Speech by Baron Daniel Janssen
Chairman of the Board of Directors
"Solvay: a pro-active enterprise, confident in its future"
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Ladies and Gentlemen,
Let me first of all welcome you all to this General Meeting. The fact that so many of you are here today is an encouraging sign of your confidence and interest in our Group.
The world in 2003 and at the start of 2004
Throughout 2003 and during the first half of 2004 the fate of the world has remained hinged on events originating in the Middle East, but which affect the entire globe.
The fall of the Baghdad regime and the arrest of the dictator on December 13, 2003 have failed to restore stability to the country or to stamp out the terrorism which continues to perpetrate attacks like the ones which took place in Madrid on March 11, 2004 and, I would add now, in Saudi Arabia on May 1 and May 30.
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All this is, unfortunately, synonymous with enormous human suffering, uncertainty and imbalances which have affected people’s behaviour, with a knock-on effect on the world economy.
Oil prices, and energy prices in general, rose throughout 2003 and even more so during the first months of 2004. At the same time the euro has strengthened against the dollar and the currencies linked to it, from an average of USD 0.9453 in 2002 to an average of 1.1306 in 2003. As Mr Michielsen will have occasion to explain to you during this General Meeting, these latter two factors strongly impacted our 2003 earnings results.
Let us examine first of all the situation on the three continents in which we are present.
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Europe which is going nowhere in particular
Let us take first Europe, where we do two-thirds of our business. Since May 1, 10 Eastern European countries have joined the European Union, making us today 25 countries and 450 million inhabitants.
All the ingredients for success would appear to be there: a very rich cultural, scientific and technical history, more than half a century of political stability and peace, a single currency, and an ambition to succeed together in a democratic fashion. 2004 should in principle be a year to be enthusiastic about, with 25 countries, a new European Commission, a new Parliament and a new Constitution.
It is not. Straightjacketed by its complexity, its slowness and its sterilizing regulatory frameworks, Europe is going nowhere in particular. Will our European Union manage to gain a new grip on itself in 2004? It is vital that it should. Let us work to achieve this. Europe also needs a good industrial policy. Every professional organisation is saying so. Will our voice be heard one day?
Regained vitality in the Americas
The Americas, where we do 30% of our business, are regaining their vitality.
The performance gap between the Old Continent and the United States is becoming increasingly evident. Once again the USA is out front, way ahead of Europe.
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This strong recovery has been fuelled by very flexible monetary policy, with historically low interest rates. Consumers appear to have regained confidence, with the economy showing real signs of revival. This is also having a positive knock-on effect on Latin America, Brazil and Argentina.
The United States remains the main market for Solvay’s pharmaceutical products, with our sales up 15% in local currency. Our recent Pharmaceuticals agreements, in particular with Wyeth, are concrete demonstration of our desire to very significantly increase our presence on this market.
Asia’s “exploding” economy
Asia is right now in a state of economic overheating. Of course, there is China, which is rightly in everyone’s mouth, with its superb growth of over 8% a year. This remarkable dynamism is sucking in - and overpaying for - all the world’s available financial, energy, transportation and raw materials resources. The Chinese government, once again demonstrating its economic lucidity and efficacy, is seeking to cool down this excessive economic overheating to produce a “soft” rather than a “hard” landing. China is also dragging the whole of South-East Asia in its wake, along with raw materials and freight transportation prices worldwide.
Solvay has a commercial presence in many of these Asian countries. But the 7% of our business we do in these countries is not enough. Our manufacturing presence there is excellent, but is limited.
Which is why we attach great importance to the agreement we recently concluded with Sinopec, in the carbonates area, in China.
2003 was also a year of contrasts, during which the three manufacturing continents fared very differently. Fortunately we are present on all three of them, in a manner optimally adapted to the local situations.
This, very briefly, is the macroeconomic situation as we see it.
A pro-active enterprise, confident in its future
Faced with this recovering world economy our Group has, with its solid system of values, its realistic vision, its effective strategy and its ability to anticipate, been able to meet the expectations of all its partners, thanks to the constant, faithful support of stable shareholders, who are more concerned with long-term growth.
We are confident in our ability to successfully meet tomorrow’s challenges.
Do we have the resources to do so ? Yes, thanks to our scientific and technical development. Our pharmaceutical research, with its well-filled and balanced pipeline, makes Solvay an attractive enterprise, enabling us to conclude agreements at prime conditions with the very largest (as we have just done with Wyeth and with Bristol-Myers Squibb). The same applies to our special polymers, carbonates, peroxides and fuel systems technologies, in which our leadership is undisputed.
Financial performance of the Solvay Group
Let me remind you of our financial objectives.
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Our objectives are ambitious, but we believe in them. Year by year, we come closer to them, steering a constant course, even in the difficult economic climate of 2003. Our very first objective is to increase our net profit by at least 10% a year.
Over the past ten years, we have reached a figure of 9%. This is a good performance.
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Our second objective is an ROE (return on equity) of 15%. Our ROE of 12.3% in 2003 puts us well on the road to this goal.
