to carry out their responsibilities, for example as team leaders or managers in multi-cultural contexts. Throughout the world the University will use the same reference frameworks and a common language (at times literally) to ensure harmonized training and carry the Group culture to the international level. The University is starting up in stages. It is already active and will be fully operational by 2008.
Integrating the five Solvay values Another task of the Solvay Corporate University will be to promote the Group Values. These Values, known by everyone, must now be put into practice. They will be taken into account when assessing employees, deciding internal promotions and awarding incentive pay.
Having all managers use HR tools and models A certain number of HR management tools are already in place in the Group. These include the skills dictionary, function families, e-PDA (support in maintaining performance assessment and development) and organizational diagrams. Human Resource management will train managers in their use.
It will also assess how they are used to make sure they are properly applied.
Managing HR processes and providing pertinent information on a single information management system A new information management system is now being developed. This new computer program, included in SAP, will be used locally but exploited worldwide. This is one facet of the “Renaissance” project. This IT system will also manage processes, which are in turn based on common, globally harmonized HR policies. Introducing an IT-based management tool will also change the roles of Human Resources managers, whose missions will take on a more strategic aspect.
The ambition of the HR function The entire HR function is looking to become a full-fledged partner of the operating units, constantly improving its understanding of the needs of the business and integrating the human element in its decisions. In this way it will be able to play its appointed role as an agent of change, be recognized as a transactional expert in all employee administration-related processes, and finally manage our skills base whilst including a social dimension. All projects implemented by the HR function are based on these principles of excellence.
Four key HR processes The achievement of these objectives is based on four priority processes that are enabling the Group to prepare its future: – Personnel and competence planning This is essential to ensure that the expertise and competences needed for realizing the Group’s ambitious objectives are really available;
Human Resources
Human Resources
55 –C areer management The career development process will be strengthened by introducing “talent round tables,” working within the defined organizational structures; – International mobility This is a cornerstone of the Group’s future development, anchoring its culture with shared management rules and policies, and permitting the transfer of know-how and expertise. – Training and development Training and development activities will be increased for all employees. These activities will reflect the needs engendered by the Group’s growth strategy. The organization of the HR function will be reviewed accordingly.
A rich dialogue Communication is one of the keys to the success of the entire programme decided on at the June 2006 strategic review. In the area of social or employee relations, the Group views its tradition of dialogue with its employees and their representa-
tives at all levels as a key asset for its future development. To reflect this, in Europe, the “Industrial Relations” manager functions will be reinforced at two levels: at country level, where HR managers will work closely with Country Managers, and at European level, where they will interface with the European Works Council (EWC). Elsewhere in the world, “Industrial Relations” manager functions will be concentrated at individual sites. The Group is also seeking more coherent Group communication by putting together, sharing and implementing a strategic communication plan, and by better integrating communication into Group processes. New initiatives include: – the annual communication plan, based on data from our targets and from the Executive Committee, the Strategic Business Units (SBUs), Functions, and Regions, presenting our priority communication objectives and validated by the Executive Committee; – the inclusion of a communication section in SBUs’ and CCs’ strategic presentations;
– t he development of communication training programs: communication will become a recognized managerial skill.
HR Solvay People Survey 2006 A new internal satisfaction survey, the Solvay People Survey 2006, was launched worldwide across all Group entities at the end of 2006. This time around, the survey stet directed at measuring the commitment and motivation of our employees. This is a complete process, the data gathering phase of which took place in November/ December 2006 using a single, simplified questionnaire, computerized wherever possible. In all 78% of employees – the very large majority – replied, with over 45 entities showing response levels in excess of 90%. The clear results and the fine segmentation will enable us to define and introduce corrective action during 2007 at every level of the organization. We can already report that the survey results are rich in positive lessons.
Solvay Global Annual Report 2006
Our primary thrusts: – Marrying economic growth and Sustainable Development; – More ecologically sound production methods and technological solutions to protect the environment; – Our employees: a priority social responsibility; – Extended social responsibility: ensuring the safety of our site neighbours, the authorities and society as a whole.
56
Acting in partnership with our stakeholders
Photograph taken on December 8, 2006 at the Solvay site at Tavaux, France. Solvay Global Annual Report 2006
Sustainable Development
Solvay has continued to integrate not only social and environmental but also economic challenges in developing its products. This involves it in dialogue and partnerships with all its stakeholders – investors, employees, clients, production plant neighbors and other groups in society. Protecting employee health and safety has always been a priority concern and major initiatives continue in this area. In the field of product safety, another major focus was the production of complete, wellstructured international dossiers on the intrinsic hazards related to our products and the risks associated with their use.
Sustainable Developement
Primary thrusts in 2006
57
The progress made in 2006 can be seen in the 65 Group projects, due to be completed in 2008, described in the report “Towards Sustainable Development 20042008.” In particular, Solvay has signed the Global Charter for Sustainable Development, a recent revision by the ICCA (International Council of Chemical Associations) of the chemical industry’s voluntary “Responsible Care®” commitment dating back to 1992 and covering the areas of health, safety and the environment. The tenth anniversary of the European Works Council (EWC) was an opportunity to engage in joint reflection with employee representatives on the challenges of Sustainable Development.
1. Marrying economic growth and Sustainable Development The Group is integrating the growing calls for sustainability into its innovation and its deployment of new activities. Growing attention is being paid to projects’ sustainability aspects. Risk and life-cycle analyses
Solvay Global Annual Report 2006
and energy, climate and health impacts are all taken into account. A specific ‘Risk Management’ Competence Center has also been created to identify and manage at the strategic level all the significant risks related to our activities and projects. Examples include research into the use of nanotechnologies in cosmetics or the use of by-products of other manufacturing chains as raw materials. The technology for producing flu vaccines in cellular cultures, generating much less waste and enabling larger quantities of a new vaccine to be produced more rapidly, is one illustration of synergies between economic and social performance.
58
NBD (New Business Development) is working on two platforms, one dedicated to sustainable energies, with a program on fuel cells and hydrogen, the other dedicated to organic electronics with a program on organic photovoltaic compounds. Other platforms in Nutrition and Environmental Technologies are at the research stage, whilst Nanotechnologies and Renewable Resources Chemistry are still at the exploratory stage.
2. More ecologically sound production methods and technological solutions to protect the environment Existing facilities are constantly evolving, and new manufacturing units incorporate significant technological advances. Our production plants in the Plastics and Chemicals Sectors are preparing, in conjunction with the relevant authorities, to revise their operating licences in the context of new European regulations to prevent pollution (the “IPPC” – Intergovernmental Panel on Climate Change – directive), based on the concept of the use of environmentally “best available technologies”. At the end of 2006, 50% of our chlorine and caustic soda production facilities were using
Solvay Global Annual Report 2006
membrane electrolysis technology. Those units still using the mercury technology meet the most stringent environmental standards. A new technology for purifying fluorinated polymer production effluent has been installed at Thorofare, NJ (USA). The reuse of recycled urban drainage water to avoid extracting ground water (at Rosignano, Italy) is another attractive example of technological progress at an industrial site.
stabilization and recycling of dredging sludge and other contaminated mineral residues, has confirmed its potential, with the Walloon Region (Belgium) authorities selecting it to treat 1.5 million tons of sediment.
The production and use of energy, of which certain Group activities are major consumers, is managed with due regard for the commitments of the Kyoto Protocol and the European “Emissions Trading” directive concerning CO2 emissions quotas, the system of which is currently under revision.
The DINOX system for injecting urea into exhaust gases, developed by Inergy Automotive Systems, makes it possible to create a cleaner diesel engine by converting nitrogen oxides into gaseous nitrogen.
The new hydrogen peroxide production unit now under construction at Antwerp (Belgium) applies a brand new technology which will achieve unequalled environmental performance. Also highly innovative is the original Epicerol™ process for producing epichlorohydrin using a by-product from the rapidly developing biodiesel industry as a raw material in place of oil derivatives.
Protecting our employees’ health and safety has always been a major emphasis of the Group’s social commitment. Another is to promote employees’ personal development through motivating working conditions. We have continued our work on bringing down accident levels to the level of the best performing units in this field. Our goal is a group-wide accident frequency rate of 1.5 per million hours worked in 2008. We demand the same performance from all subcontractors on our sites. There is still work to be done to reach this goal. The “Safety includes our partners” program (Dombasle, France), which
The ecologically responsible technologies that have been developed demonstrate the growing contribution of chemical engineering to various sectors. The NOVOSOL® technology, offering a global solution to the
The “Soil Remediation Reagents” team has in turn developed and marketed new solutions for the in-situ remediation of contaminated soils.
3. Our employees: a priority social responsibility
Accident frequency rate*
All personnel
Contractor personnel
Solvay personnel
2002
5.7
10.1
3.7
2003
4.4
7.2
3.3
2004
3.4
6.5
2.3
2005
3.2
4.4
2.7
2006
2.7
4.7
2.1
*N umber of accidents leading to a work stoppage of over 24 hours, by million hours worked.
Sustainable Development
took the Innovation Trophy 2006 in the “Management Improvement” category, is a perfect illustration of this; since the programme was introduced, the number of accidents on the site has been reduced by a factor of four. Integration of and access at the Group level to all product risk information has been extended to all substances for every production line (the Sachem project). This information covers toxicological features, current regulations and applications and markets. In turn, the Medexis system, now in its pilot stage, will integrate all health data collected by our Work Medicine and Employee Protection against Hazardous Substances departments. This will facilitate improved monitoring of personnel and earlier detection of currently unsuspected undesirable effects.
4. Extended social responsibility: ensuring the safety of our site neighbors, the authorities and society as a whole Management of industrial products is subject to increasing demands for the controlled use and, in certain cases, the elimination of specific substances. This evolution is producing new working methods, involving all players in product life cycles. Over 30 000 of our neighbors visited our sites in 2006 during open-door days and were able to take part in discussions on why we do certain things, the safety of
Contacts have been increased with safety advisers and audit bodies in the road transport (the SQAS or Safety and Quality Assessment Scheme) and bulk shipping (the Chemical Distribution Institute) fields. Our product distributors have played a growing part in ESAD (European Single Assessment Document) type audits, which catalyze the progress that is being made in accident prevention. Evolving industrial standards and legal frameworks are changing production and consumption patterns towards more sustainable products with a greater emphasis on the socio-economic and environmental dimensions. The Group is helping ensure that this development is also economically and technically realistic and applicable by everyone concerned. The development of a European regulation for fluorinated gases adopted in June 2006, to which Solvay contributed actively along with the other producers, will ensure that HFC can continue to be used in essential everyday applications (cold storage, high-performance
thermal insulation, air conditioning, high-voltage energy transportation, etc.) thanks in particular to a new quantitative audit of the confinement of gases in installations. With respect to the main objective of the European REACh (Registration, Evaluation & Authorisation of Chemicals) regulation adopted in December 2006, that is, identifying the hazards presented by chemicals and the risks attached to their use, the Group is taking a two-pronged approach: contributing to the risk evaluation files for our products, in particular through our knowledge of how customers use them, and listing all substances used in our own production processes and the related risks.
Sustainable Developement
our installations, our environmental impact and working conditions.
59
Finally, the “Essentiality of Chemicals” project presented by the Communication and Public Affairs Competence Center was joint winner of the new Partnership Prize in the Solvay Innovation Trophy 2006. This project aims at making chemistry’s contributions better known by different players in the general society – the academic, scientific and public worlds, NGOs, consumer associations and the press. A key challenge in this respect is facilitating access to the scientific data needed for a clear understanding of the issues involved.
More systematic and global processes at our production sites are contributing to a more structured sustainable development policy: – 15 production sites to date have adopted the OSHAS (Occupational Safety and Hygiene Assessment Scheme) standard, which provides a systematic and auditable system for managing employee safety. 35 sites have also been certified to the ISO 14001 environmental standard. – Specific health and environmental management plans have been applied at enterprises that have recently joined the Group: Fournier (France, Ireland), Girindus (Germany), SSIPL (India).
Solvay Global Annual Report 2006
Financial Statements 60
Solvay Global Annual Report 2006
Financial Statements
page 61
- Consolidated income statement - Consolidated cash flow statement - Consolidated balance sheet - Statement of changes in equity - IFRS accounting principles - Notes to the financial statements - Management of risks - Changes in the consolidation scope - List of companies included in the consolidation - Summary financial statements of Solvay S.A.
page 61 page 62 page 63 page 64 page 66 page 70 page 98 page 105 page 107 page 114
Auditor’s Report on the Consolidated Financial Statements
page 116
Financial
Financial Statements The following financial statements were approved by the Board of Directors meeting on February 14, 2007. They have been drawn up in accordance with the IFRS accounting principles which are set out in the coming pages. Information on related parties required by IAS 24 can be found in the “Corporate Governance� chapter.
Consolidated income statement (Notes 1-2) EUR Million
Notes
Net sales
2005
2006
8 562
9 399
-5 724
-6 126
(3)
2 838
3 273
Commercial and administrative costs
(4)
-1 417
-1 559
Research and development costs
(5)
-472
-563
Other operating gains and losses
(6)
-4
-31
Other financial gains and losses
(7)
-33
-21
REBIT
(8)
912
1 099
Non-recurring items
(9)
-357
-143
555
956
Cost of goods sold Gross margin
EBIT Charges on net indebtedness
(10)
-85
-82
Income taxes
(11a)
-153
-179
Discontinued operations
(12)
476
103
Income from investments
(13)
23
19
Net income of the Group
(14)
816
817
Minority interests
-27
-26
Net income (Solvay share)
789
791
9.51
9.57
9.46
9.52
Gross margin as a % of sales
33.1
34.8
Times charges earned
10.7
13.4
Income taxes / Earnings before taxes (%)
31.0
20.0
Earnings per share (EUR) Diluted earnings per share (EUR)
(15)
61
RATIOS
Times charges earned = REBIT / charges on net indebtedness. Earnings before taxes = Group net income - income from discontinued operations + income taxes. Explanatory notes are found after the financial statements.
Solvay Global Annual Report 2006
Consolidated cash flow statement EUR Million
Notes
EBIT Depreciation, amortization and impairments
555
956
464
522
59
-5
(17)
310
6
Income taxes paid
-236
-211
(18)
-183
-130
969
1 138
Acquisition / sale of investments
(19)
-211
172
Acquisition / sale of assets
(19)
Other Cash flow from operating activities
-505
-581
Income from investments
23
19
Changes in financial receivables
-7
29
8
3
Effect of changes in method of consolidation Cash flow from investing activities
-692
-358
Variation of capital (increase / decrease)
(20)
-803
-5
Acquisition / sale of own shares
(21)
-9
-7
-144
-458
-89
-83
Changes in borrowings Charges on net indebtedness Dividends paid
62
2006
(16)
Changes in working capital Changes in provisions
2005
Cash flow from financing activities Net change in cash and cash equivalents Currency translation differences Opening cash balance Ending cash balance
(29)
-217
-227
-1 262
-780
-985
0
36
-24
1 406
457
457
(1)
433
(1) including EUR 8 million of cash and cash equivalents from discontinued activities, in 2005, giving EUR 449 million of cash and cash equivalents on the balance sheet. Explanatory notes are found after the financial statements.
Solvay Global Annual Report 2006
Financial
Consolidated balance sheet EUR Million
Notes
2005
2006
7 051
7 276
ASSETS Non-current assets Intangible assets
(22)
770
721
Goodwill
(23)
1 079
1 214
Tangible assets
(24)
3 784
3 869
Other investments
(25)
706
790
Deferred tax assets
(11b)
510
506
202
176
4 189
3 825
Financial receivables and other non-current assets Current assets Inventories
(26)
1 162
1 221
Trade receivables
(27)
1 703
1 671
Income tax receivable
143
95
Other receivables
427
405
Cash and cash equivalents
(29)
449
433
Assets held for sale
(12)
305
0
11 240
11 101
Shareholder’s equity
3 920
4 456
Capital and Reserves
3 774
4 214
146
242
3 496
3 966
Total assets
63
EQUITY & LIABILITIES
Minority interests Non-current liabilities Long-term provisions
(28)
2 310
2 271
Deferred tax liabilities
(11b)
154
137
(29) (30)
984
1 503
Long-term financial debt Other non-current liabilities Current liabilities Short-term provisions Short-term financial debt
(28) (29) (30)
48
55
3 824
2 679
209
215
1 145
188
1 278
1 269
161
99
883
908
148
0
11 240
11 101
Return on equity (ROE)
21.8
19.4
Net debt to equity ratio
42.9
28.2
Trade liabilities Income tax payable Other current liabilities Liabilities associated with assets held for sale Total equity & liabilities
(12)
RATIOS
ROE = net income of the Group / total equity before direct allocation to equity. Net debt to equity ratio = net debt / total equity. Net debt = short and long-term financial debt less cash and cash equivalents. Explanatory notes are found after the financial statements.
Solvay Global Annual Report 2006
Statement of changes in equity Capital
EUR Million
Issue
Reserves
premiums
Own shares
Fair value
Capital
Minority
Total
translation differences
and
interests
shareholders’
Currency differences
Balance at 31/12/2004
1 269
14
Net profit for the period
2 147
-122
224
Cost of stock options Dividends 4
1 270
18
2 721
-131
64
Solvay Global Annual Report 2006
Balance at 31/12/2006
-7
-217
-9
-9
5
5
-9
-803
-812
146
3 920
791
26
817
-137
21
-116
26
-90
-6
-240
4
4 -234
1 3 283
-138
4
3 774
-7
18
341
179
1 1 271
19
-234
Acquisitions / sale of own shares Other
322
-283
791
Cost of stock options
816
4
Expenses and income recognized directly in equity Dividends
3 792
27
-210
-9
Net profit for the period
910
789
4 -9 1
Other
Issue of share capital
98
2 882
-210
Acquisitions/sale of own shares
Balance at 31/12/2005
81
789
Expenses and income recognized directly in equity
Issue of share capital
-507
equity
reserves
-420
200
4
-7
-7
1
1
1
50
51
4 214
242
4 456
Financial
Currency translation differences The closing balance sheet exchange rate for the US dollar fell from 1.1797 at the end of 2005 to 1.3170 at the end of 2006. The weaker dollar is the essential reason for the negative currency translation differences of EUR 137 million that were recognized directly in equity, taking the balance of this item from EUR 283 million at the end of 2005 to EUR 420 million at the end of 2006. Fair value differences These record the marking to market of listed securities and financial derivatives used for hedging purposes. The variation in 2006 is EUR 21 million positive thanks to rising stock market price of our shareholdings in Fortis and Sofina (EUR 66 million), partially offset by the recognition in the income statement of a part of the latent capital gain on Sofina (EUR 44 million), when 49.6 % of Financière Keyenveld S.A., which holds the Sofina shares, was sold to a third party. Minority interests This item rose by EUR 26 million in “expenses and income recognized directly in equity”, consisting of a negative currency translation difference of EUR 11 million, related essentially to the dollar, and of a positive fair value difference of EUR 37 million on Sofina. The “other” item contains a EUR 63 million increase owing to the sale of 49.6 % of Keyenveld to third parties. Readers are reminded that in 2005 minority interests fell sharply with the redemption of the EUR 800 million of preference shares subscribed by the banks at the time of the acquisition of Ausimont at the end of 2001.
65
Number of shares (in thousands)1 Shares issued and fully paid in at 1/1/2006
84 696
Capital increase Shares issued and fully paid in at 31/12/2006 Own shares held at 31/12/2006
5 84 701 1 849
Shares authorized but not yet issued Par value (per share)
0 15 EUR / share
1) See the consolidated data per share in the financial information per share given in the Management Report.
Information on the dividend proposed to the Shareholders’ Meeting can be found in the Management Report.
Solvay Global Annual Report 2006
IFRS accounting principles The main accounting policies used in preparing these consolidated financial statements are set out below :
1. Accounting system The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union. The Group has not applied in advance any standards and interpretations issued prior to the approval date of the accounts and which become mandatory only after December 31, 2006 : • IFRS 7 - Financial instruments : disclosures • IFRS 8 - Operating Segments • IFRIC 7 - Applying the restatement approach under IAS 29 financial reporting in hyperinflationary economies • IFRIC 8 - Scope of IFRS 2 • IFRIC 9 - Reassessment of embedded derivatives • IFRIC 10 - Interim financial reporting and impairment • IFRIC 11 - Group and treasury share transactions • IFRIC 12 - Service Concession Arrangements
66
Application of IFRS 7 “Financial Instruments – Disclosures”, which comes into effect from 2007 onwards, will require changes to the information given in the notes on financial instruments. Adoption of these new standards and interpretations in subsequent years should not significantly impact the consolidated financial accounts. The Group has adopted those international accounting standards which have been revised and which apply from January 1, 2006 onwards (IAS 1, IAS 19, IAS 21, IAS 39 and IFRS 4). These standards have not significantly impacted the current account period or the comparative one. The Group has adopted the following new standards and interpretations : • IFRS 6 – E xploration for and evaluation of mineral resources • IFRIC 4 – Determining whether an arrangement contains a lease • IFRIC 5 – Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds • IFRIC 6 – Liabilities arising from participating in a specific market – waste electrical and electronic equipment The financial statements also include all the information required by the 4th and 7th European directives.
Solvay Global Annual Report 2006
2.Consolidation Companies controlled by the Group (i.e. in which the Group has, directly, or indirectly, an interest of more than one half of the voting rights or is able to exercise control over the operations) have been fully consolidated. Separate disclosure is made of minority interests. All significant transactions between Group companies have been eliminated on consolidation. Companies over which the Group exercises joint control with a limited number of partners (joint ventures) are consolidated using the proportionate consolidation method. Investments in companies over which the Group exercises significant influence, but which it does not control, are accounted for using the equity method.
3. Goodwill Goodwill represents the difference between the cost of acquisition and the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or joint venture, at the acquisition date. Positive goodwill is not amortized, but tested at least annually for impairment. Any negative goodwill is immediately credited to the income statement.
4. Foreign currencies Foreign currency transactions by Group companies are recorded initially at the exchange rates prevailing at the transaction dates. Monetary assets and liabilities denominated in such currencies are then re-translated at the exchange rates prevailing at the end of the accounting period with resulting profits and losses recorded in the income statement for the period. Assets and liabilities of foreign entities included in the consolidation are translated into EUR at the exchange rates prevailing at the end of the accounting period. Income statement items are converted into EUR at the average exchange rates for the period. The resulting translation differences are transferred to the equity item “currency translation differences”.
Financial
The main exchange rates used are : Year-end rate
Average rate
2005
2006
2005
2006
1 Euro = Pound sterling
GBP
0.6853
0.6715
0.6838
0.6817
US dollar
USD
1.1797
1.3170
1.2438
1.2554
Argentinian Peso
ARS
3.5731
4.0474
3.6362
3.8594
Brazilian Real
BRL
2.7446
2.8144
3.0367
2.7329
Thai Baht
THB
48.4369
46.7701
50.0668
47.5826
Japanese Yen
JPY
138.9001
156.9299
136.8686
146.0278
5. Retirement benefit costs The Group operates a number of defined benefit and defined contribution retirement benefit plans. Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. The Group’s commitments under defined benefits plans, and the related costs, are valued using the “projected unit credit method” in order to determine the present value of the obligation at closing date. The amount recorded in the balance sheet represents the present value of the defined benefit obligations, adjusted for actuarial differences, for unrecognized past service costs and for the fair value of external plan assets, limited in the case of a surplus to the present value of available refunds and/or reductions in future contributions. Actuarial differences exceeding the higher of 10 % of the present value of the retirement benefit obligations and 10 % of the fair value of the assets of the external plan assets at balance sheet closing date are amortized over the expected average remaining working life of the participating employees.
Deferred tax assets and liabilities are required to be measured at the tax rates that are expected to apply to the financial year in which the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax liabilities relating to subsidiaries’ profits that the Group does not intend distributing in the foreseeable future are not accounted for. Deferred tax assets are recognized only where taxable profits are likely to be realized, against which the deferred tax assets will be imputed.
7. Tangible and intangible assets Tangible and intangible assets are carried at their historical cost less depreciation/amortization. Depreciation/amortization is included in the income statement under cost of goods sold, commercial and administrative costs, and in R&D costs. Depreciation/amortization is calculated on a straightline basis, according to the useful life listed below : Buildings
30 years
6. Income taxes
IT equipment Machinery and equipment
10 - 20 years
Income taxes on profits for the period include both current and deferred taxes. They are recorded in the income statement except where they relate to items recorded directly in equity, in which case they too are recorded in equity.
Transportation equipment
5 - 20 years
Patents and trademarks
5 - 20 years
Current taxes are taxes payable on the taxable profit for the period, calculated at the tax rates prevailing at the balance sheet closing date, as well as adjustments relating to previous periods.
67
3 - 5 years
Assets held under finance leases are initially recognized as assets at the lower of their fair value or the present value of the minimum lease payments related to the contracts. The corresponding liability is included in financial debts. Financial charges, representing the difference between the full amount of the lease obligations and the fair value of the assets acquired, are charged to the income statement over the duration of the contract.
Solvay Global Annual Report 2006
Agreements not in the legal form of a lease contract are analyzed with reference to IFRIC 4 to determine whether or not they contain a leasing contract to be accounted for in accordance with IAS 17. Borrowing costs directly attributable to the acquisition, construction or production of an asset requiring a long preparation period are added to the cost of this asset until it is ready for use. Grants for the purchase of assets are recorded net of the value of these assets.
8. Research and Development costs Research costs are charged in the period in which they are incurred. Development costs are capitalized if, and only if all the following conditions are fulfilled :
68
• the product or process is clearly defined and the related costs are measured reliably and can be separately identified ; • the technical feasibility of the product has been demonstrated ; • the product or process will be placed on the market or used internally ; • the assets will generate future economic benefits (a potential market exists for the product or, where it is to be used internally, its future utility is demonstrated) ; • the technical, financial and other resources required to complete the project are available.
