Speech by Mr. Aloïs MICHIELSEN, Chairman of the Executive Committee
Ladies and Gentlemen,
In the face of the enormous challenges and opportunities of the new economy, Solvay is in action.
Throughout its organization and around the globe, Solvay is mobilized to prepare -- and anticipate -- the changes guiding its markets today. A great number of projects were carried out in 1999 to accelerate the Group's growth through increased competitiveness and greater innovation. Here are the early results.
Excellent progress and new record for earnings before extraordinary items and for competitiveness
The Solvay Group completed 1999 with very good net earnings before extraordinary items of EUR 423 million, up 12%, growth higher than our yearly average target of 10%. After a very difficult start in 1999, with a decrease from 1998, earnings before extraordinary items increased by more than 40% in the second half.
Net earnings were also EUR 423 million, continuing their uninterrupted growth since 1993, an indication of the reduction of the effect of cyclical factors on our earning capacity.
The consistent growth in EBIT per employee shows the impressive improvement in competitiveness since 1991. EBIT reached nearly 20,000 /person in 1999 up from EUR 9,000 in 1991.
Ambitious investment and research projects, thanks to a solid and healthy financial structure
In 1999, the Group's investments jumped by nearly 44% compared with 1998, a year which had witnessed great economic uncertainty worldwide. For 2000, the investment budget should reach about EUR 1,050 million - that is a 14% increase. The budget devoted to R&D also grew significantly in 1999, to EUR 345 million, or +18%.
In phase with its strategy for growth in the pharmaceuticals sector, Solvay in 1999 dedicated about 40% of its investment and research budget to development of its pharmaceuticals sector - that is a doubling compared with 1997.
This proactive policy of growth by innovation is possible because the Solvay Group has succeeded in mobilizing its people in development projects. Also the Group enjoys a very solid financial structure. Net indebtedness was 26% of total equity at the end of 1999 (compared to 17% at the end of 1998), a level which, despite the ambitious investment program, is still very moderate. Since equity again increased in 1999, due in particular to a strong dollar against the Euro, Return on Equity remained stable at 11.5%, below our goal of 15%, despite the increase in net earnings.
Growth in earnings in 1999 in Pharmaceuticals, Chemicals and Processing, and many strategic measures taken in Plastics
Let us move to an overview of the performance and trends in each of our sectors, starting with Pharmaceuticals, which in 1999 generated nearly a quarter of the Group's earnings.
PHARMACEUTICALS SECTOR
In 5 years, pharmaceuticals sales have increased by nearly 70%, while earnings during this same period have more than doubled.
With pharmaceuticals sales and earnings up by 16%, 1999 was a year rich in decisions and strategic opportunities that should, after a period of consolidation, enable continued future growth. As already indicated last year to the General Shareholders Meeting, we are continuing a strategy based on four elements:
First of all, strong growth in our existing drugs, such as hormone replacement therapies, whose sales increased 24% in 1999, or the antidepressant Luvox® (+22%).
Next, external growth through alliances and acquisitions of products or companies. Thus 1999 witnessed successive closings on acquisitions of two antihypertensive products, Teveten® and Aceon®. We also acquired Unimed, a Chicago-based company, bringing in new products in the hormone field. Thanks to Unimed, significant commercial development is planned for the second half of this year, with launch of AndroGel®, recently approved by the US Food and Drug Administration as the first gel designed for deficiency in testosterone linked to andropause. Another bright spot is the marketing alliance with Duramed, which also specializes in the hormone-replacement sector in the USA; we also acquired 11% of this company.
Research constitutes the third growth factor, with new products designed to be marketed in the next three years, such as Luvox® CR, Teveten® in combination with a diuretic, Estrogel®, Cilansetron and Tedisamil, these latter two drugs designed respectively for colon treatment and cardiology.
To support the internal and external growth factors, we significantly increased our worldwide sales force in 1999. In the USA, the number of medical representatives doubled and in Japan, we have, with our partners, a sales team of 1700 representatives. In all 5,540 people sell our products throughout the world.