The behaviour of and return on Solvay shares:
During 2003 Solvay’s share price developed in seesaw market. The year began with a general weakening of stock markets, reflecting the concern generated by the US invasion of Iraq on 20 March 2003. After a relative recovery in the 2nd quarter, prices again slipped across the board in the 3rd quarter. Only at the end of 2003 did prices gradually return to where they started the year, going on to recover further at the start of 2004.
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Over the past two years, the Solvay share has continued to outperform the MSCI Chemicals and Pharmaceuticals reference indexes.
The good long-term performance of the Solvay share is due to the strategy we are implementing and the confidence generated by the developments of our Pharmaceuticals Sector and our Specialties, by the competitiveness of our Essentials and by our stronger leadership in all our activities.
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In 2003, the return on the Solvay share, that is the sum of the dividend yield (2.7%) and the growth in the share price (4.6%), amounted to 7.3%.
During the last ten years, from 1994 to 2003, the Solvay share has provided a total average return of 9 % a year.
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As for our dividend, our policy is to increase it whenever possible and, if possible, never to reduce it. The Board therefore proposes, for 2003, to keep it unchanged at EUR 1.80 a share.
Corporate Governance and re-elections of directors
Our Corporate Governance rules are set out in our annual report. These ensure that our company operates in a transparent manner, and guarantee the independence and the competence of our Board.
Since 2001 we have decided to extend this transparency to the remuneration policy applied collectively to board members on the one hand and to Executive Committee members on the other.
The terms of office of our Board Members René Degrève, Jürgen Ernst, Jean van Zeebroeck and myself end with this meeting. Each of us is standing for re-election.
In our rapidly changing world, and in two industries -chemicals and pharmaceuticals – that are in the throes of restructuring, you need to know that both your Board and your excellent Executive Committee are working intensely on the strategic choices and the projects for the future. Periods of major changes undoubtedly are times of risks. They are also, and in particular, times of opportunity.
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On behalf of the Board of Directors, let me end by thanking all our Solvay Group employees, who have carried out so many major changes within a relatively short period of time.
Thank you for your attention. I now hand over the platform to Mr Michielsen, the quality of whose strategic vision and whose effectiveness in the day-to-day management of your company I am happy to underscore.
oOOo
Speech by Mr. Aloïs Michielsen
Chairman of the Executive Committee
LOOKING TO THE FUTURE WITH CONFIDENCE
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1. INTRODUCTION
Ladies and Gentlemen,
Let me in turn thank you for attending our General Shareholders’ Meeting which, once again, will allow us to present to you the situation of our company and have a constructive dialogue with you on the present and the future of our Group.
2003: a difficult year
It is a fact that the acts of violence and the uncertainties of 2003 have added a degree of volatility to many elements that are vital for the economy: This is true for the parity of the EUR with the USD and the currencies linked to it, particularly the Chinese Yuan (CNY). It is equally true for the prices of oil, gas and coke, which are key raw materials for the Group's activities. At the same time, the gap in economic vitality between Europe and the United States continues to widen to the detriment of Europe, where growth was practically zero, and where, as you know, we still do the greater part of our business.
In this difficult context, the Group has stood its ground, with earnings down just 13% on the record level of 2002.
Let us now look together at the key figures for 2003, which are submitted for your approval.
2. 2003 RESULTS
Slide 1
Sales for 2003 reached EUR 7.56 million. The 5% fall compared with 2002 is due mainly to the negative effect of a very strong euro and the lack of growth in Europe. At constant exchange rates, our sales would have risen.
Let us look at our gross margin. This is down, on average, a little more than our sales. Rising gas prices in the USA have increased certain incoming costs which we have been unable to pass on in our sales prices.
The same applies to the significant hike in pension costs, insurance premiums and transport costs. This explains why REBIT, that is earnings before extraordinary items, financial charges and taxes, is down 20% at EUR 673 million. Despite these constraints, the REBIT / Sales figure remains at a very acceptable level of nearly 9%.
Cash flow was EUR 859 million, down 18% on 2002. This, in conjunction with rigorous selection of investment expenses, has enabled us to honour all our Group commitments and even improve, as we will see, our already very healthy financial situation.
Finally, thanks to a one-off lowering of the tax rate, net current income comes out at EUR 430 million, down just 13% on the record figure we posted in 2002.
I would like to use this occasion to thank once again all Group employees who, in this difficult context, have given the best of themselves to achieve what I would call this very honourable result.
3. BALANCE SHEET ITEMS
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Our income statement is accompanied by a very encouraging balance sheet:
we lowered net Group indebtedness, between 2002 and 2003 by some EUR 198 million, to stand at EUR 1,120 million.
consolidated shareholders’ equity fell by EUR 32 million between 2002 and 2003, due essentially to the impact of exchange rate variations.
the net debt to equity ratio stood at 32% at the end of the year, down from 37% a year before.
ROE came out at 12.3%, against 13.9% in 2002. This is a good performance in the context and is in line with our objective of 15%.
EMTN
The Solvay Group’s good ratings with the specialist agencies allowed it to raise EUR 800 million under the European Medium Term Notes (EMTN) programme at historically low rates.