10. Inventories Inventories are stated at the lower of purchasing cost (raw materials and merchandise) or production cost (work in progress and finished goods) and net realizable value. Net realizable value represents the estimated selling price, less all estimated costs of making the product ready for sale, including marketing, selling and distribution costs. Inventories are generally valued by the weighted average cost method. Cost of inventories includes the purchase, conversion and other costs incurred to bring the inventories to their present location and condition.
11. Financial instruments - Trade receivables Trade receivables are stated at their nominal value less estimated non-recoverable amounts.
- Listed financial investments Listed financial investments not considered as trading assets (securities available for sale according to IAS 39) are valued at the stock market price on each closing date. Unrealized profits and losses are recorded directly to equity.
The capitalized development costs are amortized on a straight-line basis over their useful lives.
When such assets are sold, any profit or loss already taken into equity is then included in the net income for the period.
9. Impairment
- Bank borrowings
Every year the Group carries out impairment tests on goodwill. At each balance sheet date, the Group reviews the carrying amounts of investments and tangible and intangible assets to determine whether there is any indication that any of these assets might have suffered a reduction in value. Where such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The recoverable amount is the higher of the fair value less costs to sell the asset and its value in use. The value in use is the net present value of the estimated future cash flows from the use of an asset. The recoverable amount is calculated at the level of the cash-generating unit to which the asset belongs. Where the recoverable amount is below the carrying amount, the latter is reduced to the recoverable amount.
Solvay Global Annual Report 2006
This impairment is immediately charged to the income statement as a non-recurring item. Where a previously recorded impairment no longer exists, the carrying amount is partially or totally re-established through non-recurring items, except in the case of goodwill, where the write-down cannot be reversed.
Bank loans and overdrafts are accounted for in the amount of the net proceeds received. Financial charges, including any settlement or redemption premiums, are charged over the term of the facility.
- Trade liabilities Trade liabilities are stated at their nominal value.
- Derivative financial instruments Derivative financial instruments are initially recorded at cost and re-measured to their fair value at every closing date. Changes in fair value linked to designated and effective cash flow hedges are recognized immediately in equity. Changes in fair value not linked to cash flow hedging operations are recorded in the income statement.
Financial
- Cash and cash equivalents
16. Share options
The cash and cash equivalents heading consists of cash and sight deposits, short-term deposits (under 3 months) and highly liquid investments which are easily convertible into a known cash amount and where the risk of a change in value is negligible.
Under the transitional provisions, IFRS 2 has been applied to all share options granted after November 7, 2002 which were not yet exercisable at January 1, 2005.
12. Provisions A provision is set up whenever the Group has a legal or implicit obligation at the balance sheet date : • resulting from a past event and, • which is likely to result in charges and, • where the amount of such charges can be reliably estimated. Commitments resulting from restructuring plans are recognized at the time these plans are announced to the persons concerned.
13. Segment information Segment information is produced according to two distinct criteria : a primary criterion based on the Group’s Sectors of activity, and a secondary criterion based on the main geographical regions.
14. Revenue recognition A revenue is recognized once it is probable that it will be acquired and its amount can be reliably measured. Net sales consist of sales to third parties, less trade discounts. They are recognized when the significant risks and rewards attached to the ownership of the goods are transferred to the buyer.
Share options are measured at their fair value at the date of grant. This fair value is assessed using the Black & Scholes option pricing model and is expensed on a straight-line basis over the vesting period of these rights, taking into account an estimate of the number of options that will eventually vest.
17. Accounting for CO2 emission rights CO2 emission rights are accounted for based on IAS 38 (intangible assets), IAS 37 (provisions) and IAS 20 (government grants).
69
Emission rights which have been granted free of charge are accounted for as intangible assets at a symbolic EUR 1 to the extent that they are 100 % subsidized, with a balancing entry in other current liabilities in the same amount. To the extent that the rights granted to the Group for 2005-2007 exceed the expected actual emission, no obligation exists at balance sheet date, and no provision needs to be recorded. Market sales of emission rights acquired free of charge generate a profit that is immediately recognized in income.
Dividends are recorded in the income statement when declared by the Shareholders’ Meeting of the distributing company. Interest income is recognized pro rata temporis based on the effective yield of the investment.
15. Assets held for sale Assets held for sale are measured at the lower of carrying amount and fair value less costs to sell. Assets are classified as “held for sale” where the sale is highly probable, with a formal commitment by senior management.
Solvay Global Annual Report 2006
Notes to the financial statements The notes below are cross-referenced to the summary consolidated financial statements.
Consolidated income statement (1) Financial data by Business Sector These Sectors form the basis for the reporting by primary segments. Information for 2005 is presented below : 2005 EUR Million
Income statement items Net sales
2 270
3 034
3 848
0
9 152
491
0
-249
-341
0
-590
0
External sales
2 270
2 785
3 507
0
8 562
491
Gross margin
1 564
514
760
0
2 838
85
REBIT
302
285
389
-64
912
22
Non-recurring items
-78
-30
-1
-248
-357
524
EBIT
224
255
388
-312
555
546
- Inter-segment sales 1
70
Pharmaceuticals Chemicals Plastics Corporate Consolidated Discontinued & Business operations support
Pharmaceuticals Chemicals Plastics Corporate & Business support
Cash flow items EBIT
Total Discontinued continuing operations operations
224
255
388
-312
555
546
Recurrent depreciation and amortization
74
163
177
13
427
17
Impairments
13
10
-3
0
20
0
Changes in provisions and other non-cash items
-21
-35
-13
188
119
-538
Changes in working capital
80
-15
-6
-9
50
9
370
378
543
-120
1 171
34
1 346
261
293
13
1 913
17
Cash flow from operating activities before taxes Capital expenditures
Balance sheet and other items Investments 2 Working capital
3
Provisions Headcount at Jan. 1 of following year
Pharmaceuticals Chemicals Plastics Corporate Consolidated Discontinued & Business operations support
2 505
1 993
1 858
97
6 453
130
255
451
548
450
711
274
-57
1 197
78
1 084
2 519
67
10 004
8 721
8 474
1 531
28 730
2 086
1 Inter-segment transfer prices are based on market prices. 2 Non-current assets with exception of deferred tax assets and other long-term assets. 3 Inventories, debt and liabilities, other short-term receivables and payables other than dividends payable, and other long-term assets and liabilities other than pension fund excess.
In 2005 discontinued operations include the capital gain on the sale of the high density polyethylene activity to BP and the earnings of the industrial foils activity.
Solvay Global Annual Report 2006
Financial
Information per primary segment for 2006 is presented below : 2006 EUR Million
Income statement items Net sales
Pharmaceuticals Chemicals Plastics Corporate Consolidated Discontinued & Business operations support
2 601
3 260
4 127
0
9 988
171
0
-262
-327
0
-589
0
External sales
2 601
2 998
3 800
0
9 399
171
Gross margin
1 874
591
808
0
3 273
23
- Inter-segment sales 1
REBIT Non-recurring items EBIT
451
315
409
-76
1 099
4
-149
-293
-9
308
-143
102
302
22
400
232
956
106
Pharmaceuticals Chemicals Plastics Corporate & Business support
Cash flow items
Total Discontinued continuing operations operations
EBIT
302
22
400
232
956
106
Recurrent depreciation and amortization
103
169
186
11
469
5
Impairments
10
32
6
0
48
0
Changes in provisions and other non-cash items
26
177
-9
-307
-113
-117
Changes in working capital
43
4
-23
-7
17
-22
Cash flow from operating activities before taxes
484
404
560
-71
1 377
-28
Capital expenditures
201
270
367
12
850
8
Balance sheet and other items Investments 2 Working capital
3
Provisions Headcount at Jan. 1 of following year
71
Pharmaceuticals Chemicals Plastics Corporate Consolidated Discontinued & Business operations support
2614
2 047
1 941
74
6 676
0
211
458
572
-49
1 192
0
505
807
267
907
2 486
0
10 088
8 691
8 889
1590
29 258
0
1 Inter-segment transfer prices are based on market prices. 2 Non-current assets with exception of deferred tax assets and other long-term assets. 3 Inventories, debt and liabilities, other short-term receivables and payables other than dividends payable, and other long-term assets and liabilities other than pension fund excess.
In 2006 discontinued operations include the capital gain on the sale of the industrial foils activity, as well as the first quarter earnings of this activity. It should be noted that in the income statement and balance sheet, discontinued operations appear on separate lines. In the cash flow statement, on the other hand, discontinued operations are included in all flows, with the exception of EBIT.
Solvay Global Annual Report 2006
(2) Financial data by region These data do not include discontinued operations. Group sales by market location are as follows : EUR Million
2005
%
2006
%
Europe
4 772
56 %
5 241
56 %
Nafta
2 200
26 %
2 441
26 %
Mercosur
663
8%
731
8%
Asia-Pacific and other
927
10 %
986
10 %
8 562
100 %
9 399
100 %
Total
Invested capital and capital expenditure by geographical segment are shown below.
Invested capital
Capital expenditure
EUR Million
2005
%
2006
%
2005
%
2006
%
Europe
5 640
74 %
5 923
75 %
1 739
91 %
573
68 %
Nafta
1 432
19 %
1 295
17 %
93
5%
139
16 %
380
5%
350
4%
59
3%
29
3%
Mercosur Asia-Pacific and other Total
198
2%
300
4%
22
1%
109
13 %
7 650
100 %
7 868
100 %
1 913
100 %
850
100 %
Invested capital includes the non-current assets and working capital as defined in the financial data per Sector above.
72
(3) Gross margin Expressed as a percentage of sales, gross margin rose from 33.1 % in 2005 to 34.8 % in 2006. Gross margin includes two milestone payments from Bristol-Myers Squibb (EUR 29 million), one milestone payment from Wyeth (EUR 21 million) and the settlement of a legal dispute with Global Pharmaceuticals and Impax Laboratories (EUR 10 million).
(4) Commercial and administrative costs The Group’s commercial and administrative costs rose 10 % between 2005 and 2006. This increase is spread across all three Sectors: Chemicals (11.3 %), Plastics (6 %) and Pharmaceuticals (10.3 %). The main reason for these increases are the first-time inclusion in the consolidation scope of Fournier, purchased for the Pharmaceuticals Sector (costs for the last 5 months of 2005 and full year 2006), of Girindus, purchased for the Chemicals Sector (costs for the last 4 months of 2005 and the full year 2006), and of Mississippi Polymer Technologies (February 2006) and Gharda (May 2006), purchased for the Plastics Sector.
(5) Research and development costs These have increased by 19.3 % on last year. Research and development costs are up in all three Sectors : Chemicals (19 %), Plastics (11.2 %) and Pharmaceuticals (20.7 %). As with commercial and administrative costs, the main reason for the increase in the Pharmaceuticals Sector is linked to the acquisition of Fournier. Higher costs in this Sector are also explained by the research agreement concluded with Abbott to speed up efforts in cardiometabolics (in particular for developing the new fenofibrate generation), and the milestone paid to Quintiles upon one of our compounds moving into Clinical Phase II.
Solvay Global Annual Report 2006
Financial
(6) Other operating gains and losses EUR Million
2005
Start-up, formation and preliminary study costs
2006
-9
-6
-11
-15
Costs of trials and experiments
-4
-6
Miscellaneous gains and losses
20
-4
Other operating gains and losses
-4
-31
Cost of closures and demolitions
The miscellaneous gains and losses item includes gains of EUR 30 million on the sale of the pharmaceutical products Estrogel, Rowasa, Anadrol and Balneol, gains of EUR 19 million on sales of underground cavities in Germany, EUR 24 million of site rehabilitation charges, EUR 11 million of environmental provisions, and other smaller items.
(7) Other financial gains and losses 2005
2006
-52
-46
Income from investments and interest on external financial receivables
9
14
Net foreign exchange gains and losses
4
5
EUR Million Cost of discounting provisions
Other Other financial gains and losses
6
6
-33
-21
73
The item, with a negative balance, is down EUR 12 million from 2005, owing essentially to the lower cost of discounting provisions (expected returns on pension fund investments have continued to improve) and higher dividends from unconsolidated companies.
(8) REBIT REBIT (recurring EBIT) is equal to current operating earnings, i.e. excluding non-recurring earnings. This item increased by 20.5 %.
(9) Non-recurring items Non-recurring items are reported prior to the tax impact. These consist mainly of gains and losses on the sale of real estate and financial investments, restructuring charges, provisions for risks associated with our activities, goodwill impairment charges and write-downs of other assets with no further economic use. Non-recurring items break down as follows : EUR Million Impairments
2005
2006
-20
-48
Other expenses and income
-337
-95
Non-recurring items
-357
-143
The EUR 48 million of asset impairments relates in particular to the reorganization of the barium and strontium carbonate activities (EUR 34 million - Chemicals Sector) which are under severe competitive pressure, and the impairment of an intangible asset (the Zolip product in the USA for EUR 11 million) in the Pharmaceuticals Sector following the reallocation of priorities in the USA to the development of the fenofibrate/statin combination in the project led by Abbott and AstraZeneca. Other non-recurring items produce a net charge of EUR 95 million. Income includes EUR 75 million of capital gain, on the sale of 49.6 % of the shares of Financière Keyenveld S.A. that holds the participating interest in Sofina S.A.
Solvay Global Annual Report 2006
The expenses include essentially EUR 133 million of restructuring costs to meet the 2010 objectives of the Pharmaceuticals (“INSPIRE” project). The remaining expenses relate mainly to redundancy schemes and the miscellaneous costs in the Chemicals Sector, additional provisions and various litigation costs.
(10) Charges on net indebtedness EUR Million
2005
2006
Cost of borrowings
-120
-111
36
28
Interest on lending and short-term deposits Other Charges on net indebtedness
-1
1
-85
-82
Charges on net indebtedness have decreased from EUR 85 million in 2005 to EUR 82 million in 2006, although average net indebtedness for 2006 amounts to about EUR 1 500 million, above the average level of EUR 1 200 million in 2005. The reduced charges on net indebtedness are explained : - by a higher return on cash and cash equivalents (higher interest rates for the USD, the currency in which a large portion of excess cash is held, and for the EUR), with an average return of 4.1 % in 2006 compared with 2.9 % in 2005 ; - by a lower average interest charge on borrowings (5.1 % in 2006, 5.3 % in 2005).
74
The two factors together produced a clear improvement in the average charges on net indebtedness to 5.4 % from 7.2 % in 2005.
(11) Income taxes and deferred taxes (11a) Income taxes The tax charges on earnings do not include taxes on discontinued operations. Components of the tax charge The tax charge on earnings consists of current tax and deferred tax. - Current tax represents the tax paid or payable (recovered or recoverable) in respect of the taxable profit (tax loss) for the past year, as well as any adjustments to tax paid or payable (recovered or recoverable) in relation to previous years. - Deferred tax represents the tax which will be owed (or recovered) during future years, but which has already been recognized during the past year, and which corresponds to the variation in the deferred tax items recorded in the balance sheet (see below). The deferred tax charge referring to items accounted for under shareholders’ equity is also recorded in this latter item.
Solvay Global Annual Report 2006
Financial
The tax charge breaks down as follows : EUR Million
2005
2006
Current taxes related to current year
-172
-222
Current taxes related to prior years
29
25
Deferred income tax before valuation allowance
7
59
Valuation allowance on deferred tax assets (-/+)
-17
-50
0
9
Total
-153
-179
EUR Million
Tax effect of changes in the nominal tax rates on deferred taxes
2005
2006
Income tax on items allocated directly to equity
2
3
Total
2
3
75
Reconciliation of the tax charge The effective tax charge has been reconciled with the theoretical tax charge obtained by applying to the pre-tax profit of each Group entity the nominal tax rate prevailing in the country in which it operates. EUR Million Profit before income taxes
2005
2006
493
893
-150
-268
(1)
Reconciliation of the tax charge Total tax charge of the Group entities computed on the basis of the respective local nominal rates Weighted average nominal rate Tax effect of non-deductible expenses Tax effect of tax-exempt revenues Tax effect of changes in tax rates Tax effect of current and deferred tax adjustments related to prior years Valuation allowance on deferred tax assets Effective tax charge
30 %
30 %
-112
-70
98
172
0
9
28
28
-17
-50
-153
-179
(1) Profit before income taxes = Net income of the Group - net income from discontinued operations + income taxes
Analysis of the past year’s tax charge The Group’s effective tax rate (20 %) is lower than the weighted average nominal rate (30 %), owing mainly to the exemption of dividends and capital gains from our shareholdings in unconsolidated entities (Fortis and Sofina), to tax credits generated by internal reorganizations and to the reduction of deferred tax liabilities with the lowering of nominal tax rates in the Netherlands and Bulgaria.
(11b) Deferred taxes on the balance sheet Deferred tax assets and liabilities are recorded in the balance sheet in respect of temporary differences arising from the fact that the tax authorities apply different rules when assessing assets and liabilities than those used for drawing up annual accounts. Variations occurring during the year in the deferred taxes recorded in the balance sheet are taken into income, except where they relate to items that are recorded directly in shareholders’ equity (see above). Deferred taxes are calculated based on the prevailing tax rates, or where they have been changed, at the enacted rates that are expected to apply at the time of recording the taxes payable (or recoverable) in the statutory accounts. Deferred tax assets are written down to the extent that it appears unlikely, in the light of expected future tax situations, that they will in the future generate either a reduction in the tax base or tax credits.
Solvay Global Annual Report 2006
Unless a dividend payment is planned, no deferred tax is calculated on the undistributed profits of subsidiaries as these profits are, as a general rule, reinvested locally. The deferred taxes recorded in the balance sheet fall into the following categories : Deferred tax assets 2005
2006
Employee benefits obligations
239
220
Provisions other than employee benefits
250
Tax losses
358
EUR Million
Tax credits
Deferred tax liabilities 2005
2006
-419
218 (1)
384
54
51
386
278
-514 -1
-3
Other
159
240
-250
-225
Total
1 446
1 391
-765
-647
Depreciation of tangible assets and amortization of intangible assets Development costs
Valuation allowance on deferred tax assets
-325
Offset
-611
-510
611
510
Total
510
506
-154
-137
(1)
-375
(1) The deferred tax asset relating to 2005 tax losses has been reclassified, but without affecting the Group’s balance sheet or net income.
Other information
76
All the Group’s tax loss carryforwards have generated deferred tax assets, on certain of which valuation allowances have been recorded. These tax loss carryforwards are given below by expiry date. 2005
2006
Within 1 year
43
24
Within 2 years
49
2
Within 3 years
1
13
Within 4 years
24
41
117
121
1 019
891
EUR Million
Within 5 or more years No time limit
(12) Discontinued operations In 2005 the net income from discontinued operations consisted of the capital gain on the sale of the high density polyethylene activity (EUR 532 million pre-tax and EUR 472 million after income taxes) and the net income of the industrial foils activity (EUR 9 million pre-tax and EUR 4 million after income taxes). In 2006 this item consists of the first quarter net earnings of the industrial foils activity (EUR 2 million before and after income taxes) and the capital gain on the sale of the industrial foils activity (EUR 102 million pre-tax and EUR 101 million after income taxes). The industrial foils activity covers the production, marketing and distribution of plastic sheets and foils. This activity, which was part of the Plastics Sector, was sold to Renolit AG at the end of March 2006. Discontinued operations are reported in the balance sheet under “assets held for sale” and “liabilities associated with assets held for sale”. In 2006 these items were sold and disappear from the balance sheet. For further details on discontinued operations, the reader is referred to the segment reporting in note (1) and to the table “Disposal of subsidiaries” in note (19).
Solvay Global Annual Report 2006
Financial
(13) Income from investments Income from investments consists of the dividends from Fortis and Sofina. These are EUR 4 million lower than in 2005. This is because Fortis changed its dividend policy and distributed in 2005 an advance dividend in respect of 2006 earnings, in addition to the dividend corresponding to the full results for this year.
(14) Group net income Despite a sharp fall in earnings from discontinued operations (EUR 476 million in 2005, EUR 103 million in 2006), net income remained at the record level of 2005 : EUR 817 million in 2006 compared with EUR 816 million in 2005. The minority interest in this profit figure is EUR 26 million (EUR 27 million in 2005).
(15) Diluted earnings per share The diluted earnings per share is obtained by dividing net income by the number of shares, increased by the number of potentially diluting shares attached to the issue of share options. Full data per share can be found in the management report.
Consolidated cash flow statement
77
(16) Depreciation, amortization and impairments Depreciation, amortization and impairments rose by EUR 58 million EUR compared with 2005. This increase is due to the reporting of a full year of Fournier activities (5 months in 2005), and to impairment charges of EUR 48 million in 2006 compared to EUR 20 million in 2005. These impairments relate in particular to restructurings such as the reorganization of barium and strontium activities and the writedown of an intangible asset (Zolip product in the USA) in the Pharmaceuticals Sector.
(17) Variation in provisions In 2006 the variation in provisions in the cash flow statement is EUR 6 million, close to the balance of new provisions and uses from existing provisions. The change in the balance sheet between end-2005 and end-2006 (EUR 33 million lower) is largely explained by the currency translation effect. In 2005 the major change in provisions in the cash flow statement (EUR 310 million) was linked to the provisions needed to cover the risks associated with our pharmaceuticals activity (in the field of female hormone therapy) and American and European proceedings relating to the respecting of competition rules in the peroxides area prior to 2001.
(18) Other This item serves to take out of cash flow from operating activities those items already included in cash flow from investing activities (gains on the sales of assets). For 2006 the elimination relates essentially to the EUR 75 million gain on the sale of 49.6 % of the shares of Financière Keyenveld S.A., the EUR 30 million gain on the sale of the Estrogel, Rowasa, Anadrol and Balneol pharmaceuticals products, and the gain on the sale of a plot of land at Düsseldorf (Germany).
Solvay Global Annual Report 2006
(19) Acquisition / sale of assets and investments 2005 EUR Million Investments Tangible / intangible assets Total 2006 EUR Million
Acquisitions
Disposals
Total
-1 342
1 131
-211
-589
84
-505
-1 931
1 215
-716
Acquisitions
Disposals
Total
Investments
-217
389
172
Tangible / intangible assets
-641
60
-581
Total
-858
449
-409
In 2006, acquisitions of assets and investments amounted to EUR 858 million, down from EUR 1 931 million in 2005 which included the acquisition of Fournier for EUR 1 183 million. The acquisitions of investments relate to the recording of two milestone payments and an earn-out payable to the former Fournier shareholders (EUR 117 million) and the acquisitions of Mississippi Polymer Technologies in the USA and Gharda in India. The Group also increased its participating interests in the following companies that were already proportionately consolidated at 31 December 2005 : - 6.9 % increase in the holding of Sisecam Holding in April 2006 ; - 1.5 % increase in the holding of Vinythai in June 2006 ; - acquisition of the remaining 40 % in Daehan, which has been globally consolidated since December 2006.
78
The acquisitions of assets in 2006 include the extension of the Radel installation at Marietta (United States), the extension of the electrolysis and vinyl chloride activities at Map Ta Phut (Thailand), the construction of the fluor site at Onsan (Korea), the conversion of the electrolysis membrane and a new soda ash waste processing installation at Rosignano (Italy), the contruction of a new hydrogen peroxide unit in a joint venture with BASF and an oxychloration unit at Antwerp (Belgium), and the extension of the facility making products based on fenofibrates in Cork (Ireland). The proceeds on the disposal of assets and investments amounts to EUR 449 million, mainly due to the sale of the industrial foils activities (EUR 289 million) and of 49.6 % of the shares of Financière Keyenveld S.A., which holds the Sofina shares (EUR 94 million). The disposals of assets include the sale of the Estrogel, Rowasa, Anadrol and Balneol medical products and the sale of a plot of land in Düsseldorf (Germany). Acquisitions and disposals of consolidated subsidiaries in 2005 and 2006 are set out in the tables below :
Disposals of subsidiaries 2005
2006
Non-current assets
19
147
Current assets
44
230
6
51
Current liabilities
38
133
Net assets
19
193
Gain (loss) on disposal
71
101
Total consideration received 1
90
294
EUR million
Non-current liabilities
bank balances and cash disposed of net cash inflow on disposal 1
not including any deferred payment
In 2006 this item consisted essentially of the disposal of the industrial foils activity.