Four major drug launches took place in the second half of 1999. Over the next three years, these products should represent additional sales of nearly EUR 600 M. This essential move for the future of our pharmaceuticals sector requires considerable marketing expenses. Thus, commercial costs increased by 20% in 1999 and will increase even more in 2000, with effects on the sector's results.
CHEMICALS SECTOR
We move now to our other activities, which have also witnessed significant change and progress in 1999.
Chemicals recorded a substantial increase in earnings in 1999: +9% on fairly stable sales(-1%).
We noted weakness in soda ash in Europe and Asia due to low-priced competition from Eastern European countries and China. However, we saw a significant improvement in earnings in hydrogen peroxide and double-digit growth in fluorinated products.
The Chemical portfolio of the Group is very diversified today, with high-volume products such as soda ash, barium-strontium and hydrogen peroxide - in which the Group enjoys worldwide leadership, technological advantages and a competitive edge - as well as specialty products such as fluorides, which are benefiting from strong growth and have become one of the three major sources of earnings in the Chemicals sector of the Group. Other products such as salt and chlorine products are currently being restructured to increase their competitiveness and adapt their production capacities to current market needs.
PLASTICS SECTOR
Despite an 8% increase in sales, 1999 was a year of strong contrasts for this sector. Earnings for Plastics were slightly down on a yearly basis (-2%) but up by nearly 70% in the second half of the year.
After a very difficult start in 1999, the second half of the year was excellent for PVC, a trend which has continued so far in 2000. The year 1999 was also very difficult for Solvay Indupa, especially in Argentina, due to the weakness of the Brazilian Real and the site's inadequate size - a handicap which has been eliminated in the past few months.
Major initiatives were taken to reinforce our competitiveness in PVC. These initiatives are paying off. Within the space of 18 months, a very aggressive policy of alliances, cost reduction, synergies and expansions in strong-growth markets were put into place. Thus we saw:
The creation of SOLVIN, a joint venture which is operational today and includes all the European PVC units of Solvay and BASF (other than in Spain).
Production agreements with TotalFinaElf at the SOLVAY site in Spain.
Acquisition by Solvay, with TotalFinaElf of SHELL's very competitive VCM and PVC activities in France
Start-up at the end of 1999 of new and higher-performance units in Argentina at Solvay Indupa, which should lead to appreciable improvement in earnings,
For polyolefins, a strong policy of specialties in Europe, vigorous demand and reduced costs allowed us to maintain 1999 HDPE earnings at a satisfactory level despite the large hike in ethylene prices. A construction and operating agreement for two HDPE production units in the USA was signed with Chevron Phillips. This project follows the cooperation agreements already signed in 1998 with TotalFinaElf and will contribute greatly to improved competitiveness for the Group. The remarkable growth in Specialty Polymers continued in 1999, reinforced by start-up of new units in the USA.
PROCESSING SECTOR
Despite the price hikes in plastics during the second half of 1999, the processing sector earnings were up 11% on a 4% increase in sales. This very positive evolution reflects a policy of concentration on high-added-value activities and strong growth in areas such as automotive, pipes and fittings, and medical applications. The success of our fuel systems business was again confirmed in Europs well as in the USA, and six new units or acquisitions were approved to follow our customers into Central Europe, Asia and Latin America. The joint venture with the French group Plastic Omnium announced in early 2000 has been concluded subject to approval by competition authorities. This joint venture, located in 16 countries with 30 plants, will be the world leader in fuel systems and will improve even further our prospects for profitable growth in a highly competitive and extremely demanding market. New acquisitions and expansions were also completed in the pipe and industrial films markets, in particular with acquisition in the USA of Jet Stream, an Arkansas manufacturer of PVC pipes, and Ellay, a California company specializing in films for medical use. These are the first Group operations in the USA in these two markets. In central Europe, our investments are continuing, as illustrated by the Pannon Aldra joint venture in Hungary.