Solvay Global Annual Report 2006
0
-7
90
287
Financial
Acquisitions of subsidiaries 2005
2006
Non-current assets
739
34
Current assets
475
5
Non-current liabilities
260
7
Current liabilities
371
2
EUR Million
Third party net assets Net assets Goodwill Total consideration paid 1 bank balances and cash acquired net cash outlay on acquisition 1
6
0
577
30
890
26
1 467
56
-184
-1
1 283
55
not including any deferred payment
79
The companies acquired are :
Mississippi Polymer Technologies On 13 February 2006, the Solvay group finalized the purchase of 100 % of the capital of Mississippi Polymer Technologies (absorbed by Solvay Advanced Polymers), a US-based company that has designed a family of transparent, amorphous and thermoformable materials commercialized under the PARMAX® trade mark, for a net cash outflow of EUR 22 million. The net assets acquired in the transaction and the resulting goodwill are : Carrying amount before acquisition
Fair value adjustments
Total
Intangible assets
1
-1
0
Tangible assets
2
1
3
Other investments
0
0
0
Deferred tax assets
0
0
0
Financial receivables and other non-current assets
0
0
0
Non-current assets
3
0
3
Current assets other than cash and cash equivalents
2
-1
1
Cash and cash equivalents
1
0
1
Current assets
3
-1
2
Long-term provisions
0
0
0
Deferred tax liabilities
0
0
0
Long-term financial debt
1
0
1
Non-current liabilities
1
0
1
Current liabilities
2
0
2
Net assets
3
-1
EUR Million
2
Goodwill
21
Price paid at 31/12/2006
23
Bank balances and cash acquired
-1
Net cash outlay on acquisition
22
Solvay Global Annual Report 2006
Gharda On 15 March 2006, the Solvay group finalized the purchase of the polymers division of Gharda Chemicals (Solvay Specialties India), a specialist research company, giving access to the very high performance PEEK polymer, for a net cash outlet of EUR 33 million. The net assets acquired in the transaction and the resulting goodwill are : Carrying amount before acquisition
Fair value adjustments
Total
8
0
8
21
0
21
Other investments
0
0
0
Deferred tax assets
0
2
2
Financial receivables and other non-current assets
0
0
0
29
2
31
Current assets other than cash and cash equivalents
3
0
3
Cash and cash equivalents
0
0
0
Current assets
3
0
3
Long-term provisions
0
6
6
Deferred tax liabilities
0
0
0
Long-term financial debt
0
0
0
Non-current liabilities
0
6
6
EUR Million Intangible assets Tangible assets
Non-current assets
80
Current liabilities Net assets
0
0
0
32
-4
28
Goodwill Price paid at 31/12/2006 Bank balances and cash acquired Net cash outlay on acquisition
5 33 0 33
(20) Capital increase / redemption In 2005, simultaneously with the exercise of Solvay’s option to sell its high density polyethylene activity to BP, EUR 800 million of preference shares subscribed by the banks at the end of 2001 at the time of the Ausimont acquisition were redeemed. In 2006, the Solvay group reimbursed to minority shareholders a portion of the capital of our natural Carbonate activities in the United States.
(21) Acquisition / sale of own shares At the end of December 2005, Solvay S.A. held 1 929 695 of its own shares to cover the share options offered to Group executives. In the course of 2006, it purchased another 377 011 and sold 457 700 shares following the exercise of these options by the parties concerned. At the end of 2006, the company held 1 849 006 of its own shares, which have been deducted from consolidated shareholders’ equity. As it has in every year since 1999, the Board of Directors renewed the share option plan offered to executive staff (around 300 persons) with a view to involving them more closely in the long-term development of the Group. The majority of the managers in question subscribed the options offered them with an exercise price of EUR 109.09, representing the average stock market price of the share for the 30 days prior to the offer.
Solvay Global Annual Report 2006
Financial
The 3-year vesting period is followed by a 5-year exercise period, at the end of which any unexercised options expire. Share options Number of share options at 31/12/2005
2002
2003
2004
2005
495 600
469 300
450 500
516 100
-4 000
-3 600
-4 000
465 300
446 900
512 100
Granted share options
499 100
Forfeitures of rights and expiries Share options exercised
2006
-276 800
Number of share options at 31/12/2006
218 800
Share options exercisable at 31/12/2006
218 800
0
0
0
0
63.76
65.83
82.88
97.30
109.09
9.60
9.50
7.25
10.12
21.20
Exercise price (EUR) Fair value of options at measurement date (EUR)
2006
2005
At 1/1 Granted during the year
499 100
Number of share options
Weighted average exercice price
Number of share options
Weighted average exercice price
1 415 400
70.53
1 931 500
77.68
516 100
97.30
499 100
109.09
Forfeitures of rights and expiries during the year
0
-
-11 600
81.97
Exercised during the year
0
-
-276 800
63.76
1 931 500
77.68
2 142 200
86.97
At 31/12 Exercisable at 31/12
0
81
218 800
The share options resulted in a charge in 2006 of EUR 4 million calculated by a third party according to the Black & Scholes model and recorded in the income statement under commercial and administrative costs. The model places a value on European type options, i.e. exerciseable at option maturity. The value of the option is based on : - the price of the underlying asset (Solvay share) : EUR 116.20 at 31 December 2006, - the time outstanding until the option maturity : - exercisable from 15 February 2010, - the option exercise price : EUR 109.09, - the risk-free return : 4.15 %, - the volatility of the underlying yield : 20 %.
Solvay Global Annual Report 2006
Consolidated balance sheet (22) Intangible assets EUR Million
Development costs
Patents and Other intangible trademarks assets
Total
Gross carrying amount At 31 December 2004 Capital expenditures
61
327
37
425
5
11
2
18
-2
-1
-5
-8
Changes in consolidation scope
0
600
27
627
Currency translation differences
4
20
6
30
Disposals
Other At 31 December 2005
-2
-7
-4
-13
66
950
63
1 079
Capital expenditures
11
13
4
28
Disposals
-3
-13
-3
-19
Changes in consolidation scope
0
8
1
9
Currency translation differences
-3
-14
-4
-21
Other
-1
-13
50
36
70
931
111
1 112
-25
-164
-17
-206
-11
-29
-3
-43
Impairments
0
-9
0
-9
Reversal of impairments
0
0
0
0
Disposals
1
-1
2
2
Changes in consolidation scope
0
-31
-20
-51
Currency translation differences
-2
-9
-4
-15
3
8
2
13
-34
-235
-40
-309
-10
-49
-6
-65
Impairments
0
-14
0
-14
Reversal of impairments
0
0
0
0
Disposals
2
8
3
13
Changes in consolidation scope
0
0
-1
-1
Currency translation differences
2
8
4
14
Other
1
4
-34
-29
-39
-278
-74
-391
At 31 December 2004
36
163
20
219
At 31 December 2005
32
715
23
770
At 31 December 2006
31
653
37
721
At 31 December 2006 Accumulated amortization At 31 December 2004
82
Recurring amortization
Other At 31 December 2004 Recurring amortization
At 31 December 2006 Net carrying amount
Solvay Global Annual Report 2006
Financial
(23) Goodwill EUR Million
Total
Gross carrying amount At 31 December 2004 Arising on acquisitions and changes in consolidation scope Currency translation differences At 31 December 2005 Arising on acquisitions and changes in consolidation scope Currency translation differences At 31 December 2006
142 915 22 1 079 148 -13 1 214
In 2005, EUR 874 million of the large increase in goodwill came from the acquisition of Fournier. In 2006, the increase in goodwill came primarily from the recording of two milestone payments and an earnout payable to the former Fournier shareholders (EUR 117 million) and the acquisitions of Mississippi Polymer Technologies in the USA and Gharda in India.
83
The goodwill impairment tests did not give rise to any adjustment in 2006. For these tests, the Group prepares cash-flow forecasts based on the most recent financial projections approved by executive management for the next five years. For the following years, the extrapolation of the cash flows is based on a growth rate which does not exceed the average long-term growth rate of the markets in question. The cash flow forecasts have been discounted at 7 %, which is close to the Group’s WACC (weighted average cost of capital) in order to calculate the fair value of the cash-generating unit. The essential part of the goodwill comes from the Fournier acquisition in 2005. To the extent that this goodwill represents in each country synergies which will benefit all Pharmaceuticals Sector products, goodwill cannot be allotted by product, but only by region. As a result, the cash-generating units used for the annual impairment tests on this particular goodwill item are based on the regions.
Solvay Global Annual Report 2006
(24) Tangible assets (including finance leases) EUR Million
Land & Buildings
Fixtures & Equipment
Other tangible assets
Properties under construction
Total
1 930
6 793
61
359
9 143
33
230
3
289
555
Gross carrying amount At 31 December 2004 Capital expenditures Disposals and closures
-13
-79
-6
-1
-99
Changes in the consolidation scope
72
135
20
10
237
Currency translation differences
60
284
4
16
364
Other
10
-28
21
-283
-280
2 092
7 335
103
390
9 920
Capital expenditures
27
138
4
436
605
Disposals and closures
-16
-91
-5
0
-112
Changes in the consolidation scope
25
68
0
1
94
-41
-161
-4
-11
-217
30
166
-1
-271
-76
2 117
7 455
97
545
10 214
-1 027
-4 747
-38
0
-5 812
-62
-317
-5
0
-384
-2
-13
0
0
-15
At 31 December 2005
Currency translation differences Other At 31 December 2006 Accumulated depreciation At 31 December 2004 Recurring depreciation
84
Impairments Reversal of impairments
1
3
0
0
4
Disposals and closures
9
70
6
0
85
Changes in the consolidation scope
-26
-74
-15
0
-115
Currency translation differences
-21
-156
-3
0
-180
Other At 31 December 2005 Recurring depreciation Impairments
34
261
-14
0
281
-1 094
-4 973
-69
0
-6 136
-54
-343
-7
0
-404
-8
-28
0
0
-36
Reversal of impairments
1
1
0
0
2
Disposals and closures
13
91
4
0
108
Changes in the consolidation scope
-7
-43
0
0
-50
Currency translation differences
15
84
3
0
102
Other
12
57
0
0
69
-1 122
-5 154
-69
0
-6 345
At 31 December 2004
903
2 046
23
359
3 331
At 31 December 2005
998
2 362
34
390
3 784
At 31 December 2006
995
2 301
28
545
3 869
At 31 December 2006 Net carrying amount
Solvay Global Annual Report 2006
Financial
Finance leases EUR Million
Lands and buildings
Fixtures and equipment
Total
7
5
12
Net carrying amount of finance leases included in the table above The carrying amount of lease obligations approximates to their fair value.
Finance lease obligations EUR Million Amounts payable under finance leases : Within 1 year In years two to five inclusive Beyond five years
Minimum lease payments
Present value of minimum lease payments
2005
2006
2005
2006
5
5
4
4
12
8
10
7
6
4
5
3
19
14
Less : future finance charges
-4
-3
Present value of Lease Obligations
19
14
Less : amount due for settlement within 12 months Amount due for settlement after 12 months
4
4
15
10
85
Operating lease obligations EUR Million Total minimum lease payments under operating leases recognized in the income statement of the year EUR Million Within 1 year In years two to five inclusive Beyond five years Total of future minimum lease payments under non-cancellable operating leases
2005
2006
46
49
2005
2006
46
46
138
139
68
62
252
247
(25) Other investments EUR Million Fair value at 1 January Disposed of during the year Acquired during the year Increase (decrease) in fair value Other Fair value at 31 December Of which recognized directly in equity
2005
2006
590
706
-16
-1
31
18
105
103
-4
-36
706
790
185
244
This heading contains the financial assets held for sale. It contains the shares held in Fortis, Sofina, Innogenetics and Arqule as well as companies of non-significant size which are neither consolidated nor accounted for by the equity method. Fortis and Sofina are not allocated to segments, whilst Innogenetics and Arqule are allocated to the Pharmaceuticals Sector.
Solvay Global Annual Report 2006
(26) Inventories 2005
2006
Finished goods
646
680
Raw materials and supplies
441
458
Work in progress
99
121
Other inventories
5
3
1 191
1 262
-29
-41
1 162
1 221
EUR million at December 31
Total Write-downs Net total
(27) Trade receivables In 2006, trade receivables represented 67 days’ sales. The carrying value of the trade receivables is a good approximation of the fair value at balance sheet closing date. There is no significant concentration of credit risk at Group level to the extent that the receivables risk is spread over a large number of customers and markets.
(28) Provisions EUR Million
Employee benefits
Health, safety and environment
Litigation
Other
Total
1 239
427
530
323
2 519
260
33
32
35
360
At 31 December 2005
86
Additions* Reversals Uses Currency translation differences
-20
-2
-9
-16
-47
-181
-36
-41
-47
-305
-17
-6
-21
-8
-52
Acquisitions and changes in consolidation scope
1
6
0
0
7
Disposals
0
0
0
0
0
Other
4
0
0
0
4
1 286
422
491
287
2 486
106
36
17
56
215
40
6
At 31 December 2006 Of which short-term provisions * Of which interest cost
In total, provisions for liabilities and charges reduced by EUR 33 million (-1 %). EUR 52 million is due to currency translation differences reflecting the weakness of the USD against the EUR at the end of 2006. Provisions for post-employment benefits Provisions for employee benefits were EUR 1 286 million in 2006 (EUR 1 239 million in 2005). These provisions have been set up primarily to cover post-employment benefits granted by most Group companies in line, either with local rules and customs, or with established practices which generate constructive obligations. Provisions for post-employment benefits amounted to EUR 988 million in 2006 (EUR 1 009 million in 2005) before deducting the EUR 56 million capitalized (2005 : EUR 53 million) pension asset. These provisions are set up on the basis of the IFRS accounting principles defined in item 5 of the present report and reflect the estimated compensation at the time of retirement.
Solvay Global Annual Report 2006
Financial
The balance consists of provisions for termination benefits (EUR 236 million, EUR 171 million in 2005), provisions for other long-term benefits (EUR 50 million, EUR 48 million in 2005) and provisions for benefits not valued in accordance with IAS 19 (EUR 12 million, 11 million in 2005). The sharp rise in provisions for termination benefits is linked to the restructuring of the Pharmaceuticals Sector (“INSPIRE” project). The largest pension plans are in Belgium, France, Germany, the Netherlands, the United Kingdom and the United States. Certain companies provide post-employment health or life insurance cover to their employees and related beneficiaries. This cover is either financed under insurance contracts or is covered by provisions for post-employment benefits. Total Group post-employment benefit obligations by country in % at end 2005
in % at end 2006
Netherlands
24 %
26 %
Germany
23 %
24 %
Belgium
18 %
16 %
USA
17 %
16 %
UK
7%
7%
France
6%
6%
Other countries
5%
5%
87
Post-employment benefit plans are classified into defined contribution and defined benefit plans.
- Defined contribution plans Defined contribution plans are those for which the company pays fixed contributions into a separate entity or fund in accordance with the provisions of the plan. Once these contributions have been paid, the company has no further obligation. EUR 28 million of contributions to these plans were charged to income in 2006 (EUR 29 million in 2005).
- Defined benefit plans All plans which are not defined contribution plans are deemed to be defined benefit plans. These plans can be either funded via outside pension funds or insurance companies (“funded plans”) or financed within the Group (“unfunded plans”). All main plans are assessed annually by independent actuaries. The amounts charged to income in respect of these plans are : EUR Million
2005
2006
Service cost
50
53
Interest cost
117
116
Expected return on plan assets
-71
-76
7
14
3
-3
-7
-2
Amortization of actuarial net losses / gains (-) Impact of change in asset ceiling - current year Past service cost - recognized in current year Losses / gains (-) on curtailments / settlements Net expense recognized - Defined benefit plans
-23
-5
76
97
The cost of these benefit plans is charged variously to cost of sales, commercial and administrative costs, research & development costs, other financial or operating gains and losses and non-recurring items. Overall the charge has increased by EUR 21 million. The 2005 figure included the reduction in our commitments in respect of post-retirement medical benefits in the Netherlands (EUR -23 million).
Solvay Global Annual Report 2006
The amounts recorded in the balance sheet in respect of defined benefit plans are : EUR Million
2005
2006
Defined benefit obligations - funded plans
1 616
1 663
Fair value of plan assets at end of period
-1 232
-1 298
384
365
Deficit for funded plans Defined benefit obligations - unfunded plans Funded status Unrecognized actuarial gains / losses (-) Unrecognized past service cost Amounts not recognized as asset due to asset ceiling Net liability in balance sheet Liability recognized in the balance sheet Asset recognized in the balance sheet
855
828
1 239
1 193
-311
-282
10
6
18
15
956
932
1 009
988
-53
-56
The financing deficit in our post-employment benefit plans for former employees (total obligations less the value of the assets) decreased by EUR 46 million. There have been no changes in actuarial assumptions that have a significant impact on the figures. Our commitments have risen slightly by EUR 20 million (less than 1 %); on the other hand, good returns on invested assets have made it possible to reduce the financing deficit. In 2006 defined benefit obligations evolved as follows :
88
EUR Million
2005
2006
Defined benefit obligations at beginning of period
2 263
2 471
50
53
117
116
5
5
-23
0
Service cost : employer Interest cost Actual employee contributions Plan amendments Acquisitions / Disposals (-) Curtailments Settlements
0 -2
0
-10
Actuarial loss / gain (-)
130
31
Actual benefits paid
-125
-134
62
-39
2 471
2 491
1 616
1 663
855
828
Other (foreign currency translation) Defined benefit obligation at end of period Defined benefit obligations - funded plans Defined benefit obligations - unfunded plans
Solvay Global Annual Report 2006
16 -24
Financial
The fair value of plan assets evolved as follows : EUR Million
2005
2006
Fair value of plan assets at beginning of period
1 049
1 232
Expected return on plan assets
71
76
Actuarial gain / loss (-)
63
36
Actual employer contributions
131
107
Actual employee contributions
5
5
Acquisitions / Disposals (-)
9
0
Settlements
0
-6
-125
-134
29
-18
1 232
1 298
134
112
Actual benefits paid Other (currency translation differences) Fair value of plan assets at end of period Actual return on plan assets
Changes in net obligations during the period : EUR Million Net amount recognized at beginning of period Net expense - Defined benefit plans Company contributions / direct benefit payments (cash payments)
2005
2006
988
956
76
97
-131
-107
8
1
Impact of acquisitions / disposals Changes in consolidation scope
-1
0
Currency translation differences
17
-15
Other Net amount recognized at end of period
-1
0
956
932
89
Actuarial assumptions used in determining the pension obligation at December 31 Eurozone 2005
Europe Other 2006
USA
2006
2005
4.5 % 3.5 % - 7 % 3.5 % - 6 %
5.75 %
2005
Other 2006
2005
2006
5.75 % 11.3 %
11.3 %
Discount rates 4.5 % Expected rates of future salary increases 2.5 % - 4.75 % 2.5 % - 4.75 % Expected rates of pension growth
0%-2%
Expected rates of medical care cost increases
0%-2%
2%-5% 2%-5%
4%
4%
8%
8%
0 % - 2 % 0 % - 2.7 % 0 % - 2.7 %
not avail.
not avail.
not avail.
not avail.
not avail. 5 % - 9 % 5 % - 9 %
6.6 %
6.6 %
0% - 2%
not avail.
Solvay Global Annual Report 2006
Actuarial assumptions used in determining the annual cost Eurozone Discount rates Expected rates of future salary increases Expected (longterm) rates of return on plan assets
Europe Other
USA
2005
2006
2005
2006
2005
5.0 %
4.5 %
3.5 % - 7 %
3.5 % - 7 %
6.0 %
2.5 % - 4.75 % 2.5 % - 4.75 %
2%-5%
2%-5%
4%
5 % - 6.5 % 4.5 % - 6 % 3.75 % - 7.3 % 3.5 % - 5.95 %
8.5 %
Other 2006
2005
2006
5.75 % 11.3 % 11.3 %
4%
8%
8%
8.5 % 11.3 % 11.3 %
Expected rates of pension growth
0%-2%
0%-2%
0 % - 2.7 %
0 % - 2.7 % non disp. not avail.
Expected rates of medical care cost increases
2%-3%
0 %-2 %
non disp.
not avail. 5 % - 9 % 5 % - 9 %
not avail.
not avail.
6.6 % 6.6 %
The main categories of plan assets are :
90
2005
2006
Shares
50 %
50 %
Bonds
46 %
46 %
Property
0%
1%
Other assets
4%
3%
With respect to the invested assets, it should be noted that : • they produced an actual return of EUR 112 million in 2006 (lower than the return in 2005). This amount should be compared to the expected return of EUR 76 million (EUR 71 million in 2005); • these assets do not contain any direct investment in Solvay group shares or in property or other assets occupied or used by Solvay. This does not exclude Solvay shares being included in mutual investment fund type investments; • the expected rate of return is defined at local level with the help of a local actuary. It is determined using the “building block approach” which factors in long-term inflation and the expected long-term return on each asset category. The Group expects to recognize provisions for post-employment benefits in the amount of EUR 106 million for 2007. The assumptions made for medical expenditure have a major impact on the amounts recognized in the income statement. Sensitivity to a change of percentage in the expected rates of increase of medical expenses is as follows :
EUR Million Effect on the aggregate of the service cost and the interest cost Effect on defined benefit obligation
Solvay Global Annual Report 2006
1 % increase
1 % decrease
3
-2
23
-19
Financial
Historical development of defined benefit plans : EUR Million
2005
2006
Defined benefit obligation
2 471
2 491
Plan assets
-1 232
-1 298
Deficit / surplus (-)
1 239
1 193
Experience adjustments on plan liabilities
not avail.
-14
Experience adjustments on plan assets
not avail.
-36
2005
2006
125
134
not avail.
-3
Historical development of post-employment medical plans : EUR Million Defined benefit obligation Experience adjustments on plan liabilities Health, safety and environment provisions These provisions stand at EUR 422 million, compared with EUR 427 million at the end of 2005.
91
These provisions have been set up to cover liabilities and charges connected with the mining activities which underlie certain group products, the growing constraints on the elimination or processing of residues which remain technically inevitable in certain activities, and with the constant increase in other environmental protection concerns. The estimated amounts are discounted as a function of the probable date of disbursement. As well as being updated annually, provisions are increased every year to reflect the increasing proximity of such disbursement. In 2006 this financial cost amounted to EUR 6 million. Provisions for litigation Provisions for litigation stand at EUR 491 million at the end of 2006 compared with EUR 530 million at the end of 2005. The reduction in provisions between 2005 and 2006 relates essentially to the payment of the U.S. fine (EUR 35 million) for the infringement of competition rules in the peroxides field. The main remaining provisions at the end of 2006 serve to cover : - the financial consequences of the EUR 193 million fine imposed by the European authorities for infringement of competition rules in the peroxides area, against which the Solvay group has appealed, and the financial consequences of ongoing class actions in the USA and Canada in the same area; - the risks associated with our pharmaceuticals activity, more especially in the field of feminine hormone therapy in the USA : these risks, which reduced in 2005 with the withdrawal of a certain number of plaintiffs, did not change significantly in 2006. There has been further development in the discussion with the Food and Drug Administration concerning the administrative status of Estratest®. Outstanding litigation against the Fournier group relates to the respecting of competition rules associated with changes in the formulation of fenofibrate in the USA and to intellectual property rights in relation to the various formulations of fenofibrate in Europe and Canada. These risks are covered by certain contractual guarantees from the former Fournier shareholders and for this reason no provisions have been set up. Other provisions Other provisions stand at EUR 287 million, compared with EUR 323 million at the end of 2005. The main provision, in an amount of EUR 100 million, relates to the payment – which is deemed probable – of an additional amount to the former shareholders of Fournier, tied to the future development of the acquired activities and subject to the attainment of specific milestones.
Solvay Global Annual Report 2006
Group policy on insurance Solvay group policy is to use insurance to cover all catastrophe hazards, in all cases where insurance is mandatory and also whenever insurance represents the best economic solution for allocating risk. The Group closely examines any new insurance coverage solution, so as to limit the financial consequences of incidents that could have a major impact on its assets, profits and its third party liability. In 2006, international insurance programs were renewed with a generally stable level of premiums and ancillary costs. The civil liability insurance market remains difficult for companies selling pharmaceutical products.
(29) Net indebtedness The Group’s net indebtedness is the balance between its financial debts and available cash and cash equivalents. It reduced by EUR 422 million from EUR 1 680 million at the end of 2005 to EUR 1 258 million at the end of 2006. EUR Million
2005
2006
Financial debt
2 129
1 691
-449
-433
1 680
1 258
- Cash and cash equivalents Net indebtedness
The Group’s net debt to equity ratio decreased significantly from 43 % at the end of 2005 to 28 % at the end of 2006. In November 2006, the Moody’s rating agency improved its prospects for Solvay from negative to stable. Solvay’s longterm ratings are therefore A (stable perspectives) from Standard & Poor’s and A2 (stable perspective) from Moody’s. Financial debt
92
Financial debt contracted by EUR 438 million from EUR 2 129 million to EUR 1 691 million, mainly due to the reimbursement of US commercial paper (in an equivalent of EUR 175 million) and the refinancing of the EUR 700 million EMTN bond maturing in July 2006 by the EUR 500 million of hybrid subordinated financial debt. EUR Million Subordinated loans Bonds Long-term finance lease obligations Long-term debts to financial institutions Other long-term debts
2005
2006
7
500
807
804
15
11
147
162
8
26
Amount due within 12 months (shown under current liabilities)
798
10
Other short-term borrowings (including overdrafts)
347
178
2 129
1 691
1 145
188
Total financial debt (short and long-term) The financial debt is repayable as follows : on demand or within one year in year two
Solvay Global Annual Report 2006
25
48
in years three to five
148
54
beyond five years
811
1 401
Financial
Analysis of total financial debt by currency EUR Million
Average interest rate paid
EUR
USD
GBP
Other
Total
2005
1 749
241
9
130
2 129
5.3
%
2006
1 574
20
2
95
1 691
5.1
%
Borrowings and credit lines The largest borrowings maturing after 2006 are : • in Belgium : EMTN-note type bond issues by Solvay S.A. totalling EUR 800 million : - 4.99 % fixed rate EUR 500 million, maturing 2014, - 4.75 % fixed rate EUR 300 million, maturing 2018; • in France : a EUR 500 million subordinated debt issue by Solvay Finance S.A. with support from Solvay S.A. This borrowing matures in 2104 and carries an annual coupon of 6.375 %. Rating agencies Moody’s and Standard & Poors have treated this issue as part equity, part debt. In IFRS, however, it is treated 100 % as debt. This debt is subordinated to the other debts of the Group and is listed in Luxembourg. The coupon carries a fixed rate for the first ten years. In 2016 the coupon converts to a floating rate (3-month Euribor + 335 basis points) until maturing in 2104. Solvay has an option to redeem this issue at par from 2016 onwards. The issuer has a coupon non-payment option governed by the rules of the coupon carryforward mechanism;
93
• in Germany : our 75 % share in the financing of SolVin, amounting to EUR 130 million until EUR 2008 and 120 million from 2008 to 2012 (including EUR 90 million at the fixed rate of 3.54 % until 2008); • in Austria : our 50 % share of the EUR 165 million borrowed to finance Pipelife (final maturity : 2010). In addition the Group has access to : • a USD 500 million commercial paper program which was unused at the end of 2006. This program is fully covered by back-up credit lines which were unused at the end of 2006; • a EUR 850 million bank credit line (unused at end-2006), maturing in 2011; • a EUR 400 million bank credit line (unused at end-2006), maturing in October 2013. Fair value of financial debts For floating rate financial debts and fixed-rate debts which have been the subject of a fixed/floating interest rate swap, the fair value is equal to the face value. The fair value of the Group’s fixed rate debt at the end of 2006 is : • EMTN EUR 500 million 2014 : EUR 515.2 million, • EMTN EUR 300 million 2018 : EUR 303.9 million, • Hybrid EUR 500 million 2104 : EUR 522.0 million, • Group’s share (75 % out of the total of EUR 90 million = EUR 67.5 million) in the fixed-rate financing of SolVin : EUR 68.6 million. Cash and cash equivalents Cash and cash equivalents amounted to EUR 433 million, down slightly by EUR 16 million from end-2005. 2005
2006
14
39
Term deposits
186
210
Cash
249
184
Cash and cash equivalents
449
433
EUR Million Fixed-income securities
Solvay Global Annual Report 2006
(30) Derivative financial instruments The Solvay group uses derivatives to cover clearly identified foreign exchange and interest rate risks (hedging instruments). However, the required criteria to apply hedge accounting according to IFRS are not met in all cases. This means that this form of accounting is not always applicable when the Group covers its economic risks. Currency translation differences Exchange rate fluctuations, particularly of the US dollar, can affect earnings. In the course of 2006 the EUR / USD exchange rate moved from EUR 1.1797 at the start of January to EUR 1.3170 at the end of December. The average rate in 2006 (EUR 1.2554) was, however, close to that in 2005 (1.2438). The Group’s exchange risk hedging policy is based essentially on the principles of financing its activities in local currency, systematically covering transactional exchange risk at the time of invoicing (risks which are certain) and monitoring and hedging where appropriate exchange rate positions generated by the Group’s activities, based on expected cash flows. The Group has also introduced an Average Rate Option, partially covering the conversion into EUR of a portion of earnings generated in the NAFTA zone. Managing the transactional exchange risk This is the exchange risk which attaches to a specific transaction, such as Group company buying or selling in a currency other than its functional currency.
a) Hedging transactional exchange risk when certain
94
Subsidiaries are required to transfer their foreign exchange positions (e.g. customer invoices, supplier invoices) when certain, to Solvay CICC . This systematic hedging centralizes the Group’s foreign exchange position at CICC and relieves operating subsidiaries of the administrative burden of exchange risk management. CICC’s foreign exchange position is then managed under rules and specific limits which have been set by the Group. The main management tools are the spot and forward purchase and sale of currencies, and the purchase of options.
b) Hedging forecast short / medium-term foreign currency flows Forecasted foreign currency flows are regularly mapped, by SBU, in order to measure the Group’s expected exposure to transactional exchange risk on an annual horizon. In its present structure, the Group’s exposure is essentially linked to the EUR / USD risk : the Group is “long” in USD by around USD 650 million a year (this figure has increased in particular since the Fournier acquisition). The Group’s overall activities generate a net positive USD flow. Based on this mapping and depending on market conditions, foreign exchange hedging can be carried out on the basis of expected flows. The main financial instruments utilized are forward currency sales and the purchase of put options. The Group covered its 2006 exposure in an amount of USD 449 million. From the accounting point of view, the covering operation is preferably documented in a way that enables it to be treated as a perfect hedge. The effects of this hedging are allocated by Strategic Business Unit and accounted for, depending on the accounting classification, either as sales or as other financial gains and losses. Managing the exchange risk on debt Group borrowings are generally carried out by the Group’s financial companies, which make the proceeds of these borrowings available to the operating entities.
Solvay Coordination Internationale des Crédits Commerciaux, S.A.
Solvay Global Annual Report 2006
Financial
The choice of borrowing currency depends essentially on the opportunities offered by the various markets. This means that the selected currency is not necessarily that of the country in which the funds will be invested. Nonetheless, operating entities are financed in their own local currencies, with this currency being obtained, where appropriate, by currency swaps against the currency held by the financing company. The cost of these currency swaps is included under the cost of borrowing. These enable us to limit the exchange risk both in the financial company and in the company finally using the funds. In emerging countries it is not always possible to borrow in local currency, either because local financial markets are too narrow and funds are not available, or because the financial conditions are too onerous. In such a situation the Group has to borrow in a strong currency. Nonetheless the Group has taken advantage of any opportunities to refinance its borrowing in emerging countries with local currency debt. In this way, at the end of 2006, the Group had no foreign exchange exposure on its residual currency borrowings. Managing the translation exchange risk The translation exchange risk is the risk affecting the portion of the Group’s consolidated earnings generated by subsidiaries operating in a currency other than the EUR (the Group’s functional currency). For the Solvay group, this risk relates mainly to the translation into EUR of earnings generated in the Nafta region.
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Based on the expected net earnings in the Nafta region for the period in question and depending on market conditions, steps may be taken to hedge this translation risk. The main financial instrument used here is the Average Rate Option. The effects of this hedging are recorded under other financial gains and losses. In 2005 the Solvay group hedged USD 45 million of relative translation risk related to 2006. During 2006 the Solvay group did not hedge additional translation exchange risk. Balance sheet risk management The Group’s net assets (EUR 4.5 billion at end-2006) are distributed as follows, by reducing order of importance : • Euro Zone : 55 % • Nafta : 26 % • Brazil and Argentina : 8 % • Asia-Pacific : 5 % • Bulgaria : 3 % • Great Britain : 1 % • Other : 2 % In all the Group is exposed to 28 currencies in the Nafta region, Latin America, Asia and Eastern Europe. A VaR (Value at Risk) analysis has been carried out to quantify the balance sheet risk. Based on market expectations for the volatility of the currency pairs, the VaR appears to be close to 7 % of the Group’s current equity (EUR 289 million) within a 99 % confidence interval. This risk has decreased compared with the end of 2005 (EUR 384 million) owing mainly to the lower volatility observed on foreign exchange markets. Measures to hedge equity have not been considered.
Solvay Global Annual Report 2006
Managing interest rate risk Interest rate risk is managed at Group level. At December 31, around EUR 1 400 million of the Group’s debt was fixed-rate. • The Group has fixed the interest rates of its bond loans (EUR 300 million maturing 2018, EUR 500 million maturing 2014); • The hybrid subordinated issue placed on the market in 2006 (EUR 500 million maturing 2104) carries a fixed coupon until 2016 and floating thereafter; •T he financing of SolVin, which amounts to EUR 130 million until 2008 and 120 million from 2008 to 2012, carries a fixed rate in respect of EUR 90 million until 2008. Identical financial instruments relating to the same operation are not included in the table below. 2006
2005 Notional amount
Fair value
Notional amount
Fair value
Foreign exchange contracts and swaps
624
-4
352
1
Options
154
2
212
6
1 029
1
68
15
0
0
0
0
0
0
0
1 822
-1
632
8
EUR Million Foreign currency derivatives
Interest rate derivatives Swaps Other
96
Other derivatives Total derivative financial instruments (1)
(1)
1
Two large swaps matured in 2006 at the same time as the underlying debts : the swaps linked to the EUR 700 million EMTN issue and the USD 220 million of US commercial paper.
(31) Commitments to acquire tangible and intangible assets EUR Million Commitments for the acquisition of tangible and intangible assets of which : JV’s
2005
2006
26
8
1
1
2005
2006
151
204
77
72
The reduction reflects the completion of major investment projects.
(32) Contingent liabilities EUR Million Liabilities and commitments of third parties guaranteed by the company Pledges given or irrevocably committed by Group companies on their own assets as security for their own or third-party liabilities and commitments Commitments resulting from technical guarantees attached to sales of goods or services Additional milestones and earn-outs for Fournier Litigation and other major commitments
0
0
290
190
31
22
The increase in “Liabilities and commitments of third parties guaranteed by the company” is due mainly to higher bank guarantees given to the Italian VAT office.
Solvay Global Annual Report 2006
Financial
The “Pledges given or irrevocably committed by Group companies” in 2005 have been changed from EUR 187 million to EUR 77 million to avoid considering as contingent a liability already shown on the Group balance sheet. In 2006 the Group recognized milestones payable to former Fournier shareholders in an amount of EUR 100 million. The balance of the milestones (EUR 190 million) depends on market conditions and future product performances. EUR 19 million under the litigation and other major commitments heading consists of a contingent liability linked to the supply of ethylene (2005 : EUR 24 million). The amounts relating to Joint Ventures are included in the table below. 2005
2006
Liabilities and commitments of third parties guaranteed by the company
2
3
Pledges given or irrevocably committed by Group companies on their own assets as security for their own or third-party liabilities and commitments
7
5
Commitments resulting from technical guarantees attached to sales of goods or services
0
0
Litigation and other major commitments
0
0
EUR Million
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(33) Joint ventures The Joint Ventures are proportionately consolidated in the annual accounts at the following amounts (see the list of proportionately consolidated companies). 2005
2006
Non-current assets
838
867
Current assets
638
578
Non-current liabilities
322
337
EUR Million
Current liabilities Net sales Cost of sales
481
458
1 970
2 081
-1 624
- 1 703
Solvay Global Annual Report 2006
Management of Risks Acting responsibly as a corporate citizen and caring for the health, safety and environment of its employees and the community at large are key components of Solvay’s vision that are embedded through the Group’s Responsible Care® policy. Since its foundation in 1863, Solvay has successfully demonstrated its ability to anticipate and respond appropriately to an ever-changing world and to achieve sustainable and profitable growth with a profound respect and concern for the environmental and social contexts in which it operates. In its 144-year history, Solvay has built up a solid track record of good practices in the management of the risks inherent to its chemical and pharmaceutical activities. The diverse businesses within the Group generate a variety of risks, some of which could possibly affect the Company as a whole. But diversity contributes to the reduction of the overall risk, as the Company’s different businesses, processes, policies and structures offset some risks against each other, merely through a balanced portfolio of products. During its strategic review in June 2006, the Executive Committee highlighted risk management as a priority, and decided to further enhance the related processes and measures implemented throughout the Group. Solvay’s policy is to achieve good Enterprise Risk Management : - our policy is to identify, assess and manage all potentially significant business opportunities and risks, by applying systematic risk management integrated with strategy, business decisions and operations; - while continuously improving our risk management capabilities, we achieve risk awareness and confidence in entrepreneurship and make risk management part of everyone’s job. Solvay has defined ten categories of risk :
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- Market & Growth – Strategic - Supply Chain and Property - Regulatory, Political and Legal - Corporate Governance and Internal Procedures - Financial - Product - To people - Environmental - Information and IT - Reputation The purpose of this report is to describe the risk associated with each category and to outline the actions undertaken by the Group to reduce that risk. The order in which these risk categories are listed is not an indication of their severity or probability. The mitigation efforts described are no guarantee that risks will not materialize but demonstrate the Group’s efforts in an entrepreneurial way to reduce risk exposures.
1. Market & Growth – Strategic Risk Strategic Risk is Solvay’s exposure to adverse developments in our markets or our competitive environment as well as the risk of making erroneous strategic decisions. Examples of such risks are technological leaps allowing the development of substitute products or manufacturing processes, drastic changes in energy prices, the lack of success of a new product and product pipeline failures, scarcity of key raw materials, reduction of demand in our main markets as a consequence of new legislation, events affecting our most important customers, and significant imbalances between supply and demand in our markets, major social crises.
Solvay Global Annual Report 2006
Financial
Mitigation efforts The potential impact of adverse events is managed at Group level, and involves in particular : - Managing activities and maintaining a balanced portfolio of products, - Diversification of the customer base in different market segments, - Adaptation of operations to the changing macroeconomic and market environment, - Selective vertical integration to limit potential cumulative effects from raw materials, - Strict financial policy of controlling the debt to equity ratio. The periodic review of the main macroeconomic assumptions, market assumptions and key strategic issues of each Strategic Business Unit (SBU) for the next five years is managed in the strategy and plan process of the Group. The strategy phase focuses on market and competitive environment assumptions and on the strategic options of each SBU. The planning phase focuses on the business plan, scenarios, and on the main projects on which execution of the strategy relies. The strategy and business plans of each SBU are presented by the management of the SBU to, discussed with and amended and approved by the Executive Committee. The Corporate Development department acts as facilitator in the process, cross-checking assumptions between the different business units and with external sources. Corporate Development continuously updates its strategic analysis of the competitive environment. The major strategic orientations are submitted to the Board, which has the ultimate responsibility for the Group’s strategy.
2. S upply Chain and Property Risk
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Supply Chain and Property Risk is Solvay’s exposure to risks associated with raw material, suppliers, production units and transportation, such as risks of major equipment failure or damage, transportation accidents, drastic shortages of raw materials or energy, natural disasters or transportation strikes. Mitigation efforts Key risk areas are addressed with policies and risk control programs such as health and safety, process safety, risk engineering, integrated resource planning and supply chain optimization systems (ERP), emergency response, central and local crisis management, business continuity, etc. All plants are subject to audits and in this context the risks of damage to production units and consequential business interruption events are identified and quantified by risk engineers. Solvay evaluates the recommendations and implements those it finds appropriate. The geographical distribution of production units around the world reduces the overall impact of one production unit being damaged or interrupted. Some pharmaceutical and specialty products are however, only produced in one single plant. The inventories of finished products and raw material for pharmaceutical and some specialty products are managed to create buffer stocks. Solvay is buying insurance to reduce the financial impact of potential events causing extensive damage and consequential interruption of supply. In reference to Raw Materials, further to its ownership of several mines and quarries, Solvay reduces the risk of disruption (availability, reliability and price) by : - the use of medium and long term contracts; - the diversity and the flexibility of the sources of raw materials to the extent possible; - the development of partnerships with preferred suppliers. As for Energy Supply, Solvay has been consistently implementing programs to reduce its energy consumption for many years. While Solvay has energy-intensive industrial activities, particularly in Europe (soda ash, electrolysis), it also operates a range of industrial activities with a relatively low energy consumption, in particular in the Pharmaceuticals Sector and the SBU Specialty Polymers. The risk exposure to availability and reliability of energy supply has to be managed well. A number of strategic initiatives can reduce the effect of the volatility of energy markets : Solvay’s technological leadership in processes, its flexible, high-performance industrial facilities, the construction of cogeneration units (which generate both electricity and steam) in major plants and a strategy of supply coverage with medium to long-term contracts. Solvay Global Annual Report 2006
As permitted by the specific market conditions of each SBU, price increases are negotiated to offset the increase of energy costs. Solvay is a founding member of Exeltium, a project by a group of electro-intensive industries in France intended to ensure reliable and sustainable energy supply at a competitive price. In Belgium, Solvay participates in a similar project called Blue Sky. Solvay is monitoring the effect of the Kyoto protocol and the cost of CO2 emissions. The Kyoto protocol is endorsed by Solvay and is integrated in its strategy as it at least indirectly affects every company including upstream operators (through energy cost and raw materials) and downstream businesses (with an impact on transport, contractors and customers).
3. Regulatory, Political and Legal Risk Regulatory Risk is Solvay’s exposure to events like the non-approval of a new pharmaceutical product, government price regulation, new legislation affecting imports and exports, new regulations banning a product or making it uneconomical to produce, etc. Legal Risk is the exposure to adverse consequences of non-compliance with regulations or contractual undertakings, or the loss of rights or benefits expected from protection by regulation or contract. This includes various areas like product liability, administrative or criminal sanctions, contractual or intellectual property disputes, as well as the potentially adverse outcome of ongoing litigation. Political Risk is Solvay’s exposure to, for example, the destruction or loss of control of production means or the unavailability of raw materials, utilities or logistic or transport facilities resulting from political decisions, civil war, nationalization, terrorism or other circumstances where the normal exercise of the public authority is disrupted.
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Solvay must obtain and retain regulatory approval for operating most of its production facilities. Regulatory approval is also required for the marketing and sale of pharmaceutical products and specialty products for specific uses like healthcare. Given the international scope of the Group, those regulatory approvals emanate from authorities or agencies in many countries. The withdrawal of any previously granted approval or the failure to obtain an authorization may have an adverse effect on our business and operating results. The same could also apply in the case of regulatory changes likely to cause us to incur additional costs. To the same extent, the existence of price controls in the Pharmaceuticals Sector negotiated with or imposed by relevant health authorities or the possible existence of trade barriers and tariffs could also limit our revenues and have an adverse impact on our business and operating results. In Europe, approvals will be required in the near future for some chemical products as a consequence of the implementation of the REACh directive. The geographical spread of the Group around the world is a factor reducing some regulatory and political risks. Mitigation efforts Proper design of the products and its production processes contributes to the management of regulatory and legal risks, as well as the timely and thorough applications for necessary approvals. In pharmaceuticals, processes have been set up for contacts with regulators and to promote the accurate and appropriate flow of product information among all stake-holders, such as prescribers, patients, and regulators supervising and controlling product use. To manage legal risk Solvay maintains in-house legal and intellectual property resources, and relies on additional external professional resources as appropriate. By doing business, Solvay is naturally exposed to disputes and litigations. Adverse outcome of such disputes or litigations is always possible. The Group is managing this risk by relying on the internal and external resources and by making appropriate financial provisions. In the chemicals and plastics industries, technological know-how can remain protected by way of trade secret, which is often a good substitute for patent protection and Solvay is, in many cases, a leader in the technological know-how for its production processes. However, Solvay systematically considers patenting new products and processes and maintains continuous efforts to preserve its proprietary information.
Solvay Global Annual Report 2006
Financial
In respect of political risks, Solvay’s actions include risk-sharing with local or institutional partners as well as insurance solutions.
4. Corporate Governance and Internal Procedures Risk Corporate Governance and Internal Procedures Risk is Solvay’s exposure to failure to comply with its own Code of Conduct, policies and processes. Examples of risks are failed Human Resource strategy, failure to integrate an acquired company, failure to comply with internationally recognized Corporate Governance rules and good practices, etc. Mitigation efforts On the application of its Corporate Governance rules, Solvay has a comprehensive corporate governance charter, publicly available on www.solvay.com, and publishes its yearly report on the application of Solvay’s Corporate Governance rules. With respect to behavioral risks, training programs have been widely deployed in order to make managers aware of the importance of legal and antitrust risks. Training will also be organized to enhance ethical compliance with Solvay’s Code of Conduct. Any violation of the Code will be acted upon. A compliance organization under the leadership of the Group General Counsel is being set up to promote and monitor compliance across the Group. Compliance Officers are being appointed in all regions.
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Solvay reduces the risks linked to Corporate Governance and internal procedures by implementing strict policies regarding the hiring and training of employees and by making sure the Code of Conduct is enforced rigorously throughout the organization, in large part by genuinely embedding it in the values of the company.
5. Financial Risk Financial Risk is Solvay’s exposure to foreign-exchange risk, liquidity risk, interest-rate risk, counterparty risk (credit risk), or failure to fund pension obligations. • Liquidity Risk relates to Solvay’s ability to service and refinance its debt including notes issued and to fund its operations. This depends on its ability to generate cash from operations. Mitigation efforts The Group is recognized as historically having a prudent financial profile. On the one hand, Solvay maintains as its objective a net debt to equity ratio not durably exceeding 45 %. On the other hand, Solvay’s liquidity profile is very strong, mainly supported by significant cash balances and committed bank facilities. • As for Foreign Exchange Risk, Solvay is naturally exposed to it as a consequence of its international activities. In its present structure, the Group’s exposure is mainly associated with the EUR/USD risk, as the Group‘s overall activities generate a net positive USD flow. Consequently, a depreciation of the USD will generally result in lower revenues for Solvay. Mitigation efforts The geographical diversification of production and sales provides a natural currency hedge because of the resulting combination of an income stream and an expense base in local currency. Furthermore, Solvay closely monitors the foreign-exchange market and enters into hedging measures whenever deemed appropriate. In practice, Solvay enters into forward and option contracts securing the EUR value of sales in USD during the following months. • Interest-rate Risk is Solvay’s exposure to fluctuating interest rates. In its present structure, the Group has locked in the largest part of its net indebtedness with fixed interest rates. Mitigation efforts Solvay closely monitors the interest-rate market and enters into interest-rate swaps whenever deemed appropriate.
Solvay Global Annual Report 2006
• Solvay is exposed to Counterparty Risk in cash management and foreign-exchange and interest-rate risk management as well as in its commercial relations with customers. A default by one of Solvay’s banking counterparties could cause a loss in value of one of its bank deposits or the loss of an interest-rate or foreignexchange hedge. The failure to pay by one of Solvay’s customers could lead to a write-down on the trade receivables. Mitigation efforts Solvay manages its financial counterparty risk by working with banking institutions of the highest caliber (with selection based on major rating systems) and minimizes the concentration of risk by limiting its exposure to each of these banks to a certain threshold, set in relation to the institution’s credit rating. Furthermore, customer credit risk is managed by a risk committee and by an in-house network of credit managers who fix credit limits for customers and follow-up on cash collections. Additionally Solvay may also use credit insurance policies to manage customer credit risk. • Concerning the Risk of Funding Pension Obligations, Solvay is exposed whenever it operates defined-benefit plans. Fluctuations in discount rates, salaries and social security, longevity and asset/liability matching can have an important impact on the liabilities of such pension plans. Mitigation efforts The Group has reduced its exposure to defined-benefit plans by converting existing plans into pension plans with a lower risk profile for future services or by closing them to new entrants. Examples of plans with a lower risk profile are hybrid plans, cash balance plans and defined-contribution plans. Solvay developed guidelines and processes to better manage the pension funding risk. Over the past years the major defined benefit-pension plans (Germany, Netherlands, UK, USA, Spain and Belgium) representing more than 80 % of the Group’s pension obligations (under IFRS) have been reviewed in line with the above principles. The Group also ordered a global asset/liability management study (the results of which are expected in early 2007) in order to have a global picture of the risk inherent in the existing pension plans.
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6. Product Risk • Product Liability Risk is Solvay’s exposure stemming from injury or damage to third parties or their property arising from the use of a Solvay product, as well as the resulting litigation. Product liability may arise from out-of-specification products, inappropriate use or previously unidentified effects. Risks in Chemicals and Plastics also include the possibility of manufacturing errors resulting in defective products, product contamination or altered product quality and potential recalls. Mitigation efforts Product liability exposure is reduced by quality assurance and control, adequate technical assistance to customers and health and safety programs. The Group supplies information relating to the safe use and handling of its products. For products with significant hazards, which in general are only sold directly to industrial users, the SBUs involved have product stewardship programs including material safety data sheets. In Pharmaceuticals, stringent processes govern product labeling. Implementation of the REACh directive is expected to result in a reduction of Product Liability Risk exposure in Europe. • Product Development Risk is Solvay’s exposure to failure to develop new products and technologies or scale up a process. Solvay’s operating results depend, among other factors, on the innovation and development of commercially viable new products and production technologies. Because of the lengthy development process, technological challenges and intense competition, Solvay cannot ensure that the products it develops will become market-ready or achieve commercial success. If Solvay is unsuccessful in developing new products and production processes in the future, its competitive position and operating results will be harmed. Mitigation efforts Solvay devotes substantial resources to Research and Development. Solvay continuously improves the competitiveness of its essential products over the long term, through technological improvements and innovation. Innovation is the cornerstone of the Group’s strategy, and Solvay considers that managing the challenges related to product development is more about opportunity than risk for the company. Management of R&D by programs and projects fully in line with Solvay’s strategy enhances R&D performance and reduces the risk of failure.
Solvay Global Annual Report 2006
Financial
Management by projects, with a conceptual and operational roadmap for moving a new product project from idea to launch, also ensures that resources are used in an optimal way. Participation in venture capital funds allows Solvay to remain engaged at the forefront of emerging businesses such as alternative renewable energies and organic electronics. Solvay launched a dynamic innovation program at corporate level eight years ago, covering its main fields of activity, including R&D.
7. Risk to People Risk to People is the exposure of employees, contractors and the public to adverse effects from Solvay’s activities and products, for example from plant processes or from transportation of hazardous chemicals. A major accident can injure people or lead to the temporary closing of a plant and ultimately expose Solvay to significant liabilities. Mitigation efforts Solvay considers the safety and health of people key aspects in the management of its activities. The Group has consistently developed and implemented stringent safety programs. Related policies and risk control programs apply to all production units and other facilities, including to contractors and newly acquired plants.
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The risk of hazardous chemicals transportation is reduced by mapping and minimizing transport routes and by the operation of integrated production units, which do not require the transportation of intermediate goods. Solvay follows recommendations of associations like Eurochlor and programs like Responsible Care®.
8. Environmental Risk Environmental Risk is Solvay’s exposure stemming from the accidental release of a chemical substance following a plant equipment failure, a transport accident or production problems resulting in exceeding permitted emission levels. Solvay operates manufacturing plants in many regions. Like most industrial equipment, this may create environmental risks through the accidental release of chemicals into the environment. Around 30 sites are covered by regulations dealing with major risks. Like most other industrial companies, Solvay has to manage and remediate historical soil contamination at some of its sites. Mitigation efforts Solvay considers environmental protection as a key aspect in the management of its activities. Well-defined pollution and accident prevention measures have been in place at Solvay for a long time. Policies and risk control programs are applied in all production units and other facilities, including newly acquired plants. The Group has, in particular, taken the necessary steps to comply with regulations concerning major risks, which include detailed accident-prevention measures. The Group has developed internal expertise in soil management. Hydrogeological studies and soil characterizations are conducted systematically to diagnose potential problems, evaluate risks to aquifers and discuss with the relevant authorities remediation or confinement actions. A number of such actions have been completed or are underway.