Strategy and reinforcement of our portfolio of activities
Our strategy leads to very significant changes in the Group's portfolio of activities. Today, combining leadership in its markets and constant pressure to reinforce its competitiveness and its capacity for innovation, Solvay has carved out a position as an expert in a number of markets requiring high-tech materials and specialties, which increase our earning ability.
In 1999, the EBIT of the pharmaceuticals activities, specialties and "advanced materials" represented 80% of the Group's total EBIT.
Expertise and leadership in our markets
It is essential for a group such as ours to concentrate on activities where our know-how will enable us to make progress and reinvent ourselves.
That is why we concentrate on the areas of the Group's greatest competence:
In Pharmaceuticals, niches such as gastroenterology, hormone replacement therapies, mental health and more recently cardiology.
In Chemicals, alkalis, fluorine products and hydrogen peroxide, for which we continue to see new end uses.
In high-performance polymers, where our downstream activities in the demanding automotive, medical products, telecommunications, construction and engineering markets makes us a recognized leader.
In processing, niches such as fuel systems, pipes, medical films and waterproofing films.
Our goal is to acquire worldwide leadership in these areas of competence.
Innovation, dynamism and confidence
Behind all these projects for the Group's future, there are men and women who, utilizing the resources put at their disposal, are working to discover new avenues of innovation in all of our activities. This commitment was especially encouraged at the beginning of the year 2000 through the first Innovation Trophies, awarded by Mr. J. Solvay, Mr. Y. Boël, Mr. D. Janssen and me. We are going to continue in this vein in 2001 by adding numerous possibilities opened up by e-business. I again thank all our colleagues for this enthusiasm and dynamism.
Underlying these projects there is also the confidence of our shareholders, whether they are institutions, family members or individuals. Compared to the troubles felt by other groups which today have been dismantled and sometimes destroyed, I can only thank our shareholders who have understood the value of strategy over short-term goals.
Sustainable development
A support and framework for all of our actions is the Group's determination to be a responsible enterprise and ensure its future in line with its fundamental values:
Respect for individuals, both among our employees and in the communities that surround us
Our industrial vocation based on research and technologies.
Development of our areas of competence, which, in this time of e-business, more than ever determine the Group's leadership in its markets.
We invite you to become familiar with our recent document titled "Our Role in a Changing World," which assesses the significant contribution the Group has made to the fundamental development and well-being of humankind in areas such as potable water, safe and well-insulated housing, environmentally efficient transportation, food preservation, health and telecommunications,…
E-business and extranets: new growth opportunities
What are our areas of competence worth when compared to values- sometimes virtual-- of the new economy and e-business? Certainly, as 1999 showed, very real earnings, cash flows and dividends which the stock market progressively seems to appreciate.
Nonetheless we are also making e-business an opportunity for our products and a means to accelerate the discovery of new end uses. Some Solvay activities have already broken into electronic commerce, such as fuel systems, where Solvay companies communicate with their customers through electronic channels. In the Pharmaceuticals sector, Solvay is developing extranets designed for doctors and hospitals, in order to assist practitioners at all levels. The SOLVAY Group has also bought raw materials on the Internet and has purchased electricity over the Web. We are adapting to a new way of serving our customers, getting into a system of transactions specific to the Web. For that, Solvay is developing commercial sites and portals, alone or in collaboration with partners.
PERSPECTIVES
What are the prospects for the year 2000? Today we are benefiting from a favorable world economy, which, if it holds throughout the year, will strengthen the earnings expected from all the strategic initiatives put into place by the Group. The year 2000 has begun well -- much better than 1999 -- in particular due to the remarkable performance of Plastics, boosted by PVC. Again this year, these products will give us the means to develop in the pharmaceuticals sector and to invest more in marketing of the newly launched products.
Ladies and Gentlemen, in this period of constant pressure to change, I think I can say to you that we are doing everything to adapt. We are continuing our efforts because we know that we must be worthy of your confidence.
In conclusion, let me once more thank all of our colleagues around the globe for their participation in efforts and changes which are often quite difficult.