9. I nformation and IT Risk IT is integrated in the business to process and exchange information and to optimize business processes such as, for example, industrial production unit controls and management, inventory management, supply chain management and productivity enhancement. Therefore, IT choices and strategy strongly impact the business. The losses from outages, service-level degradation or IT systems failure can raise business-continuity issues and can result in the loss of revenue. Business information is a real asset within the corporation that must be valued and protected by structured processes like access management or controlled duplication. The two challenges regarding information assets are to reduce the risks of accidental unavailability or loss and the risks of deliberate misuse, abuse and theft.
Solvay Global Annual Report 2006
Mitigation efforts Every employee is responsible for the appropriate management of information in compliance with the laws and policies related to information and use of IT systems. Internal IT specialists manage and safeguard systems and their integrity, and support and train employees in IT security, making regular back-up copies and safer use of the systems. Some important IT systems are hosted and technically managed by external IT suppliers. The choice of these suppliers, the contractual conditions and the level of services they can provide are crucial to reduce the risks linked to IT.
10. Reputation Risk Reputation is a key asset. Loss of reputation can result in competitive disadvantage. The reputation risk deals with the subjective, composite perception of a company by its different stakeholders. Trust is a fundamental ingredient to reputation. Mitigation efforts Besides overall good management, control practices and systems, efficient communication (transparent, consistent and timely) and long-term solid relationships, both inside and outside the organization, contribute in the long run to establishing trust. Among those relationships, Solvay participates in specific programs in the US (through the American Chemistry Council) and Europe (through CEFIC) to improve the reputation of the chemical industry.
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Furthermore, communication processes, systems, plans and programs are established in order to create, develop and maintain a regular flow of two-way communication with the main stakeholders: shareholders and the financial community, employees, customers, authorities, local communities and opinion leaders directly or through press and other media. Examples are the quarterly release of the Group’s results, internal magazines, websites, open doors, meetings and events. Clear values supported by the Code of Conduct, combined with a high level of Corporate Governance are instrumental in reducing the reputation risk. Specific management and communication systems exist to give early warning of developing crises and to ensure an adequate response in the case of unexpected and sudden adverse events that can potentially harm the Group’s reputation. Dedicated people are trained to face such situations while crisis simulations are organized on a regular basis.
Solvay Global Annual Report 2006
Financial
2006 Consolidation Scope The Group consists of Solvay S.A. and a total of 400 subsidiaries and associated companies in 50 countries. Of these, 166 are fully consolidated and 81 are proportionately consolidated, whilst the other 153 do not meet the criteria of significance. In accordance with the principle of materiality, certain companies which are not of significant size have not been included in the consolidation scope. Companies are deemed not to be significant when they do not exceed any of the three following thresholds in terms of their contribution to the Group’s accounts : • sales of EUR 20 million, • balance sheet total of EUR 10 million, • headcount of 150 persons. Companies that do not meet these criteria are, nevertheless, consolidated where the Group believes that they have a potential for rapid development, or where they hold shares in other companies that are consolidated under the above criteria.
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List of companies entering or leaving the Group and changes in consolidation methods Ch = Chemicals Ph = Pharmaceuticals Pl = Plastics - = not allocated
Companies entering the Group Country
Company
BELGIUM
Solvay Specialties Compounding S.A. - Solvay Stock Option Management S.P.R.L. - BASF Interox H202 Production N.V. Ch
LUXEMBOURG Solvay Finance (Luxembourg) S.A.
Sector
Comments new company new company new JV
-
meets the criteria for consolidation
NETHERLANDS Brightwork Investments B.V. Sodufa Pharmaceuticals B.V.
- Ph
purchase meets the criteria for consolidation
FRANCE
Solvay Finance S.A. Solvay - Organics - France S.A.S.
- Ch
new company meets the criteria for consolidation
POLAND
Solvay Pharma Polska Sp. z.o.o.
Ph
new company
BULGARIA
Pipelife Bulgaria O.O.D.
Pl
meets the criteria for consolidation
RUSSIA
Pipelife Russia O.O.O.
Pl
new company
UNITED STATES Mississippi Polymer Technologies, Inc.
Pl
purchase
INDA
Solvay Specialities India Private Limited
Pl
meets the criteria for consolidation
CHINA
Solvay (Shanghai) Ltd
Pl
meets the criteria for consolidation
Solvay Global Annual Report 2006
Companies leaving the Group
106
Country
Company
Sector Comments
BELGIUM
Alkor Draka S.A. Pl Solvay Industrial Foils Manag. and Research S.A. Pl
sold sold
NETHERLANDS Solvay Draka B.V.
Pl
sold
FRANCE
Alkor Draka S.A.S. BTG Pharma S.A.S. Ondex S.A.S.
Pl Ph Pl
sold absorbed by Vivalsol SNC sold
ITALY
Alkor Draka Italia S.r.l. Fournier Pharma S.p.A. GOR Applicazioni Speciali S.p.A.
Pl Ph Pl
sold absorbed by Solvay Pharma SpA sold
GERMANY
Alkor Folien GmbH Alkor GmbH Kuststoffe
Pl Pl
sold sold
SPAIN
Alkor Draka Iberica S.A. Solvay Interox S.A.
Pl Ch
sold liquidated
GREAT BRITAIN
Alkor Draka Limited Alkor Draka (UK) Ltd
Pl Pl
sold sold
DENMARK
Alkor Draka Nordic K/S
Pl
sold
FINLAND
Pipelife M-Plast OY
Pl
sold
CZECH REP.
Solvay Alkor Folie Spol sr.o.
Pl
sold
UNITED STATES
Solvay Draka, Inc. Solvay HDPE, L.P. Mississippi Polymer Technologies, Inc. Solvay PE, Inc. Solvay Polyolefins, Inc. Solvay Realty Holding LLC Solvay R & D, Inc.
Pl Pl Pl Pl Pl - -
sold liquidated absorbed by Solvay Advanced Polymers liquidated liquidated absorbed by Solvay Services LLC absorbed by Solvay Services LLC
CHINA
Chengdu Chuanwie Plastic Pipe Co. Ltd
Pl
sold
Change of consolidation method Country
Company
SOUTH KOREA Daehan Specialty Chemials Co., Ltd
Solvay Global Annual Report 2006
Sector Comments Ch
purchase of remaining 40 % from third party
Financial
List of fully consolidated Group companies Indicating the percentage holding, followed by the Sector. It should be noted that the percentage of voting rights is very close to the percentage holding. Ch = Chemicals Ph = Pharmaceuticals Pl = Plastics - = not allocated BELGIUM Financière Keyenveld S.A., Bruxelles Fournier Pharma S.A., Bruxelles Mutuelle Solvay S.C.S., Bruxelles Peptisyntha S.A., Neder-Over-Heembeek Solvay Benvic & Cie Belgium S.N.C., Bruxelles Solvay Chemicals International S.A., Bruxelles Solvay Chemie S.A., Bruxelles Solvay Coordination Internationale des Crédits Commerciaux (CICC) S.A., Bruxelles Solvay Participations Belgique S.A., Bruxelles Solvay Pharma & Cie S.N.C., Bruxelles Solvay Pharmaceuticals S.A. - Management Services, Bruxelles Solvay Specialities Compounding S.A., Bruxelles Solvay Stock Option Management S.P.R.L., Bruxelles LUXEMBOURG Solvay Finance (Luxembourg) S.A., Luxembourg Solvay Pharmaceuticals S.a.r.l., Luxembourg NETHERLANDS Brightwork Investments B.V., Amsterdam Physica B.V., Weesp Sodufa B.V., Weesp Sodufa Pharmaceuticals B.V., Weesp Solvay Chemie B.V., Linne-Herten Solvay Finance B.V., Weesp Solvay Holding Nederland B.V., Weesp Solvay Pharma B.V., Weesp Solvay Pharmaceuticals B.V., Weesp FRANCE Fournier Industrie et Santé S.A., Dijon Laboratoires Fournier S.A., Dijon Synkem S.A.S., Chenove Solvay Benvic France S.A.S., Paris Solvay - Carbonate - France S.A.S., Paris Solvay - Electrolyse - France S.A.S., Paris Solvay Finance France S.A., Paris Solvay Finance S.A., Paris Solvay - Fluorés - France S.A.S., Paris Solvay - Organics - France S.A.S., Paris Solvay - Olefines - France S.A.S., Paris Solvay Participations France S.A., Paris Solvay Pharma S.A.S., Suresnes Solvay Pharmaceuticals S.A.S., Suresnes Solvay Solexis S.A.S., Paris Solvay - Spécialités - France S.A.S., Paris Vivalsol S.N.C., Paris ITALY SIS Italia S.p.A., Rosignano Società Elettrochimica Solfuri e Cloroderivati (ELESO) S.p.A., Milano Società Generale per l’Industria della Magnesia (SGIM) S.p.A., Angera Solvay Bario e Derivati S.p.A., Massa Solvay Benvic - Italia S.p.A., Rosignano
50.4 100 99.9 100 100 100 100 100 100 100 100 100 100
Ph Ph Pl Ch Ch Ph Ph -
100 100
Ph
100 100 100 100 100 100 100 100 100
Ph Ph Ph Ch Ph Ph
100 100 100 100 100 100 100 100 100 100 100 100 99.9 100 100 100 100
Ph Ph Ph Pl Ch Ch Ch Ch Pl Ph Ph Pl Ch Ph
100 100 100 100 100
Ch Ch Ch Pl
107
Solvay Global Annual Report 2006
108
Solvay Global Annual Report 2006
Solvay Chimica Italia S.p.A., Milano Solvay Chimica Bussi S.p.A., Rosignano Solvay Fluor Italia S.p.A., Rosignano Solvay Finanziaria S.p.A., Milano Solvay Padanaplast S.p.A., Roccabianca Solvay Pharma S.p.A., Grugliasco Solvay Solexis S.p.A., Milano GERMANY Cavity GmbH & Co KG, Hannover Fournier Pharma GmbH, Thansau Girindus AG, Bensberg Hispavic GmbH, Hannover Kali-Chemie AG, Hannover Salzgewinnungsgesellschaft Westfalen mbH & Co KG, Epe Solvay GmbH, Hannover Solvay Advanced Polymers GmbH, Hannover Solvay Arzneimittel GmbH, Hannover Solvay Chemicals GmbH, Hannover Solvay Fluor GmbH, Hannover Solvay Infra GmbH, Hannover Solvay Infra Bad Hoenningen GmbH, Hannover Solvay Interox Bitterfeld GmbH, Bitterfeld Solvay Kali-Chemie Holding GmbH Solvay Management Support GmbH, Hannover Solvay Organics GmbH, Hannover Solvay Pharmaceuticals GmbH, Hannover Solvay Salz Holding GmbH, Hannover Sovlay Salz Beteiligungs GmbH & Co KG, Hannover Solvay Verwaltungs-und Vermittlungs GmbH, Hannover SPAIN Electrolisis de Torrelavega A.E.I., Torrelavega Laboratorios Fournier S.A., Tres Cantos Solvay Benvic Iberica S.A., Barcelona Solvay Ibérica S.L., Barcelona Solvay Fluor Iberica S.A., Tarragona Solvay Participaciones S.A., Barcelona Solvay Pharma S.A., Barcelona Solvay Quimica S.L., Barcelona SWITZERLAND Girindus S.A., Fribourg Solvay (Schweiz) AG, Zurzach Solvay Pharmaceuticals Marketing & Licensing AG, Allschwil Solvay Pharma AG, Bern PORTUGAL 3S Solvay Shared Services-Sociedade de Serviços Partilhados Unipessoal Lda, Carnaxide Fournier Farmaceutica S.A., Porto Salvo Solvay Farma Lda, Porto Salvo Solvay Interox - Produtos Peroxidados S.A., Povoa Solvay Portugal - Produtos Quimicos S.A., Povoa AUSTRIA Solvay Österreich GmbH, Wien Solvay Pharma GmbH, Klosterneuburg
100 100 100 100 100 100 100
Ch Ch Ch Pl Ph Pl
100 100 75 100 100 65 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Ch Ph Ch Pl Ch Pl Ph Ch Ch Ch Ch Ch Ch Ph Ch Ch -
100 100 100 100 100 100 100 100
Ch Ph Pl Ch Ph Ch
75 100 100 100
Ch Ch Ph Ph
100 100 100 100 100
Ph Ph Ch Ch
100 100
Ch Ph
Financial
GREAT BRITAIN Fournier Pharmaceuticals Ltd, Slough Solvay Chemicals Ltd, Warrington Solvay Healthcare Ltd, Southampton Solvay Interox Ltd, Warrington Solvay UK Holding Company Ltd, Warrington Solvay Speciality Chemicals Ltd, Warrington IRELAND Fournier Laboratories Ireland Ltd, Cork Solvay Healthcare Ltd , Dubin Solvay Finance Ireland Ltd , Dublin FINLAND Solvay Chemicals Finland Oy, Voikkaa SWEDEN Neopharma AB, Västra Frölunda POLAND Fournier Polska Sp. z o.o., Warszawa Solvay Pharma Sp. z o.o., Piaseczno Solvay Pharma Polska Sp. z o.o., Warszawa BULGARIA Solvay Bulgaria AD, Devnya RUSSIA Solvay Pharma OOO, Moscow UNITED STATES American Soda LLP, Parachute, CO Ausimont Industries, Inc., Wilmington, DE Fournier Pharma Corp, Inc., Parsippany NJ Girindus America, Inc., Cincinnati OH Girindus Sales Corporation, Tampa FL Girindus Corporation, Tampa FL Montecatini USA, Wilmington, DE Solvay Advanced Polymers, LLC, Alpharetta, GA Solvay Alkalis, Inc., Houston, TX Solvay America, Inc., Houston, TX Solvay America Holdings, Inc., Houston, TX Solvay Automotive Plastics & Systems, Inc., Troy, MI Solvay Chemicals, Inc., Houston, TX Solvay Engineered Polymers, Inc., Houston, TX Solvay Finance (America) Inc., Houston, TX Solvay Fluorides, LLC, Greenwich, CT Solvay Information Services NAFTA, LLC, Houston, TX Solvay Pharma US Holdings, Inc., Houston, TX Solvay Pharmaceuticals, Inc., Marietta, GA Solvay North America LLC, Inc., Houston, TX Solvay Soda Ash Joint Venture, Houston, TX Solvay Soda Ash Expansion JV, Houston, TX Solvay Solexis, Inc., Wilmington, DE Unimed Pharmaceuticals Inc., Deerfield, IL CANADA Fournier Pharma, Inc., Montreal Solvay Engineered Polymers (Canada), Inc., Concord Solvay Pharma, Inc., Scarborough Solvay Pharma Canada, Inc., Scarborough
100 100 100 100 100 100
Ph Ch Ph Ch Ch
100 100 100
Ph Ph -
100
Ch
100
Ph
100 100 100
Ph Ph Ph
100
Ch
100
Ph
100 100 100 75 75 75 100 100 100 100 100 100 100 100 100 100 100 100 100 100 80 80 100 100
Ch Pl Ph Ch Ch Ch Pl Pl Ch Pl Ch Pl Ch Ph Ph Ch Ch Pl Ph
100 100 100 100
Ph Pl Ph Ph
109
Solvay Global Annual Report 2006
110
Solvay Global Annual Report 2006
MEXICO Italmex S.A., Mexico Solvay Engineered Polymers Mexico S.A. de C.V., Monterrey Solvay Fluor Mexico S.A. de C.V., Ciudad Juarez Solvay Mexicana S. de R.L. de C.V., Monterrey Solvay Quimica Y Minera Servicios S.A. de C.V., Monterrey Solvay Quimica Y Minera Ventas S.A. de C.V., Monterrey BRAZIL Solvay Farma Ltda, Sao Paulo Solvay do Brasil Ltda, Sao Paulo Solvay Indupa do Brasil S.A., Sao Paulo Solvay Quimica Ltda, Sao Paulo ARGENTINA Solvay Indupa S.A.I.C., Bahia Blanca Solvay Argentina S.A., Buenos Aires Solvay Quimica S.A., Buenos Aires AUSTRALIA Fournier Pharma Australia Pty Ltd, Pymble Solvay Interox Pty Ltd, Banksmeadow Solvay Pharmaceuticals Pty Ltd, Pymble JAPAN Nippon Solvay KK, Tokyo Solvay Advanced Polymers KK, Tokyo Solvay Seiyaku KK, Tokyo Solvay Solexis KK, Minato Ku-Tokyo CHINA Solvay (Shanghai) Ltd, Shanghai THAILAND Peroxythai Ltd, Bangkok SINGAPORE Solvay Singapour Pte Ltd, Singapore INDA Solvay Pharma India Ltd, Mumbai Solvay Specialities India Private Limited, Mumbai CAYMAN ISLANDS Solvay Finance (Cayman) Ltd ,Georgetown Blair International Insurance (Cayman) Ltd, Georgetown SOUTH KOREA Daehan Specialty Chemicals Co., Ltd, Seoul Solvay Fluor Korea Co. Ltd, SĂŠoul
100 100 100 100 100 90
Ph Pl Ch Ch Ch Ch
100 100 69.9 100
Ph Pl Ch
69.9 100 100
Pl Ch
100 100 100
Ph Ch Ph
100 100 100 100
Ch Pl Ph Pl
100
Pl
83.9 100 68.9 100
Ch Ph Pl
100 100
-
100 100
Ch Ch
Financial
List of proportionately consolidated Group companies BELGIUM BASF Interox H2O2 Production N.V., Bruxelles Inergy Automotive Systems (Belgium) N.V., Herentals Pipelife Belgium S.A., Kalmthout Inergy Automotive Systems Research S.A., Bruxelles Solvic S.A., Bruxelles SolVin S.A., Bruxelles NETHERLANDS Inergy Automotive Systems Netherlands Holding B.V., Weesp Pipelife Finance B.V., Enkhuizen Pipelife Nederland B.V., Enkhuizen FRANCE Inergy Automotive Systems S.A., Paris Inergy Automotive Systems France S.A.S., Compiègne Inergy Automotive Systems Management S.A., Paris Pipelife France S.N.C., Gaillon SolVin France S.A., Paris ITALY SolVin Italia S.p.A., Ferrara GERMANY Inergy Automotive Systems (Germany), Karben Pipelife Deutschland Verwaltungs-GmbH Bad Zwischenahn, Bad Zwischenahn Pipelife Deutschland GmbH & Co KG Bad Zwischenahn, Bad Zwischenahn Pipelife Deutschland Asset Management GmbH, Bad Zwischenahn Solvay & CPC Barium Strontium GmbH & Co KG, Hannover Solvay & CPC Barium Strontium International GmbH, Hannover SolVin GmbH & Co KG, Hannover SolVin Holding GmbH, Hannover SPAIN Hispavic Iberica S.L., Barcelona Inergy Automotive Systems (Spain) S.L., Vigo Inergy Automotive Systems Valladolid, S.L., Gava Pipelife Hispania S.A., Zaragoza Vinilis S.A., Barcelona PORTUGAL Pipelife Portugal-Sistemas de Tubagens Plasticas Lda, Nogueira Da Maia AUSTRIA Pipelife International GmbH, Wiener Neudorf Pipelife Austria GmbH & Co KG, Wiener Neudorf Solvay Sisecam Holding AG, Wien GREAT BRITAIN Inergy Automotive Systems (UK), Telford IRELAND Inergy Reinsurance Ltd , Dublin SWEDEN Pipelife Sverige A.B., Oelsremma Pipelife Hafab A.B., Haparanda Pipelife Nordic A.B., Göteborg NORWAY Pipelife Norge AS, Surnadal FINLAND Pipelife Finland OY, Oulu Propipe OY, Oulu
50 50 50 50 75 75
Ch Pl Pl Pl Pl Pl
50 50 50
Pl Pl Pl
50 50 50 50 75
Pl Pl Pl Pl Pl
75
Pl
50 50 50 50 75 75 75 75
Pl Pl Pl Pl Ch Ch Pl Pl
75 50 50 50 48.8
Pl Pl Pl Pl Pl
50
Pl
50 50 71.4
Pl Pl Ch
50
Pl
50
Pl
50 50 50
Pl Pl Pl
50
Pl
50 50
Pl Pl
111
Solvay Global Annual Report 2006
112
Solvay Global Annual Report 2006
POLAND Pipelife Polska S.A., Karlikowo Inergy Automotive Systems Poland Sp. z o.o., Warszawa ROMANIA Inergy Automotive Systems Romania S.R.L., Pitesti Pipelife Romania S.R.L., Cluj-Napoca SLOVENIA Pipelife Slovenija, d.o.o., Trzin ESTONIA Pipelife Eesti AS, Tallinn LITHUANIA Pipelife Lietuva UAB, Vilnius LATVIA Pipelife Latvia SIA, Riga BULGARIA Deven AD, Devnya Pipelife Bulgaria EOOD, Plovdiv Solvay Sodi AD, Devnya CROATIA Pipelife Hrvatska Republika d.o.o., Karlovac HUNGARY Pipelife Hungaria Kft, Debrecen CZECH REPUBLIC Pipelife Czech s.r.o., Otrokovice SLOVAKIA Inergy Automotive Systems Slovakia s.r.o., Bratislava Pipelife Slovakia s.r.o., Piestany GREECE Pipelife Hellas S.A., Moschato Attica TURKEY Arili Plastik Sanayii AS, Pendik RUSSIA Pipelife Russia OOO, Moscou Soligran ZAO, Moscou UNITED STATES Inergy Automotive Systems Holding (USA), Troy, MI Inergy Automotive Systems (USA) LLC, Troy, MI Pipelife Jet Stream, Inc. Siloam Springs, AR CANADA Inergy Automotive Systems (Canada), Inc., Blenheim MEXICO Inergy Automotive Systems Mexico S.A. de C.V., Ramos Solvay & CPC Barium Strontium Reynosa S. de R.L. de C.V., Reynosa Solvay & CPC Barium Strontium Monterrey S. de R.L. de C.V., Monterrey BRAZIL Dacarto Benvic S.A., Santo AndrĂŠ Peroxidos do Brasil Ltda, Sao Paulo Inergy Automotive Systems Brazil Ltda, Sao Paulo ARGENTINA Inergy Automotive Systems Argentina S.A., Buenos Aires CHINA Changzhou Pipelife Reinforced Plastic Co. Ltd, Changzhou Pipelife (Guangzhou) Plastic Pipe Mfg Ltd, Nansha Sichuan Chuanxi Plastic Co. Ltd, Xipu Pixian County THAILAND Inergy Automotive Systems Thailand Ltd, Bangkok Vinythai Public Company Ltd, Bangkok
50 50
Pl Pl
50 50
Pl Pl
50
Pl
50
Pl
50
Pl
50
Pl
71.4 50 71.4
Ch Pl Ch
50
Pl
50
Pl
50
Pl
50 50
Pl Pl
50
Pl
50
Pl
50 50
Pl Pl
50 50 50
Pl Pl Pl
50
Pl
50 75 75
Pl Ch Ch
50 69.4 50
Pl Ch Pl
50
Pl
32.5 50 25.5
Pl Pl Pl
50 49.9
Pl Pl
Financial
SOUTH KOREA Inergy Automotive Systems Co. Ltd, Kyungju Solvay & CPC Barium Strontium Korea Co. Ltd, Onsan JAPAN Inergy Automotive Systems KK, Tokyo SOUTH AFRICA Inergy Automotive Systems South Africa (Pty) Ltd, Brits VIRGIN ISLANDS Pipelife Holding (HK) Ltd, Tortola
50 75
Pl Ch
50
Pl
50
Pl
50
Pl
113
Solvay Global Annual Report 2006
Summary financial statements of Solvay S.A. The annual financial statements of Solvay S.A. are presented in summary format below. In accordance with the Companies Code, the annual financial statements of Solvay S.A., the management report and the statutory auditor’s report will be deposited with the National Bank of Belgium. These documents are also available on request from : Solvay S.A. Rue du Prince Albert 33 B - 1050 Brussels The Statutory Auditor has expressed a reservation with regard to the decision, mentioned in the management report, to maintain the value of Solvay Finance (Luxembourg) at the historical value of the investments contributed to it. The reserve relates solely to the accounts of Solvay S.A. and does not in any way concern the Group’s consolidated accounts.
Balance sheet of Solvay S.A. (summary) 2005
2006
3 385
3 406
Start-up expenses and intangible assets
69
68
Tangible assets
66
61
Financial assets
3 250
3 277
Current assets
2 782
2 538
15
22
EUR Million ASSETS Fixed assets
114
Inventories Trade receivables
121
135
Other receivables
1 485
2 373
Short-term investments and cash equivalents
1 161
8
Total assets
6 167
5 944
Shareholder’s equity
3 765
3 787
Capital
1 270
1 271
Other equity
1 966
1 966
529
550
SHAREHOLDERS’ EQUITY AND LIABILITIES
Net income carried forward Investment grants Provisions and deferred taxes Financial debt
0 269
1 578
1 425
- due in more than one year
815
814
- due within one year
763
611
Trade liabilities
120
108
Other liabilities Total shareholders’ equity and liabilities
Solvay Global Annual Report 2006
0 356
348
355
6 167
5 944
Financial
Income statement of Solvay S.A. (summary) 2005
2006
Operating income
739
755
Sales
314
305
EUR Million
Other operating income Operating expenses Operating profit / loss
425
450
-772
-781
-33
-26
10
183
Current profit before taxes
-23
157
Extraordinary gains / losses
377
94
Profit before taxes
354
251
33
7
387
258
-
-
387
258
Financial gains / losses
Income taxes Profit for the year Transfer to (-) / from (+) untaxed reserves Profit available for distribution
115
Solvay Global Annual Report 2006
Statutory Auditor’s Report To the shareholder’s meeting on the consolidated financial statements for the year ended 31 December 2006. To the Shareholders As required by law and the company’s articles of association, we are pleased to report to you on the audit assignment which you have entrusted to us. This report includes our opinion on the consolidated financial statements together with the required additional comment. Unqualified audit opinion on the consolidated financial statements We have audited the accompanying consolidated financial statements of SOLVAY SA (“the company”) and its subsidiaries (jointly “the group”), prepared in accordance with International Financial Reporting Standards as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium to quoted companies. Those consolidated financial statements comprise the consolidated balance sheet as of 31 December 2006, the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, as well as the summary of significant accounting policies and other explanatory notes. The consolidated balance sheet shows total assets of EUR 11 101 million and a consolidated profit (Solvay share) for the year then ended of EUR 791 million. The financial statements of several significant entities included in the scope of consolidation which represent total assets of EUR 1 612 million and a total profit of EUR 84 million have been audited by other auditors. Our opinion on the accompanying consolidated financial statements, insofar as it relates to the amounts contributed by those entities, is based upon the reports of those other auditors.
116
The Board of Directors of the company is responsible for the preparation of the consolidated financial statements. This responsibility includes among other things : 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; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with legal requirements and auditing standards applicable in Belgium, as issued by the “Institut des Reviseurs d’Entreprises/Instituut der Bedrijfsrevisoren”. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. In accordance with these standards, we have performed procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we have considered internal control relevant to the group’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 group’s internal control. We have assessed the basis of the accounting methods used, the consolidation policies, the reasonableness of accounting estimates made by the company and the presentation of the consolidated financial statements, taken as a whole. Finally, the Board of Directors and responsible officers of the company have replied to all our requests for explanations and information. We believe that the audit evidence we have obtained, together with the reports of other auditors on which we have relied, provides a reasonable basis for our opinion. In our opinion, and based, to the extent necessary, upon the reports of other auditors, the consolidated financial statements give a true and fair view of the group’s financial position as of 31 December 2006, and of its results and its cash flows for the year then ended, in accordance with International Financial Reporting Standards as adopted by the EU and with the legal and regulatory requirements applicable in Belgium to quoted companies.
Solvay Global Annual Report 2006
Financial
Additional comment The preparation and the assessment of the information that should be included in the Directors’ report on the consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to include in our report the following additional comment which does not change the scope of our audit opinion on the consolidated financial statements : - The Directors’ report on the consolidated financial statements includes the information required by law and is in agreement with the consolidated financial statements. However, we are unable to express an opinion on the description of the principal risks and uncertainties confronting the group, or on the status, future evolution, or significant influence of certain factors on its future development. We can, nevertheless, confirm that the information given is not in obvious contradiction with any information obtained in the context of our appointment.
Brussels, 15 February 2007
117
The statutory auditor
DELOITTE Bedrijfsrevisoren / Reviseurs d’Entreprises BV o.v.v.e. CVBA / SC s.f.d. SCRL Represented by Michel Denayer
Solvay Global Annual Report 2006
Notes
118
Solvay Global Annual Report 2006
Corporate Governance
Report on the application of the Corporate Governance rules
119
Solvay Global Annual Report 2006
Table of contents 1.
Legal and shareholding structure of Solvay S.A.
p. 121
2.
Capital and dividend policy 2.1. Policy in respect of capital 2.2. Dividend policy
p. 122
hareholders’ Meetings S 3.1. Place and date 3.2. Agenda of the Shareholders’ Meeting 3.3. Procedure for calling meetings 3.4. Blocking of shares and appointment of proxies 3.5. Procedure 3.6. Documentation
p. 124
he Board of Directors T 4.1. Role and mission 4.2. Modus operandi and representation 4.3. Composition of the Board of Directors 4.4. Evaluation and training 4.5. Committees 4.6. Compensation
p. 126
he Executive Committee T 5.1. Role and Mission 5.2. Delegation of powers 5.3. Composition of the Executive Committee 5.4. Frequency of and preparation and procedure for Executive Committee meetings 5.5. Compensation
p. 131
3. 4. 5.
120
6.
Chairmen’s roles in achieving harmony between the Board of Directors and the Executive Committee
p. 134
7.
External auditing
p. 134
8.
Code of conduct
p. 134
9.
Internal organization of the Solvay group
p. 135
10. Relations with shareholders and investors Annexes : 1. “Mission Statement” of the Audit Committee 2. Policy on the compensation of General Managers
Solvay Global Annual Report 2006
p. 136
p. 138 p. 139
Corporate Governance
Introduction This report presents the application in 2006 of the Solvay group’s “Corporate Governance” rules. It presents the application of the recommendations of Belgian Corporate Governance Code in accordance with the “comply or explain” principle.
1. Legal and shareholding structure of Solvay S.A. 1.1. Solvay S.A. is a société anonyme (public limited liability company) created under Belgian law, having its registered office at 33, rue du Prince Albert, Brussels, Belgium. The company’s by-laws can be found on the Solvay internet site: www.solvay-investors.com. Its company purpose consists of pharmaceutical, chemical and plastic activities. 1.2. Its shares are either bearer shares (in denominations of 1, 10, 100 or 1 000 shares) or registered shares, at the shareholder’s choice. Shares may be converted through a simple request to the company, accompanied by the shareownership certificate. This possibility of changing bearer shares into registered shares will be particularly attractive in the context of the dematerialization of bearer shares from January 1, 2008 onwards (Service des Actionnaires, rue du Prince Albert 33, B-1050 Brussels (Belgium), Tel.: +32-2-509.63.09). The practical arrangements for eliminating bearer shares are the subject of proposals for amendments to the by-laws of the company that will be put to a vote at the Extraordinary Shareholders’ Meeting of May 8, 2007. At December 31, 2006, the capital of Solvay S.A. was represented by 84 701 133 shares, including
1 849 006 shares held by Solvay S.A. itself to cover the stock option program (further details under 2.1. “Company capital”). Each share entitles its holder to one vote whenever voting takes place (except for the shares held by Solvay S.A. itself, the voting rights for which are suspended). All shares are equal and common. The share is listed on Euronext Brussels. Solvay’s share price is included in several indexes: • Euronext 100, consisting of the leading 100 European companies listed on EURONEXT, where Solvay ranks in 60th place (0.46% of the index) (at January 1, 2007). • The Bel 20 index, based on the 19 most significant shares listed on Euronext Brussels. At January 1, 2007, Solvay represented around 5.6% (6th position by value in this index). Solvay shares are included in the ‘Chemicals - Specialties’ category of the Euronext Brussels sectoral index. • Various European indexes: Stoxx, Euro Stoxx, FTSE 300, … In the USA shareholders can acquire Solvay shares in the form of ADRs (American Depositary Receipts) under a program (no. 834437-10-5) sponsored by Solvay S.A. and managed by J.P. Morgan Chase & Co (New York). These ADRs are not listed in the USA. One ADR represents one share and entitles its holder to vote on the basis of the underlying share. 1.3. Solvay S.A.’s main shareholder is Solvac S.A., a registered company which at January 1, 2007 held a little over 30% of capital and voting rights in Solvay (compared with 27% at January 1, 2006). Solvac S.A. is the only Solvay S.A. shareholder to have filed the transparency declarations that are required for shareholdings exceeding the thresholds of 3 and 5% (and multiples thereof).
The latest declaration (December 15, 2006) is available on the internet site www.solvay-investors.com. Solvac S.A. is a société anonyme established under Belgian law and listed on Euronext Brussels. Its shares, all of which are registered, may be held by physical persons only. The very large majority (around 80%) of its capital is held by members of the families of the founders of Solvay S.A. This gives Solvay S.A. a free float of 70%. This amount is held by: • Individual shareholders who hold shares directly in Solvay S.A. None of these persons, either individually or in concert with others, reaches the 3% transparency declaration threshold. • European and international institutional shareholders, whose number and growing interest can be measured by the intensity of contacts at the many roadshows, by the regular publication of analysts’ reports and by the significant increase in trading volumes over recent years (an average daily trading volume of 181 000 shares in 2006 and 170 000 in 2005). The company has been informed that certain individual shareholders have decided to arrange to consult together when questions of particular strategic importance are submitted by the Board of Directors to the Shareholders’ Meeting. Each of these shareholders remains, however, free to vote as he chooses.
121
1.4. At the June 2005 and May 2006 Shareholders’ Meetings, shares were deposited and votes cast in respect of an average 40% of Solvay S.A.’s capital.
Solvay Global Annual Report 2006
2. Capital and dividend policy
of options. 97.2% of these stock options were accepted by these executives.
2.1. Policy in respect of capital
In 2006, stock options representing a total of 1 446 600 shares were exercised as follows (it should be noted that options are in principle exercisable over a period of 5* years after being frozen for 3 years): • 1999 stock option plan: 384 300 shares • 2000 stock option plan: 435 200 shares • 2001 stock option plan: 350 300 shares • 2002 stock option plan: 276 800 shares
2.1.1. Since being listed on the Stock Exchange and converted into a société anonyme in 1969, the company has not made public calls for capital from its shareholders, instead self-financing out of its profits, only a portion of which are distributed (see “Dividend policy” below).
122
2.1.2. In December 1999 the company introduced a new annual stock option program for Group executives worldwide. This program is covered by own shares purchased by Solvay S.A. on the stock exchange. Authorizations of this new system have been granted several times by extraordinary Shareholders’ Meetings for 18-month periods each time. The extraordinary Shareholders’ Meeting of May 9, 2006 renewed this authorization for a further 18 months. The most recent annual program of stock options (exercisable from February 13, 2010 to December 13, 2014) was offered at the end of 2006 to around 300 Group executives, at an exercise price of EUR 109.09 per share. This price represents the average closing price of the Solvay share on Euronext during the 30 days preceding the offering
As authorized by the Shareholders’ Meeting, the stock option program is covered by share buy-backs. At December 31 2006, the own shares held in portfolio by Solvay S.A. represented 2.2% (1 849 006 shares) of the capital of the company. Since January 2007, the covering program has been taken over by Solvay Stock Option Management S.A., a subsidiary of Solvay S.A. Voting and dividend rights attached to these shares are suspended as long as they are held by the company. 2.1.3. Article 523 of the Companies’ Code At its December 14, 2006 meeting, the Board of Directors implemented
its annual stock option plan in favour of around 300 Group executives. These include Mr. Christian Jourquin and Mr. Bernard de Laguiche, who are also directors. The latter persons therefore declared their situation and abstained from the deliberations of the Board of Directors that concerned them with respect to stock options. The Board of Directors noted their declaration of abstention, granting them 30 000 and 15 000 options respectively under the 2006 stock option plan. Given that this allocation was in conformity with the application grid which has existed for several years, its price being calculated based on the average stock market price for the previous 30 days, the Board deemed that it fell under Article 523 §3.2 of the Companies Code covering habitual operations undertaken at normal market conditions and under normal market guarantees for operations of the same type. 2.1.4. In 2003 the company decided not to renew the “poison pill” defensive warrants that allowed it to oppose any hostile takeover bid through a capital increase of 24 million new shares reserved for four allied companies, including Solvac S.A. It has, however, retained the ability to buy back up to 10% of its own shares on the stock market in the event of a threat of serious and imminent damage, such as, for
Stock option programs Issue date
Exercise price (in EUR)
Exercise dates
Acceptance rate
1999
76.14
02/2003-12/2007
99.2%
2000
58.21
02/2004-12/2008
98.9%
2001
62.25
02/2005-12/2009
98.6%
2002
63.76
02/2006-12/2010
98.4%
2003
65.83
02/2007-12/2011
97.3%
2004
82.88
02/2008-12/2012
96.4%
2005
97.30
02/2009-12/2013
98.8%
2006
109.09
02/2010-12/2014
97.2%
* Increased to 8 years in the case of the 1999 to 2002 Stock Options Plans, for beneficiaries in Belgium.
Solvay Global Annual Report 2006
Corporate Governance
i.e. the balance after deducting the advance payment, is payable in May.
and a payment of the balance.
example, a hostile public takeover bid. This system was renewed in June 2005 for a three-year period by an extraordinary Shareholders’ Meeting of the company. 2.1.5. The company’s by-laws contain so-called “authorized capital” provisions empowering the Board of Directors to increase the capital of the company by up to EUR 25 million. During the past five years this right has been used only to cover the former stock option scheme and to absorb Solvay Sports S.A. 2.2. Dividend policy 2.2.1. Board policy is to propose a dividend increase to the Shareholders’ Meeting whenever possible, and as far as possible, never to reduce it. This policy has been followed for very many years. The graph below illustrates the application of this policy over the past 20 years. 2.2.2. The annual dividend is paid in two installments, in the form of an advance payment (interim dividend)
In October 2006 the Board of Directors decided to change the way the advance payment is set. From 2006 onwards this method includes a guidance of 40% (rounded) of the total previous year’s dividend, and takes into account the results for the first nine months of the current year. In this way, for 2006, an interim dividend of EUR 0.80 per share (EUR 1.0667 gross before Belgian withholding tax at 25% in full discharge) was approved by the Board of Directors on October 26, 2006. This interim dividend (coupon no. 79), which was paid on January 18, 2007, is to be offset against the total dividend for 2006, which was proposed by the Board of Directors on February 15, 2007. As to the balance, once the annual financial statements have been completed, the Board of Directors proposes a dividend, in accordance with the policy described above, which it submits to the ordinary Shareholders’ Meeting for approval. The second dividend installment,
The net dividend for 2006 proposed to the General Shareholders’ Meeting of May 8, 2007 is EUR 2.10 per share (EUR 2.80 gross per share), up 5 % from that for 2005. Given the advance dividend payment made on January 18, 2007 (EUR 0.80 net per share – coupon no. 79), the balance of EUR 1.30 net per share will be payable from May 15, 2007 (coupon no. 80). 2.2.3. Shareholders who have opted to hold registered shares receive the advance dividend and the balance of the dividend automatically and free of charge by transfer to the bank account they have indicated, on the dividend payment date.
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Shareholders who have opted to hold bearer shares, either in a bank account or physically, receive their dividends via their banks or as they elect and arrange. Coupons representing the advance dividend and dividend balance are
Evolution of the Solvay dividend from 1987 to 2006 (in EUR) 2.10
EUR 2.00
2.00 1.90
1.75
1.65 1.49
1.50 1.25 1.00
1.24
1.24
1.24
1.24
1.24
1990
1991
1992
1993
1994
1.36
1.36
1995
1996
1.70
1.70
2000
2001
1.80
1.80
2002
2003
1.55
1.17 1.02 0.92
0.75 0.50 0.25 0.00 1987
1988
1989
1997
1998
1999
2004
2005
2006
Solvay Global Annual Report 2006
payable at the banking institutions below, with which the company has established payment procedures: • Fortis Bank S.A., Montagne du Parc 3 – 1000 Brussels • ING Belgium South West Europe, Cours Saint Michel 60 – 1040 Brussels • KBC Bank S.A., Havenlaan 2 – 1080 Brussels • Fortis Banque Luxembourg, 50, av. J.F. Kennedy, L–2951 Luxembourg • Crédit Suisse, Paradeplatz 8 – CH–8021 Zürich • Deutsche Bank, Taunusanlage 12 – D–60262 Frankfurt-am-Main • ABN Amro B.V., Foppingsdreef 22/AA 3330 – NL–1102 BS Amsterdam.
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Dividends in respect of ADRs are payable by Morgan ADR Service Center, P.O. Box 8205 – USA-Boston, MA 02266-8205. 2.2.4. The company does not have any reduced-tax VVPR shares, given that almost its entire capital was issued before the introduction of this pro-dividend tax regime. The company has not, up to this point, proposed optional dividends to its shareholders, i.e. stock instead of cash dividends, as this option does not offer in Belgium any tax or financial benefit to make it attractive to investors.
3. Shareholders’ meetings 3.1. Place and date The company’s annual ordinary Shareholders’ Meeting is held on the second Tuesday of May at 14.30 in the Auditorium, 44 rue du Prince Albert, Ixelles. The Board tries to organize any necessary extraordinary Shareholders’ Meeting immediately before or after the annual Shareholders’
Solvay Global Annual Report 2006
Meeting. The next ordinary and extraordinary Shareholders’ Meetings will therefore be held on May 8, 2007 starting at 14.00. 3.2. Agenda of the Shareholders’ Meeting The Shareholders’ Meeting is convened by the Board of Directors, which also sets its agenda. Shareholders may, however, request the calling of a Shareholders’ Meeting and/or the addition of an item to the agenda where those shareholders together represent 20% of the capital, as required by Belgian law. In this case, their request is mandatorily granted. If these shareholders represent less than 20% of the capital, their request must be sent in good time to the Board of Directors which will be the sole judge of whether or not to accede to it. The agenda of the ordinary annual Shareholders’ Meeting as a rule includes the following items: • the Board of Directors’ and the auditor’s reports on the financial year; • the Corporate Governance report for the financial year; • approval of the annual financial statements; • setting the dividend for the year; • discharge of the directors and the statutory auditor in respect of the financial year; • setting the number of directors and of independent directors, the length of their terms of office and the rotation of renewals; • election of directors and of the external auditor (renewals or new appointments); • setting of directors’ fixed compensation and attendance fees for their work in the Board of Directors or on the Committees (only in the case of changes); • setting the auditor’s annual fee for the external audit for the duration of the auditor’s appointment; and • approval of change of control clauses in significant contracts (e.g. joint ventures).
Extraordinary Shareholders’ Meetings are required in particular for all matters affecting the content of the company’s by-laws. Every time the Board of Directors prepares a special report in advance of an extraordinary Shareholders’ Meeting, this special report is enclosed with the notice of the meeting and is published on the company’s internet site. 3.3. Procedure for calling meetings The notices convening Shareholders’ Meetings contain the place, date and time of the meeting, the agenda, the reports, proposed resolutions on each item to be voted on, and the procedure for taking part in the meeting or for appointing proxies. Holders of registered shares receive notice of the meeting by mail at the address they have given, including notification of participation and proxy forms. Holders of bearer shares are notified of meetings by announcements in the Belgian press. Notices of meetings are published in the official Belgian gazette (Moniteur Belge/Belgisch Staatsblad) and in Belgium’s French and Dutchlanguage financial newspapers (L’Echo and De Tijd). The major banks established in Belgium also receive the necessary documentation to pass on to Solvay shareholders among their clients. 3.4. Blocking of shares and appointment of proxies Belgian legislation provides for the temporary blocking of shares to enable the company to identify with certainty the shareholders authorized to vote at the Shareholders’ Meeting. 3.4.1. For holders of registered shares, shares are blocked automatically to the extent that their rights are represented by an entry in the shareholders’ register held by the company itself. All that is required is for them to
Corporate Governance
send either their notification of participation or proxy form to the company’s General Secretariat. In both cases, documents must reach the company five working days before the Shareholders’ Meeting for the shareholder to be permitted to vote. 3.4.2. For holders of bearer shares, the procedure is not automatic and the shareholder must block his shares until the Shareholders’ Meeting, either with his bank, which will advise the General Secretariat, or at the company’s registered office. Notice of blocking must be in the hands of the General Secretariat five working days before the Meeting for the shareholder to be entitled to vote. Similarly, a shareholder wishing to be represented by another party must also send a proxy form that reaches the General Secretariat at least five working days before the Meeting. 3.4.3. The exercise of voting rights attached to shares that are jointly owned or the usufruct and bare property rights of which have been separated, or shares belonging to a minor or a legal incapacitated person, follows special legal and statutory rules, a common feature of which is the appointment of a single representative to exercise the voting right. Failing this, the voting right is suspended until such appointment. 3.4.4. When a proxy is appointed, this proxy must be a shareholder himself for the appointment to be valid (with certain exceptions i.e. a spouse or legal person). The company will count proxy votes in accordance with the mandating party’s instructions. Where the proxy wishes to modify the instruction in a mandate during the course of the Shareholders’ Meeting, the shareholder must state this expressly, on his or her responsibility, at the time of the vote. Blank proxy forms are treated as positive votes unless otherwise stated by the proxy at the time of the vote. Invalid proxy forms are
excluded from the count. “Abstentions” formally expressed as such during a vote or on proxy forms are counted as such. 3.5. Procedure 3.5.1. The annual Shareholders’ Meeting is chaired by the Chairman of the Board or, in his absence, by the Vice-Chairman. The Chairman will preside over the discussions following Belgian practice for deliberative meetings. He will take care to ensure that questions from the Meeting are answered, whilst respecting the agenda. He will appoint the tellers as well as the secretary of the meeting, who as a rule is the Corporate Secretary.
one candidate for a given office. The minutes of the Shareholders’ Meeting are drawn up and adopted by shareholders at the end of the meeting. They are signed by the Chairman, secretary, tellers and those shareholders who wish to do so. Minutes of extraordinary Shareholders’ Meetings are notarized. 3.5.5. Minutes of the most recent Shareholders’ Meetings are published on the company’s internet site www.solvay-investors.com. Copies or official extracts may be obtained on request by shareholders under the signature of the Chairman of the Board.
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3.6. Documentation 3.5.2. Resolutions in ordinary Shareholders’ Meetings are passed by a simple majority of votes of shareholders present and represented on a “one share, one vote” basis. 3.5.3. In the case of extraordinary Shareholders’ Meetings, the law requires a quorum (including proxies) of 50% of the capital, failing which a new Shareholders’ Meeting must be convened, which may deliberate even if a quorum has still not been achieved. Additionally, resolutions need to be passed by qualified majorities, in most cases of at least 75% of votes cast.
Documentation relating to Shareholders’ Meetings (notice of meeting, agenda, proxy and notification of participation forms, special report of the Board of Directors, etc.) is available every year on the Internet site www.solvayinvestors.com. This documentation is available in French and Dutch (official versions) and in English (unofficial translation).
3.5.4. Voting is, as a general rule, public, by show of hands. Votes are counted and the results announced immediately. Provision is made for secret balloting in exceptional cases when a particular person is involved. This procedure has never been requested until now. This by-law was amended at the extraordinary Shareholders’ Meeting of May 9, 2006 so as to set a threshold of 1% of capital to be reached by one or more shareholders acting in concert, and only when there is more than
Solvay Global Annual Report 2006
4. The Board of Directors
Secretary, and setting their missions and the extent of the delegation of powers to the Executive Committee.
4.1. Role and mission The Board of Directors is the highest management body of the company. The law accords to it all powers which are not attributed, by law or by the by-laws, to the Shareholders’ Meeting. In the case of Solvay S.A., the Board of Directors has reserved certain key areas for itself and has delegated the remainder of its powers to an Executive Committee (see below). It has not opted to set up a Management Committee as defined by Belgian law. The main key areas which the Board of Directors has reserved for itself are: 1. Matters for which it has exclusive responsibility, either by law or under the by-laws, for example:
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• the preparation and approval of the consolidated periodical financial statements and those of Solvay S.A. (quarterly - consolidated only, half-yearly and annual) and the related communications. • adoption of accounting standards (in this case the IFRS standards for the consolidated accounts and Belgian standards for the Solvay S.A. unconsolidated accounts). • convening Shareholders’ Meetings and drawing up the agenda and proposals for resolutions to be submitted to them (concerning, for example, company financial statements, dividends, amendments to the by-laws, etc.). 2. Setting the main policies and general strategic directions of the Group. 3. Adopting the budget and longterm plan, including investments, R&D and financial objectives. 4. Appointing the Chairman and members of the Executive Committee and the Corporate
Solvay Global Annual Report 2006
5. Supervision of the Executive Committee and ratification of its decisions, where required by law. 6. Appointing from among its members a Chairman and a Vice-Chairman, and creating from among its members an Audit Committee, a Compensation and Appointments Committee and a Finance Committee, defining each Committee’s mission and determining its composition and its duration. 7. Major decisions concerning acquisitions, divestitures, the creation of joint ventures and investments. Major decisions are considered to be those involving amounts of EUR 50 million or more. 8. Setting the compensation of the Chairman of the Executive Committee, of Executive Committee members and of General Managers belong to the Office of the Comex. 9. Establishing internal “Corporate Governance” and “Compliance” rules. In all matters for which it has exclusive responsibility, the Board of Directors works in close cooperation with the Executive Committee, which in particular is responsible for preparing most of the proposals for decisions by the Board of Directors. 4.2. Modus operandi and representation 4.2.1. Board Members have available to them the information needed to carry out their functions in the form of dossiers drawn up under instructions from the Chairman and sent out to them by the Corporate Secretary several days before each session. They may also receive additional information of any kind that may
be of use to them from, depending on the nature of the question, the Chairman of the Board, the Chairman of the Executive Committee or the Corporate Secretary. Decisions to obtain outside expertise, when necessary, are taken by the Board of Directors, for those subjects falling within its authority. 4.2.2. The company is validly represented with regard to third parties by the joint signature of persons with the following capacities: the Chairman of the Board of Directors and/or directors belonging to the Executive Committee. For documents relating to the day-to-day management of the company, the signature of a single director on the Executive Committee is sufficient. Powers may also be delegated on a case-by-case basis as needs arise. 4.3. Composition of the Board of Directors 4.3.1. Size & Composition At January 1, 2007, the Board of Directors consisted of 16 members, as follows (see page 127). 4.3.2. On May 9, 2006, Mr. Aloïs Michielsen succeeded Baron Daniel Janssen as Chairman of the Board of Directors. The ordinary Shareholders’ Meeting of May 9, 2006 allocated the directorships of Baron Daniel Janssen, who had reached the age limit, and of Mr. Ken Minton, one year before reaching the age limit, to Mr. Anton van Rossum and Prof. Dr. Bernhard Scheuble respectively, both as independent directors. The same ordinary Shareholders’ Meeting also renewed the directorships of Mr. Denis Solvay and Mr. Jean-Martin Folz for further four-year terms. Mr. René Degrève resigned his directorship at the end of February 2006 to take up executive functions in North America. He remains a member of the Executive Committee.
Corporate Governance Year of birth
Year of 1st appointment
Solvay S.A. mandates, and expiry date of directorship
Diplomas and activities outside Solvay
Presence at meetings as a function of appointment
Mr. Aloïs Michielsen (B)
1942
1990
2009 (since May 9, 2006) Chairman of the Board of Diorectors and of the Finance and Compensation/Appointments Committees
Civil engineering degree in chemistry and MA in Applied Economics (Catholic University of Louvain), Business Administration (University of Chicago), Director of Miko, Director of Fortis
5/5
Mr. Christian Jourquin (B) (*)
1948
2005
2009 (since May 9, 2006) Chairman of the Executive Committee, Director, member of the Finance Committee and guest of the Compensation/Appointments Committee
Commercial Engineering degree (Université Libre de Bruxelles) ISMP Harvard
5/5
Baron Hubert de Wangen (F)
1938
1981
2009 Independent Director
Chemical engineering degree (Ecole Polytechnique Fédérale de Lausanne), Former Executive Director of Kowasa and non-executive Director of Jotace (Spain)
5/5
Mr. Jean-Marie Solvay (B)
1956
1991
2008 Independent Director and member of the New Business Board
CEO of Albrecht RE Immobilien GmbH&Co. KG.
5/5
Chevalier Guy de Selliers de Moranville (B)
1952
1993
2009 Independent Director Member of the Finance Committee (since May 9, 2006) and the Audit Committee
Civil engineering degree in mechanical engineering, and MA in Economics (Catholic University of Louvain) Chairman of HB Advisors (UK), Director and Chairman of the Audit Committee of Norilsk Nickel and of Wimm-Bill-Dann Foods OJSC (Russia)
4/5
Mr. Denis Solvay (B)
1957
1997
2010 Independent Director, Vice-chairman of the Board of Directors (since May 9, 2006), Member of the Audit Committee and of the Compensation/Appointments Committee (since May 9, 2006)
Commercial engineering degree (Free University of Brussels) Director (and Member of the Audit Committee) of Eurogentec, Director of Abelag Group and CEO of Abelag Aviation
5/5
Mr. Nicolas Boël (B)
1962
1998
2009 Independent Director Member of the Compensation and Appointments Committee
MA in Economics (Catholic University of Louvain), Master of Business Administration (College of William and Mary – USA)
4/5
Mr. Whitson Sadler (US)
1940
2002
2007 Independent Director Chairman of the Audit Committee (since January 1, 2006)
Bachelor of Arts in Economics (University of the South, Sewanee – USA), Master of Business Administration Finance (Harvard) Retired General Manager of the Solvay S.A. for the NAFTA region
5/5
Mr. Jean van Zeebroeck (B)
1943
2002
2010 Independent Director Member of the Compensation and Appointments Committee
Doctorate of Law and diploma in Business Administration (Catholic University of Louvain), MA in Economic Law (Free University of Brussels), Master of Comparative Law (University of Michigan – USA) Corporate Secretary of European Owens Corning
5/5
Mr. Jean-Martin Folz (F)
1947
2002
2010 Independent Director Member of the Compensation and Appointments Committee
Ecole Polytechnique and Mining Engineer (France) Chairman of PSA Peugeot Citroën until February 6, 2007 and Director of Saint-Gobain
4/5
Mr. Jacques Saverys (B)
1937
2003
2007 Independent Director
MA in Economics (University of Ghent) Director of Siemens Belgium, former Managing Director of Compagnie Maritime Belge, former Chairman of the Union des Armateurs de Belgique and the European Community Shipowners’ Association, former Director of the Office National du Ducroire
5/5
Mr. Karel van Miert (B)
1942
2003
2009 Independent Director Member of the Finance Committee
MA in Diplomacy (University of Ghent) Former Competition Commissioner for the European Commission Board member of Agfa Gevaert, the Persgroep group and Sibelco SA, member of the Supervisory Boards of Royal Philips Electronics, RWE AG, Munchner Ruck and Anglo American Vivendi Universal, Member of the Advisory Boards of Eli Lilly Holdings Ltd, Fitch and and Goldman Sachs International, former Chairman of the Executive Board of the University of Nijenrode (Netherlands)
4/5
Dr Uwe-Ernst Bufe (D)
1944
2003
2009 Independent Director Member of the Finance Committee
Doctorate in Chemistry (Technical University of Munich) Member of the Supervisory Board of UBS AG, Germany, member of the Supervisory Board of Altana AG and Akzo Nobel, Director of Umicore.
5/5
Mr. Bernard de Laguiche (F) (*)
1959
2006
2009 Member of the Executive Committee, Director and member of the Finance Committee (since March 1, 2006)
Commercial Engineering degree – Lic. oec. HSG (University of St. Gallen, Switzerland)
4/4
Prof. Dr. Bernhard Scheuble (D)
1953
2006
2010 Independent Director (since May 9, 2006)
MSc,Nuclear Physics & PhD, Solar Energy (Freiburg University)
3/3
Mr. Anton van Rossum (Nl)
1945
2006
2010 Independent Director (since May 9, 2006)
Economics and Business Administration (Erasmus Universiteit Rotterdam), Board member of the Credit Suisse Group and ViceChairman of the Board of Winterthur until December 22, 2006. Member of the Supervisory Board of VNU until June 13, 2006. Chairman of the Supervisory Board of Erasmus University. Trustee of the Conference Board. President of the European League for Economic Cooperation.
2/3
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* Full-time activity in the Solvay group
Solvay Global Annual Report 2006
His directorship was taken over by Mr. Bernard de Laguiche effective March 1, 2006 by decision of the ordinary Shareholders’ Meeting of June 2005. At the ordinary Shareholders’ Meeting of May 8, 2007, a proposal will be made by the Board to allocate the directorship of Mr. Jacques Saverys, who is retiring at age 70 as required, to Mr. Charles CasimirLambert, whose curriculum vitae is attached to the notices convening the ordinary Shareholders’ Meeting. At the same date Mr. Charles Casimir-Lambert will relinquish his post of Director of Solvac S.A. During the same ordinary Shareholders’ Meeting, the Board of Directors will propose that Mr. Whitson Sadler’s independent directorship be renewed for a further four-year term.
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Terms of office and age limit Directors are appointed by the Shareholders’ Meeting for four years, they may be reappointed. To avoid all directorships terminating at once, a rotation was established by lot when the company was converted into a societé anonyme over 35 years ago. The age limit for membership of the Board is the ordinary Shareholders’ Meeting following the member’s 70th birthday. In this case, the director in question resigns, and is replaced, for his remaining term of office, by a successor appointed by the Shareholders’ Meeting. Following the recommendations of the Belgian Corporate Governance Code on the terms of directorships, the Shareholders’ Meeting decided in 2005 to shorten directors’ terms of office from six to four years. 4.3.3. Criteria for nomination The Board of Directors applies the following primary criteria when proposing candidates for election to directorships by the ordinary Shareholders’ Meeting: • ensuring that a substantial majority
Solvay Global Annual Report 2006
of directors on the Board are “non-executive”. At January 1, 2007, 14 out of 16 directors were non-executive, and two belonged to the Executive Committee (Mr. Christian Jourquin and Mr. Bernard de Laguiche); • Belgian law and the by-laws of the company permit spontaneous candidacies for the post of director. These must be addressed to the company in writing at least 30 days before the ordinary Shareholders’ Meeting. Exercise of this right is not encouraged; • ensuring that a large majority of non-executive directors are independent according to the independence, defined by law and further tightened by the Board of Directors (see “criteria of independence” below). In this respect, the independent status of 13 out of 14 non executive directors has been recognized by the ordinary Shareholders’ Meeting. • ensuring that the members of the Board of Directors together reflect the shareholder structure and possess the wide range of competences and experience required by the Group’s activities; • ensuring that the Board of Directors’ international composition appropriately reflects the geographic extent of its activities. At January 1, 2007 the Board included members of five different nationalities; • ensuring that the candidates it presents commit to devoting sufficient time to the task entrusted to them. In this respect, attendance at Board Meetings was very high in 2006. • ensuring, finally, that it does not select any candidate holding an executive position in a competing company or who is involved in the external audit of the Group. The Chairman of the Board gathers the information allowing the Board of Directors to verify that the selected criteria have been met at the time of appointment, renewal
and during the term of office. 4.3.4. Criteria for independence Based on Belgian law, the Board of Directors sets the criteria for determining directors’ independence. Each director fulfilling these criteria is presented to the ordinary Shareholders’ Meeting for confirmation. The Board has chosen to apply in particular the following criteria: • to be viewed as independent, a director may not have exercised an executive function within the Solvay group for at least three years. In this respect the Board of Directors is stricter than the law, which sets a limit of only two years. According to this criterion, Mr. Christian Jourquin and Mr. Bernard de Laguiche, as members of the Executive Committee, are not independent. Mr. Aloïs Michielsen, having been Chairman of the Executive Committee of Solvay until May 9, 2006, is not recognized as independent. On the other hand, Mr. Denis Solvay’s executive position at the Mutuelle Solvay has not been considered sufficiently significant to disqualify him as an independent director of Solvay S.A.; • being a non-executive director of a local Group holding company has not been considered as an obstacle to independence. This is the case of Mr. Whitson Sadler, who remains a non-executive director of Solvay America, Inc.; • a director who is a major shareholder is not considered as being independent. The law considers a shareholding to be significant when it reaches or exceeds 10%. This is the case of Solvac S.A., the managing director of which until May 2007 was Mr. Charles Casimir-Lambert. No director holds more than 1% of Solvay shares; • finally, to be viewed as independent, a director may not have business or other relations
Corporate Governance
with the Solvay group, for example as a customer or supplier, the nature or size of which could potentially affect the independence of his judgment. In this respect, the fact that PSA is a customer of the Inergy joint venture in the fuel systems field has not been considered as potentially affecting Mr. Jean-Martin Folz’s independence of judgment. The same applies to Mr. Uwe-Ernst Bufe as a Director of Umicore, a company with which Solvay has formed a joint venture in the field of research, the size of which is not significant. At January 1, 2007, 13 out of 16 directors fulfilled the criteria of independence, as confirmed by a vote of the ordinary Shareholders’ Meeting of May 9, 2006. 4.3.5. Appointment, renewal, resignation and dismissal of directors The Board of Directors submits directors’ appointments, renewals, resignations or dismissals to the ordinary Shareholders’ Meeting for approval, after first seeking the opinion of the Compensation and Appointments Committee. The ordinary Shareholders’ Meeting decides on proposals made by the Board of Directors in this area by a simple majority. When a directorship becomes vacant during a term of office, the Board of Director may appoint a new member, subject to ratification by the next following ordinary Shareholders’ Meeting.
be called by the Chairman of the Board, after consulting with the Chairman of the Executive Committee. The agenda for each meeting is set by the Chairman of the Board of Directors after consulting with the Chairman of the Executive Committee. The Corporate Secretary is charged, under the supervision of the Chairman of the Board of Directors, with organizing meetings, and sending notices of meetings, agendas and the dossier containing the item-by-item information required for decision-making. To the extent possible, he ensures that directors receive notices of meetings and complete files at least five days before the meeting. The Corporate Secretary prepares the minutes of the Board Meetings, presenting the draft to the Chairman and then to all members. Finalized minutes that have been approved at the following Board meeting are signed by all directors having taken part in the deliberations. The Board of Directors takes its decisions in a collegial fashion by a simple majority of votes. Certain decisions that are considered particularly important by the company’s by-laws require a three-quarters majority. The Board may not validly transact its business unless half of its members are present or represented. Given the very high level of attendance, the Board of Directors has never been being unable to transact its business. 4.4. Evaluation and Training
4.3.6. Frequency, preparation and holding of Board meetings The Board of Directors met five times in 2006. Five meetings are also planned in 2007. The dates of ordinary meetings are set by the Board of Directors itself, right now about six months before the start of the year. It is planned in future to plan meetings for two financial years ahead. Additional meetings can, if needed,
4.4.1. Evaluation Between the end of 2006 and the 1st quarter of 2007 the Board of Directors reviewed its own composition, modus operandi and the composition and modus operandi of the committees created by it. Board members were invited to express their views on these various
points based on a questionnaire drawn up with the help of the Belgian Governance Institute. 4.4.2. Training An “induction program” of training is provided for new Directors, aimed at acquainting them with the Solvay group as fast as possible. The program includes a review of the Group’s strategy and its three Sectors of activity and of the main challenges in terms of growth, competitiveness and innovation, as well as finance, Research & Development directions, human resources management, the legal context and the general organization of operations.
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This program is open to every Director who wishes. It also includes a visit to an industrial or research site. 4.5. Committees 4.5.1. Rules common to the various Committees • The Board of Directors has set up three specialized Committees: the Audit Committee, the Finance Committee and the Compensation and Appointments Committee. • These Committees do not have decision-making powers. They are advisory in nature and report to the Board of Directors, which takes the decisions. They are also called on to give opinions at the request of the Board of Directors or Executive Committee. After presentation to the Board of Directors, the Committees’ reports are attached to the minutes of the next following Board meeting. • All terms of office on the three Committees are for two years. These were renewed and/or revised by the Board of Directors meetings of February 2005 and February 2006. • Committee members (except for Executive Committee members) receive separate compensation for this task.
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4.5.2. The Audit Committee At January 1, 2007, the Audit Committee was composed of Mr. Whitson Sadler, who became Chairman following the departure of Mr. Ken Minton (January 1, 2006), Mr. Denis Solvay, Chevalier Guy de Selliers de Moranville and, since the general Shareholders’ Meeting of May 9, 2006, of Messrs. Bernhard Scheuble and Anton van Rossum. All are independent non-executive directors. The Secretariat is provided by a member of the Group’s internal legal staff. This Committee met four times in 2006, with one meeting before each Board meeting scheduled to consider the publication of periodical results (quarterly, half-yearly, annual). Participation in Audit Committee meetings was a very high 100%. The Audit Committee oversees the internal control of Group and Solvay S.A. accounting, checking in particular its reliability and compliance with legal and internal accounting procedures. Its mission has been set out in an internal “Terms of Reference” document (see Annexe 1). At each meeting, the Audit Committee hears reports from the General Manager for Finance (Mr. Bernard de Laguiche since March 1, 2006), the Head of the Internal Audit Department (Mr. Alain Chif) and of the Auditor in charge of the External Audit (Deloitte & Touche, represented by Mr. Michel Denayer). It also examines the quarterly report of the Group’s Legal Competence Centre on significant ongoing legal disputes (including tax and intellectual property disputes). It meets alone with the auditor in charge of the external audit whenever it deems such meetings useful. The Chairman of the Executive Committee (Mr. Christian Jourquin since May 9, 2006) is invited, once a year, to discuss the major risks to which the Group is exposed. 4.5.3. The Finance Committee At January 1, 2007 the Finance
Solvay Global Annual Report 2006
Committee consisted of Mr. Aloïs Michielsen (Chairman since the end of the term of office of Baron Daniel Janssen on May 9, 2006), Messrs. Christian Jourquin (Chairman of the Executive Committee since May 9, 2006) and Bernard de Laguiche (General Manager for Finance since March 1, 2006) and three nonexecutive, independent directors, Messrs. Karel Van Miert, Uwe-Ernst Bufe and Chevalier Guy de Selliers de Moranville The Corporate Secretary, Mr. Jacques Lévy-Morelle, acts as secretary to the Committee. This Committee met four times in 2006, giving its opinion on financial matters such as the amounts of the interim and final dividends, the levels and currencies of indebtedness in the light of interest rate developments, the hedging of foreign exchange and energy risks, the content of financial communication, etc. It gives its opinion on the press releases announcing the quarterly results. It may also be called on to give opinions on Board policies on these matters. In this way, in 2006 it recommended that that the policy concerning the interim dividend be modified (see page 123). Participation of members of the Finance Committee was very high (100%). 4.4.4. The Compensation and Appointments Committee At January 1, 2007, this Committee consisted of Mr. Aloïs Michielsen (Chairman since the end of the term of office of Baron Daniel Janssen on May 9, 2006), and four independent, non-executive directors, Messrs. Jean-Martin Folz, Jean van Zeebroeck, Nicolas Boël and Denis Solvay. Mr. Christian Jourquin is invited as Chairman of the Executive Committee. Mr. Daan Broens, the Group’s General Manager Human Resources, reports to the Committee and acts as secretary. The Committee met three times in 2006. Participation of the members of the Compensation and Appointments Committee was
very high (close to 100%). The Committee gives its opinion on appointments to the Board of Directors (Chairman, Vice-Chairman, new members, renewals and Committees), to Executive Committee positions (Chairman and members) and to General Manager positions. In the area of compensation, it advises the Board of Directors on compensation policy and compensation levels for members of the Board of Directors, the Executive Committee and General Management. It also gives its opinion to the Board of Directors and/or Executive Committee on the Group’s main compensation policies (including stock options). 4.6. Compensation 4.6.1. General principles Directors of Solvay S.A. are compensated with fixed emoluments, the common basis of which is set by the ordinary Shareholders’ Meeting, and any supplement thereto by the Board of Directors on the basis of article 27 of the by-laws. Directors do not receive any variable compensation linked to results or other performance criteria. They are not entitled to stock options, nor to any supplemental pension scheme. 4.6.2. Fixed basic compensation • The ordinary Shareholders’ Meeting of June 2005 decided to set director’s compensation as follows, starting in the 2005 financial year: a gross fixed annual emolument of EUR 35 000 per Director, and an individual attendance fee of EUR 2 500 gross per meeting for Directors attending Board meetings. • To confirm the attendance fees of the Audit Committee; EUR 4 000 gross for members and EUR 6 000 gross for the Chairman. • Finally, to grant attendance fees to members of the Compensation and Appointments Committee and
Corporate Governance
of the Finance Committee: EUR 2 500 gross per member and EUR 4 000 gross for the Chairmen of these Committees. The Chairman of the Board of Directors, the Chairman of the Executive Committee and Executive Directors do not, however, receive attendance fees for participating in these Committees. 4.6.3. Additional compensation The Board of Directors has used the authorization given to it by article 27 of the by-laws to grant additional fixed compensation to the Chairman of the Board of Directors in the light of his workload and the additional responsibility attached to his task. 4.6.4. Total compensation In 2006 directors together received gross compensation totalling EUR 1 471 815 in respect of their Board and Committee work. In 2005, this total gross compensation amounted to EUR 1 480 520. 4.6.5. Expenses The company reimburses directors’ travel and subsistence expenses for meetings and while exercising their Board and Board Committee functions. The Chairman of the Board of Directors is the sole nonexecutive director having permanent logistics support (office, secretariat, car). The other non-executive directors receive logistics support from the General Secretariat as and when needed. The company also carries customary insurance policies covering the activities of Board Members in carrying out their duties.
5. The Executive Committee 5.1. Role and Mission 5.1.1. The Board of Directors defines the role and mission of the Executive Committee. The main discussion and decisions on this subject date back to December 14, 1998. There
have been no significant changes since then. 5.1.2. The Executive Committee, as a group, has been assigned the following main tasks by the Board of Directors: • day-to-day management of the company is delegated to it; • it ensures that the company, its subsidiaries and its affiliates are properly organised, through the choice of members of their governing bodies (Boards of Directors, etc.); • it appoints senior managers (except to those functions where the decision lies with the Board of Directors); • it supervises subsidiaries; • it has delegated authority from the Board of Directors for investment and divestiture decisions (including acquisitions and sales of knowhow) up to a ceiling of EUR 50 million. At each meeting, the Board of Directors is informed of and ratifies the Executive Committee’s decisions and recommendations in respect of investments of between 10 and 50 million for the immediately previous period; • it sets Group policies, except for the most important ones, which it proposes to the Board of Directors; • it sets executives’ compensation (except where the decision lies with the Board of Directors); • it prepares and proposes to the Board of Directors, for its decision: – general strategies (including the effect of strategies on the budget and 5-year plan and the allocation of resources); – general internal organization; – major financial steps that have the effect of modifying the company’s financial structure; – the creation and termination of major activities, including the corresponding entities (branches, subsidiaries, joint ventures); and – the company’s financial statements. • it submits to the Board of Directors all questions lying within the latter’s competence, and reports
to the Board on the exercise of its mission; • it executes the decisions of the Board of Directors. 5.2. Delegation of powers The Executive Committee operates on a collegial basis, whilst consisting of members exercising General Management functions. The execution of Executive Committee decisions and the following up of its recommendations is delegated to the Executive Committee member (or another General Manager) in charge of the activity or of the function corresponding to the decision or recommendation.
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5.3. Composition of the Executive Committee 5.3.1. Size of the Executive Committee On May 9, 2006, Mr. Christian Jourquin succeeded Mr. Aloïs Michielsen as Chairman of the Executive Committee, Mr. Christian Jourquin having himself been replaced by Mr. Vincent De Cuyper as member of the Executive Committee in charge of the Chemicals Sector since May 1, 2006. Also, within the existing Executive Committee, Mr. Bernard de Laguiche took over Finance and Information Systems on March 1, 2006, whilst Mr. René Degrève took over the post of Regional Manager NAFTA. At September 1, 2007, Mr. Luigi Belli, a Member of the Executive Committee and General Manager Research & Technology, will leave his current position in order to undertake special missions for the Executive Committee. Based on a proposal from the Compensation and Appointments Committee, the Board of Directors has decided unanimously to appoint Mr. Jean-Michel Mesland to the position of General Manager Research & Technology and a
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Member of the Executive Committee as of the same date.
be held concurrently with that of Chairman of the Board of Directors.
are made for setting variable compensation.
5.3.3. Terms of office and age limits Executive Committee members are appointed by the Board of Directors for two-year renewable terms. The Board of Directors has set an age limit of 65 for Executive Committee membership.
5.3.5. Appointment and renewal procedure The Chairman of the Executive Committee is appointed by the Board of Directors based on a proposal by the Chairman of the Board of Directors and with recommendations by the Compensation and Appointments Committee and the outgoing Chairman of the Executive Committee. The other Executive Committee members are also appointed by the Board of Directors, but on the proposal of the Chairman of the Executive Committee in agreement with the Chairman of the Board of Directors and with the concurrence of the Compensation and Appointments Committee. Executive Committee members’ performance is assessed annually by the Chairman of the Executive Committee. This assessment is undertaken together with the Chairman of the Board and with the Compensation and Appointments Committee whenever proposals
5.4. Frequency, preparation and procedure of Executive Committee meetings
5.3.4. Criteria for appointment The Executive Committee is a collegial body made up of specialist members, generally from the Group’s General Managements. Members must work full-time for the Group. With the exception of the Chairman, its members were in 2006 the General Manager for Finance, the General Managers of the three Sectors (Chemicals, Plastics and Pharmaceuticals) and the General Manager for Research and Technology. All Executive Committee members have employment contracts with the Group companies, except for the Chairman, who has self-employed status. The post of Chairman of the Executive Committee may not
5.4.1. The Executive Committee met 19 times in 2006. Meetings are generally held at the Company’s registered office, but can also be held elsewhere at the decision of the Executive Committee Chairman. The Executive Committee sets the dates of its meetings around six months before the start of the year. Additional meetings can be convened by the Chairman of the Executive Committee, who sets the agenda based on proposals from the General Managements. 5.4.2. The Corporate Secretary, who acts as secretary to both the Board of Directors and the Executive Committee, is responsible, under the supervision of the Chairman of the Board of Directors, for organizing meetings and sending out notices of meetings, agendas and the dossiers containing the item-by-item information required
Year of birth
Year of 1st appointment
Term of office ends
Diplomas and main Solvay activities.
Presence at meetings (as a function of of times of appointment)
Mr. Christian Jourquin (B)
1948
1996
2008
Commercial Engineering degree (Université Libre de Bruxelles) ISMP Harvard, Chairman of the Executive Committee.
19/19
Mr. René Degrève (B)
1943
1994
2008
Commercial engineering degree (Université Libre de Bruxelles), Master of Business Administration (INSEAD). Executive Committee member in charge of NAFTA Regional Management.
19/19
Mr. Bernard de Laguiche (F)
1959
1998
2008
Commercial engineering degree – MA in economics HSG (University of St Gallen – Switzerland) Executive Committee Member in charge of Finance/IT.
19/19
Mr. Luigi Belli (I)
1942
1998
2008
Civil Engineering degree in Mechanics (University of Pisa), ISMP Harvard, Executive Committee Member in charge of Research & Technology.
17/19
Mr. Jacques van Rijckevorsel (B)
1950
2000
2009
Civil Engineering degree in Mechanics (Catholic University of Louvain) Advanced studies in Chemical Engineering (Université Libre de Bruxelles), AMP Harvard, Executive Committee Member in charge of the Plastics Sector.
19/19
Mr. Werner Cautreels (B)
1952
2005
2009
Bachelor and Master of Science in Chemistry and Doctorate in Chemistry (University of Antwerp), AMP Harvard, Executive Committee Member in charge of Pharmaceuticals activities
19/19
Mr. Vincent De Cuyper (B)
1961
2006
2008
Chemical engineering degree (Catholic University of Louvain Master in Industrial Management (Catholic University of Louvain), AMP Harvard, Executive Committee Member in charge of Chemicals activities from May 1, 2006.
17/19
Solvay Global Annual Report 2006
Corporate Governance
for decision-making. He makes sure that members receive notices and dossiers – complete whenever possible – at least five days before meetings. The Corporate Secretary draws up the minutes of Executive Committee meetings and has them approved by the Chairman of the Executive Committee and subsequently by all members. Minutes are formally approved at the following meeting. They are not signed, but the Chairman of the Executive Committee and the Corporate Secretary may deliver certified conformed extracts.
Committee members is set as a global gross amount. This includes not only the gross compensation earned at Solvay S.A., but also amounts received as compensation or as directors’ fees, from companies throughout the world in which Solvay S.A. holds majority or other shareholdings. In 2005 the Board of Directors updated, based on a proposal from the Compensation and Appointments Committee, a compensation policy applicable to its main executives, including the members of the Executive Committee. This policy is set out in an annexe.
5.4.3. The Executive Committee takes its decisions by a simple majority, with its Chairman having a casting vote. If the Chairman of the Executive Committee finds himself in a minority he may, if he wishes, refer the matter to the Board of Directors which will then decide on the matter. In practice, however, almost all Executive Committee decisions are taken unanimously, so that the Chairman has never made use of his casting vote. Attendance at meetings was close to 100% in 2006. The Executive Committee has not appointed any specialist Committees from among its members. It does, however, set up ad hoc working teams, led mainly by General Managers chosen on the basis of the competences required. The Executive Committee regularly invites other employees to its discussions on specific subjects.
5.5.2. Fixed and variable compensation levels For 2006 the Board of Directors awarded to the seven members of the Executive Committee together gross fixed and variable compensation (excluding stock options) amounting to EUR 6 185 527, representing EUR 3 187 932 of gross fixed compensation and EUR 2 997 595 of gross variable compensation (paid in 2007 but relating to the objectives for 2006). Total gross compensation for 2005 amounted to EUR 5 706 414, of which EUR 2 902 598 of gross fixed compensation and EUR 2 803 816 of gross variable compensation. The above 2006 figures include the following amounts paid to the Chairmen of the Executive Committee:
5.4.4. Every three years the Executive Committee holds an offsite meeting to discuss the Group’s strategic directions. A meeting of this type was organized in 2006 at the initiative of the new Chairman of the Executive Committee. 5.5. Compensation 5.5.1. General principles The compensation of Executive
- fixed compensation of EUR 162 890 and variable compensation of EUR 379 209 paid to Mr. Aloïs Michielsen; - fixed compensation of EUR 512 164 and variable compensation of EUR 574 596 paid to Mr. Christian Jourquin. 5.5.3. Level of stock options In December 2006 the Board of Directors awarded, on the proposal of the Compensation and Appointments Committee, share options to Group executives.
In accordance with the abovementioned method for setting the price, the exercise price is EUR 109.09 per option with a three-year freeze. 111 000 options were awarded to and accepted by Executive Committee members in 2006, compared with 120 000 in 2005. Of these the Chairman of the Executive Committee accepted 30 000 and the General Manager for Finance 15 000 (see also 2.1.3. ‘Article 523 of the Companies Code’ page 122). 5.5.4. Extra-legal pension Given his self-employed status in Belgium, the Chairman of the Executive Committee has his own separate contractual arrangement, with pension, death in service, disability and end of contract provisions, which (excluding any personal contributions) are financially comparable with those applicable to his Executive Committee colleagues subject to the Pension Regulations for executives in Belgium.
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In 2006, the cost to the company of covering the extra-legal pensions plus the death in service and disability provisions to the benefit of active members of the Executive Committee amounted to EUR 2 658 000. 5.5.5. Expenses and insurance Executive Committee members’ expenses are governed by the same rules that apply to all management staff, i.e. item-by-item justification of professional expenses incurred. Private expenses are not reimbursed. In the case of mixed professional/ private expenses (such as cars), a proportional rule is applied in the same way as to all management staff in the same position. In the area of insurance, the Company provides the same type of coverage - in particular for civil liability - as it does for senior managers.
Solvay Global Annual Report 2006
6. Chairmen’s roles in achieving harmony between the Board of Directors and the Executive Committee The Chairman of the Board of Directors and the Chairman of the Executive Committee work together to harmonize the work of the Board of Directors (including its committees) with that of the Executive Committee.
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The following measures have been introduced to achieve this: • the two Chairmen meet as often as is necessary on matters of common interest to the Board of Directors and the Executive Committee; • the Chairman of the Board of Directors is invited once a month to join the Executive Committee meeting during its discussion of the most important items on which proposals will be made to the Board of Directors; • the Chairman of the Executive Committee (and the Finance Manager, a member of the Executive Committee), is also a member of the Board of Directors, where he presents the Executive Committee’s proposals.
7. External Auditing The auditing of the company’s financial situation, its financial statements and the regular nature of the same with respect to the Companies Code and the by-laws, and of the operations to be recorded in the financial statements, is entrusted to one or more auditors appointed by the Shareholders’ Meeting from among the members, either physical or legal persons, of the Belgian Institute of Company Auditors. The mission and powers of the auditor(s) are those granted by the law. The Board of Directors sets the number of auditors and fixes their
Solvay Global Annual Report 2006
emoluments in accordance with the law. Auditors are also entitled to reimbursement of their travel expenses for auditing the company’s plants and administrative offices. The Shareholders’ Meeting may also appoint one or more alternate auditors. Auditors are appointed for three-year renewable terms, which may not be revoked by the Shareholders’ Meeting other than for good reasons. The mandate of the international audit company Deloitte Réviseurs d’Entreprise, represented by Mr. Michel Denayer, was renewed at the Shareholders’ Meeting of June 4, 2004 and will expire at the end of the ordinary Shareholders’ Meeting of 2007. The Shareholders’ Meeting of June 4, 2004 also renewed the mandate of the alternate auditor, the international audit company Deloitte Réviseurs d’Entreprise, represented by Mr. Ludo De Keulenaar, also expiring at the end of the ordinary Shareholders’ Meeting of 2007. The Shareholders’ Meeting also established the Auditor’s annual emoluments at EUR 340 000, all costs included, excluding VAT, for the duration of its mandate. The latter’s report is shown on page 134. Additional fees received by Deloitte in 2006 amount to EUR 322 000. For the entire consolidated Group, the fees received by Deloitte break down as follows: • fees for auditing the financial statements: EUR 4 439 000; • other audit and miscellaneous services: EUR 462 000; • special mission and tax advice EUR 105 000.
8. The Code of conduct The Solvay Code of conduct expresses certain Values that serve
as a reference framework for the Group’s decisions and actions: • Ethical behaviour • Respect for people • Customer care • Empowerment • Teamwork. All these Values need to be respected and applied constantly and consistently. The Code of conduct is part of the Group’s constant efforts to maintain and strengthen trust both among all its employees and between the Group and its partners, including its employees, their representatives, shareholders, customers and suppliers, government agencies and all other third parties. The Code also draws inspiration from international conventions such as the Universal Declaration of Human Rights, the Convention on the Rights of the Child, and the conventions of the International Labour Office Organization (ILO). To obtain the widest possible involvement of all employees in implementing this Code, the Group will continue to promote a rich and balanced social dialogue between senior management and social partners. The Solvay group also seeks to have this Code respected contractually within its joint ventures. The Solvay takes various measures to ensure that this Code is applied, including targeted training programmes, in order to minimize the danger of violation and with provision for clear sanctions where necessary. Special measures within the Board of Directors The Board of Directors subscribes to the Group rules on ethical values, in particular as regards confidentiality and non-usage of insider information. In particular, it has adopted strict rules defining the periods during which members should abstain from all direct or indirect transactions involving Solvay shares (and related
Corporate Governance
derivative instruments) before the publication of results or other information that could affect the market price of Solvay shares. The task of interpreting and monitoring compliance with these rules lies with the Corporate Secretary. Subject to the items set out in item 2.1.3. (Article 523 of the Companies Code, page 122) in 2006 members of the Board of Directors were not confronted with conflict of interest situations requiring the implementation of the legal procedures provided for by the Companies’ Code. On the other hand, and in a very limited number of cases, one or the other member has preferred, for ethical reasons, to withdraw and to abstain from participating in debates and in voting, for example directors belonging to the Executive Committee when the Board of Directors is deciding on the renewal of their terms of office, on their bonus or the number of stock options to allocate to them. Special measures within the Executive Committee The Executive Committee respects the same ethical and compliance rules as the Board of Directors (see above). These rules are, however, tighter in at least two respects: • in questions of insider information, given the Executive Committee’s participation in major decisions, including the establishment of the results, and the allocation of stock options, stricter rules apply to avoid any insider trading, for example, as regards the sale during possibly sensitive periods of shares obtained from the exercise of stock options; • in the area of “compliance,” given the problems recently encountered again with regard to compliance with competition rules, in particular in Europe but also in the USA, a tightening of compliance policy desired by the Executive Committee is under way
at all levels, including setting up a network of compliance officers. Notification to the Banking, Finance and Insurance Commission of transactions involving Solvay shares Persons exercising managing responsibilities within the Group, that is: • the members of the S.A. Board of Directors • the members of the Executive Committee • the Company Secretary • the General Manager for Human Resources and • the General Counsel have been informed of their obligation to declare to the Banking, Finance and Insurance Commission every transaction involving Solvay shares undertaken for their own account within the meaning of the Law of August 2, 2002.
9. Internal organization of the Solvay group 9.1. The activities of the Solvay group are organized as follows: • The Pharmaceuticals Sector; • The Chemicals Sector; • The Plastics Sector. 9.2. Each Sector, except Pharmaceuticals, is in turn divided by business area into Strategic Business Units (SBUs). Each SBU’s field of activity is set out in greater detail in the pages of the annual report devoted to the Sectors. The SBUs in the Chemicals and Plastics Sectors are almost entirely composed of individual subsidiaries by business area and by company. In most cases these subsidiaries are held by local national holding companies, particularly where tax consolidation is permitted. Examples of this are Solvay America, Inc. in the USA and Solvay GmbH (formerly Solvay Deutschland GmbH) in Germany.
A different subsidiary holding structure exists for the Pharmaceuticals activity. Rather than being held by national holding companies, all the Group’s pharmaceuticals subsidiaries are held by a single holding company, Solvay Pharmaceuticals Sàrl, in Luxembourg. This pharmaceuticals holding company is ultimately 100% owned by Solvay S.A. 9.3. Since January 1, 2007, the Sectors and SBUs have been supported by five Functional Managements (Finance, Research & Technology, Human Resources, Legal & Compliance* and Corporate Secretariat)*, in turn subdivided into Competence Centers. Nearly all Functional Managements and their Competence Centers are located at Solvay S.A. in Brussels and in national holding companies, where they are part of Regional or Country Managements.
135
9.4. Sectors and SBUs are also supported by specialist services organized into Business Support Centers (BSCs). These BSCs can be international, national or site-specific. Depending on their specific purpose, they are attached to a Functional Management, to a Sector, to an SBU or to a Regional or Country Management. 9.5. The Executive Committee is assisted in its task by the “Office of the Comex”, composed of: • the Corporate Secretary, the General Counsel and the General Manager for Human Resources; • the Regional Managers for Europe, NAFTA, Mercosur and Asia-Pacific; • the General Secretariat (SG-CA); • the Shareholder Services Department; • Corporate Development; • the Group Head of Communications; • the Group Head of Public Affairs; • the Group Innovation Champion. The “Office of the Comex” is not a collegiate body. It consists of
* Separate functional entities since January 1, 2007.
Solvay Global Annual Report 2006
individual persons and of three departments chosen to provide the Executive Committee with advice or, in the case of the Corporate Secretariat and Shareholder Services, to provide logistic and operational support.
10. Relations with shareholders and investors The Group thanks its shareholders and all others, in particular journalists and analysts, for their interest they continue to express in Solvay. 10.1. The Solvay share in 2006
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After rising strongly by +16% in 2005, the Solvay share price rose by another 25% in 2006. This positive evolution demonstrates strong investor interest in the Group’s activities and the successful implementation of its strategy. It also reflects the excellent results posted during 2006. The highest price was EUR 116.2 (December 29, 2006), compared to EUR 104.1 in 2005, setting a new record for the Solvay share. The average price was EUR 95.7
EUR 120
Share Price
answer their questions and to explain short and long-term developments at the Group to them, with appropriate regard for the equal treatment of all shareholders. The Group’s communication policy is to disseminate, as soon as reasonably possible, information that is of material interest for the market in the form of press releases and/or press conferences.
(EUR 90.3 in 2005). The lowest price was EUR 83.1 (June 13, 2006) as against EUR 79.95 in 2005. Average daily trading volumes also increased in 2006 to 181 000 shares compared with 170 000 shares in 2005. The graph above shows that the Solvay share price, after trailing markets at the start of the year, ended the year outperforming the Euronext 100 (+19 %), and Stoxx 50 (+10 %). This outperformance has continued into the start of 2007.
Solvay S.A. Investor Relations Rue du Prince Albert, 33 B-1050 Brussels (Belgium) Telephone: +32 2 509 60 16 Telefax: +32 2 509 72 40 also by e-mail: investor.relations@ solvay.com
The Solvay share price can be consulted directly on 2 internet sites: > www.solvay-investors.com > www.euronext.com 10.2. Active financial communication Throughout the year the Investor Relations Team is ready to meet individual and institutional shareholders and investors, to
from 01/01/2006 to 31/12/2006 Solvay
25 %
Euronext 100
19 %
Stoxx 50
10 %
Volume
115 110
800000
105
700000
100
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95
500000
90
400000
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70
0
J
Solvay Global Annual Report 2006
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Corporate Governance
The Solvay share compared with the indexes (2006) 120 116
Solvay
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108 104
Stoxx 50
100 96 92 88 84 80
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137 A dedicated Internet site, www.solvay-investors.com, has been established to provide shareholders and investors with useful information and documentation and Group financial and strategic information. On this site, one can also join a Shareholders’ and Investors’ Club in order to receive e-mail notification of the publication of most of this information. For addition information on ADRs, a telephone hotline is also available at 1-800-428-4237 (from the USA and Canada) or 1-781-575-4328 (from other countries). 10.3. Flow of financial information In 2006, the Belgian Financial Analysts’ Association hailed the continuous improvements in the flow of financial and strategic information, the publication of quarterly results, the adopting of the International Financial Reporting Standards, an increasingly appreciated internet site and a proactive Investor Relations service. In particular, portfolio managers ranked Solvay among the best for quality of relations with management and for the consistency and pertinence of information provided.
10.4. Shareholders’ Clubs and Individual Investors For many years the Group has maintained very close relations with clubs of individual investors both by taking part in fairs and conferences and by providing regular information on the life of the Group (press releases, the annual report, etc.) on request. In 2006, the Solvay group actively continued its meetings with individual investors. To give examples: In March 2006, Mr. Aloïs Michielsen and some of his Executive Committee colleagues met with over 250 readers of CASH magazine, including members of investor clubs from the Investa and VFBB (Flemish Association of Investors and Investors Clubs) federations. The “Journée de l’action”, also in March, and the “Finance Avenue” in October were further opportunities to meet Solvay management: • In April 2006, Solvay was present at the ‘Investors’ Happening’ organized in Antwerp by the VFBB, which every year brings together more than 1 000 participants, and during which Mr. Aloïs Michielsen presented the latest strategic developments at Solvay.
• In September, Mr. Christian Jourquin, the Chairman of the Executive Committee since May 2006, presented his vision of the future during a ‘Trends Lunchtime Meeting’. • Solvay also took part in meetings of Euronext Brussels, the most recent of which was held at Essene in Belgium. 10.5. Roadshows and meetings for professionals In 2006 over 400 contacts were established at meetings and events organized in Europe (Brussels, London, Paris, Frankfurt, Geneva, Zurich, Milan, etc.), the United States (New-York, Boston) and Canada. The annual analysts’ meeting in October, which is also open to the financial press, was attended by over 50 analysts and investors from nine European countries and the USA. The visit, coupled with a visit to the brand new vaccines unit at the pharmaceuticals research site at Weesp, Netherlands, provided an opportunity to examine Group strategy, major changes in the activities portfolio and recent developments, and in particular the strategic directions of the Pharmaceuticals Sector for the coming years.
Solvay Global Annual Report 2006
Conference calls with management are also systematically organized, on a quarterly basis, to comment on Group results.
ANNEXE 1
AUDIT COMMITTEE “Mission Statement” 1. Members
10.6. A specific internet site
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A dedicated internet site, www.solvay-investors.com, provides shareholders and investors with the latest published financial and strategic information from the Group. The site informs investors and shareholders of many valuable services, such as the financial servicing department. It also provides useful contacts with chemicals and pharmaceutical analysts who track the Group on a regular basis. Surfers can also join a Shareholders’ and Investors’ Club in order to receive e-mail notification in three languages (French, Dutch, English) of the publication of information of various kinds: agendas of certain meetings, including the Annual Shareholders’ Meeting, draft wording of by-law amendments, special reports of the Board of Directors, publication of the annual report, unconsolidated parent company accounts, payment of dividends, etc. 10.7. Quarterly earnings publication Out of a desire to provide ever more finely tuned and regular communication, the Group began in 2003 to publish quarterly results in accordance with International Financial Reporting Standards (IFRS).
Solvay Global Annual Report 2006
The Audit Committee consists of a Chairman and at least two members, all three of whom are non-executive directors and at least two of whom are independent directors. 2. Guests The Audit Committee generally invites the following persons to report to its meetings: a) the Group’s chief financial officer; b) the head of the internal audit department; c) a representative of the Group’s statutory auditor. 3. Frequency of meetings The Audit Committee meets at least four times a year prior to the publication of the annual, half-yearly and quarterly results. Additional meetings may be organized to discuss and agree on the scope of audit plans and on audit costs, and to discuss other important financial questions. 4. Main tasks of the Audit Committee a) The Audit Committee ensures that the annual report and accounts, the periodic financial statements and all other important financial communications by the Group conform to generally accepted accounting principles (IFRS for the Group, Belgian accounting law for the parent company). These documents should provide a fair and relevant view of the business of the Group and of the parent company and meet all legal and stock market requirements. b) The Audit Committee regularly examines the accounting strategies and practices that are applied in preparing the Group’s
financial reports, making sure that these conform to good practices and meet the requirements of the appropriate accounting standards. c) The Audit Committee regularly examines the scope of the external audit and the way it is implemented across the Group. The Audit Committee studies the recommendations of the external audit and the auditor’s report to the Board of Directors. d) The Audit Committee monitors the effectiveness of the Group’s internal control systems, and in particular the financial, operational and standards controls, along with risk management. The Audit Committee also satisfies itself that the electronic data processing systems used to generate financial data meet the required standards. The Audit Committee ensures that these systems meet legal requirements. e) In respect of the internal audit, the Audit Committee verifies the scope/programs/results of the work of the internal audit department and makes sure that the internal audit organization has the necessary resources. The Audit Committee checks that internal audit recommendations are properly followed up. f) The Audit Committee examines the appointment of the Statutory Auditors and assesses the appropriateness of their fees. In consultation with the chief financial officer, the Audit Committee participates in the choice of head of the internal audit department. g) The Audit Committee examines areas of risk that can potentially have a material effect on the Group’s financial situation. These include, for example, the foreign exchange risk, major legal disputes, environmental questions, product liability issues, etc. During such examination, the Audit Committee examines the procedures in place to identify these major risks and to quantify their potential impact on the Group and the way the
Corporate Governance
control systems work. 5. Minutes As a sub-committee of the Group’s Board of Directors, the Audit Committee prepares minutes of each of its meetings and submits them to the Board.
responsibilities; • maintain and further strengthen the performance culture of the Group by linking compensation directly to the fulfilment of demanding individual and collective performance targets. The structure and level of the General Managers’ total compensation (fixed and variable) is reviewed annually.
ANNEXE 2
COMPENSATION POLICY FOR GENERAL MANAGERS In general This compensation policy applies to Solvay’s General Managers, i.e. the CEO, the members of the Executive Committee and the General Managers and members of the Office of the Comex. General Managers’ compensation is set by the Board of Directors based on the recommendations of the Compensation and Appointments Committee. The guiding principles of Solvay’s compensation policy for its General Managers can be summarized as follows: • ensure overall competitive compensation opportunities which will enable Solvay to attract, retain, motivate and reward executives of the highest calibre essential to the successful leadership and effective management of a global chemical and pharmaceutical company; • focus executives’ attention on critical success factors for the business that are aligned with the company’s interests in the short, medium and long term; • encourage executives to act as members of a strong management team, sharing in the overall success of the Group, while still assuming individual roles and
Compensation reflects overall responsibility as well as individual experience and performance. It takes into account relevant competitive practice considering the nature and level of the position as well as specific characteristics of the business sectors in which Solvay operates. Other factors which are deemed relevant, such as fairness and balance within the company, are also taken into consideration. To assess relevant competitive practice, Solvay considers a blend of some 20 leading European chemical and pharmaceutical companies as its frame of reference, taking into consideration Solvay’s relative size in terms of sales revenues and headcount vis-à-vis these companies.
quartile level of the market in case of outstanding collective and individual performances. Elements of Compensation The compensation of the General Managers comprises base salary, annual incentives (i.e. performance related cash bonuses) and longterm incentives, which constitute the General Managers’ total direct compensation. General Managers also enjoy other benefits such as, in essence, retirement, death, disability and medical benefits. Performance- based and, hence, variable pay represents at a minimum close to 50% of the General Managers’ total direct compensation.
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Base salary Base salary is reviewed - but not necessarily changed - on an annual basis. This review assesses current levels against median levels of the reference market taking into account the responsibilities and scope of the position of the General Manager, as well as individual competencies, relevant professional experience, potential for future development and sustained performance over time. Annual incentives
The composition of this group will be reviewed on a periodic basis to assure that it continues to reflect the company’s strategic orientation. For executives with a non-European home country and who are based outside Europe, the home country practice (ideally weighted towards the chemical and pharmaceutical sectors) constitutes the reference. For external market data, the services of internationally recognized compensation consultants are retained. Solvay’s objective is to provide total compensation levels which are at or around the median of the retained reference market for normal performance and close to the upper
The target incentive levels related to the full achievement of aIl pre-set performance objectives range from 50% to 100% of the base salary depending upon the position in the (Office of the) Comex. These percentages have been determined taking into consideration median target bonus levels observed in the retained reference market and Solvay’s policy regarding the target compensation mix and competitive positioning. Generally speaking, Solvay aims at offering, on average, base salary plus annual incentive opportunities close to the median levels observed in the reference market.
Solvay Global Annual Report 2006
The actual annual bonus amount varies according to the performance of the Solvay group, its various sectors and the individual General Managers’ performances. The actual bonus ranges from zero (in case of truly poor performances) up to 150% of the amount corresponding to normal performance in case of outstanding achievements. The overall business performance is measured in terms of ROE (return on equity); the individual performance is measured against a set of predetermined region/business-sector/ function goals as well as other executive-specific critical objectives approved by the Board of Directors. Long-term incentives The long-term incentive is delivered through periodic grants of stock options.
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Each year, the Board of Directors, upon the recommendation of the Compensation and Appointments Committee, sets the number of stock options that are granted respectively to the Chairman of the Executive Committee, the members of the Executive Committee and the other members of the Office of the Comex. In determining the actual number of options to be granted to each group of General Managers, the Board is guided by prevailing long-term incentive levels and practices in the reference market. The options’ strike price is equal to the average closing price of the Solvay share on Euronext Brussels during the 30 days preceding the start of the offer. The options expire eight years after the date of grant. They vest as from the first day of the year following the third anniversary of the grant and can be exercised during specified “open periods”.
Solvay Global Annual Report 2006
Other benefits The General Managers are entitled to retirement, death and disability benefits, as a rule, on the basis of the provisions of the plans applicable in their home country. Other benefits, such as medical care and company cars or car allowances, are also provided according to the rules applicable in the host country. The nature and magnitude of these other benefits are largely in line with the median market practice. The retained reference market is, as a rule, a blend of some 20 leading Belgian companies and Belgian subsidiaries of foreign-owned organisations generally considered as attractive employers by national and international executive talent and for which the representative benefit practices can be regarded as sufficiently in line with prevailing European standards at executive level.
“ … I have always sought to serve science, because I love science and see it as a promise of progress for humanity.”
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Ernest Solvay, in a speech in Brussels, 14 December 1893.
Solvay Global Annual Report 2006
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Executive Committee and General Managers
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1. Aloïs Michielsen Chairman of the Executive Committee (until May 9, 2006) 2. Christian Jourquin – General Manager of the Chemicals Sector (until April 30, 2006) Chairman of the Executive Committee (from May 9, 2006) 3. Bernard de Laguiche – General Manager for Finance (from March 1, 2006) Member of the Executive Committee 4. René Degrève – General Manager for Finance (until February 28, 2006) – General Manager NAFTA (from April 1, 2006) Member of the Executive Committee 5. Luigi Belli – General Manager for Research & Technology (until August 31, 2007) Member of the Executive Committee 6. Jacques van Rijckevorsel – General Manager of the Plastics Sector Member of the Executive Committee 7. Werner Cautreels – General Manager of the Pharmaceuticals Sector Member of the Executive Committee 8. Vincent De Cuyper – General Manager of the Chemicals Sector (from May 1, 2006) – Member of the Executive Committee 9. Jean-Michel Mesland – General Manager for Research & Technology (from September 1, 2007) – Member of the Executive Committee
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10. Jacques Lévy-Morelle General Counsel (until December 31, 2006) and Corporate Secretary 11. Marc Duhem Regional Manager Europe 12. Christian De Sloover Regional Manager Asia Pacific 13. Daniel Broens General Manager for Human Resources 14. David Birney General Manager NAFTA (until March 31, 2006) 15. Paulo Schirch Regional Manager Mercosur 16. Dominique Dussard General Counsel (from January 1, 2007) 3
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Solvay Global Annual Report 2006
Shareholders’ diary – May 8, 2007 : announcement of three months 2007 earnings (at 13.00) and Annual and Extraordinary Shareholders’ Meetings (at 14.00)a – May 15, 2007 : payment of the balance of the 2006 dividend (coupon no. 80) – July 27, 2007 : announcement of six months 2007 earnings (at 07.30) – October 26, 2007 : announcement of nine months 2007 earnings and the interim dividend for 2007 (payable in January 2008, coupon no. 81) (at 07.30) – Mid-February 2008 : announcement of annual earnings for 2007 (at 07.30)
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