To round off this look at our figures, without going into the details that you can find in the annual report, let me comment briefly on each of our four Sectors.
4. THE CHEMICALS SECTOR: the importance of China
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Maintaining market shares and volumes in the Chemicals Sector against a background of the strong EUR and overcapacity dragged down our earnings by 25% in 2003.
Our carbonates were hard hit by rising energy prices, American imports into Europe and Chinese exports on Asian markets previously supplied from other sources.
China is now the world’s leading consumer and producer of soda ash. Which is why the agreement Solvay has just signed with SINOPEC, a solid partner listed on international financial markets, is so important to us, giving us a stake in a modern, high performance soda works in China.
In the Chemicals Sector, I would also point to the success of our H2O2 business and to the difficult year we had in NaOH with falling prices and declining sales of fluorinated gases owing to the late start-up of a new production unit at Tavaux.
5. PLASTICS SECTOR: Specialty Polymers
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Earnings in the Plastics Sector fell owing to a bad year for the vinylic chain in Europe. This area has, however, begun to recover in recent months.
In turn, our Specialty Polymers, which are aimed at high tech markets, have been affected by the sluggishness of key sectors like the automotive, aircraft and microelectronics industries. These markets too have been begun to pick up since the end of 2003, and initial 2004 figures confirm the upturn. Specialty Polymers are a major contributor to Group earnings and provide both stability and innovation, as this market is cyclical in terms of volumes only, unlike Essentials, where volumes and prices both evolve simultaneously.
This activity is also a major source of innovation, with a very large number of new Specialty Polymers applications currently under study.
6. PROCESSING SECTOR : Innovation and Competitiveness in fuel systems
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Inergy Automotive Systems, the world's leading producer of fuel systems, last year manufactured 11.8 million units in 28 plants. Our Joint Venture has increased its market share with new platforms in Japan and new models, in particular in the USA.
Permanent innovation enabled Inergy to strengthen its leadership in 2003. Let me mention here the PZEV (Partial Zero Emission Vehicle) system, right now the best-performing system anywhere in the world, which has won us major contracts with US and Japanese manufacturers.
Pipelife in the pipes area and Industrial Foils also posted lower earnings in 2003 than in 2002. Both areas, however, strengthened their market positions, and both have picked up strongly since the start of this year.
7. PHARMACEUTICALS SECTOR: dynamic research activity
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Pharmaceuticals Sector sales declined by 2%. At constant exchange rates they would have increased by 6%. Our sales to the USA grew by 15% in USD, notwithstanding a 24% drop in Estratest sales. Constructive discussions continue with the FDA on the status of this product. In our press releases we have mentioned law suits in the HRT area in the United States. At this stage, this litigation is “progressing favourably”.
It also remains an established fact that short-term hormone treatments present a positive risk/benefit relationship for many patients suffering the effects of menopause. This market should therefore gradually return to growth.
REBIT, at EUR 243 million, was down 8% on 2003. At constant exchange rates it would have risen by 2%.
Our Pharma research pipeline, with around thirty molecules at the development stage, is also very promising for the longer term future.
In 2003 and early 2004 our R & D and marketing efforts have produced concrete results. Let me mention here the agreement we recently signed with Wyeth Pharmaceuticals to co-develop and co-market mental health drugs, including bifeprunox, a compound developed by our own Research. This new agreement enables us to announce today peak sales for bifeprunox, in excess of USD 1 billion. This agreement will also enable us to accelerate development of this compound from 2004 onwards.
Let me also mention the filing of the registration dossier for cilansetron in the UK, to be followed soon by the USA, the geographical expansion of Androgel® to Eastern European countries, South Africa and Italy, the newly signed agreements with Bristol Myers Squibb for the joint development and marketing of an anti-obesity compound and, last but not least, the registration of Estrogel® in the USA. All these developments allow us to look to the future with confidence.
8. OUR GROWTH STRATEGY
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What do we owe these results to?
To the determination with which we work, day in, day out, to apply our growth strategy.
With its two key directions of Leadership on the one hand, and of faster development in Pharmaceuticals and Specialties on the other, this growth strategy has proved its effectiveness both in economically favourable years like 2002 and in more difficult ones. In 2003 it proved its solidity, generating profits and making us financially even stronger in a profession in which many other companies are performing poorly or are even up for sale. Today, certainly EUR 30 billion of chemicals assets are looking for buyers or changing hands.
These two directions of growth rest on two pillars: COMPETITIVENESS AND INNOVATION
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Our first strategic pillar is Competitiveness.
Three elements deserve to be emphasised here:
The Executive Committee has decided that the various Group entities should study proposals to enable them, over a three-year period, to cut their principal operating costs by 20%.
We continue to restructure. This can take the form of rationalisations, sales, acquisitions or partnerships,
We have introduced a more dynamic exchange risk management system which covers us further into the future, both for transactions and for c rrency translations.
These various necessary measures demonstrate a management approach that anticipates the future. They also reflect our ambition for our industry in general and for our Group in particular: we want the European chemical industry to survive, and we want to be a major part of it.
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Another strategic pillar is innovation. It is vital for our group. At the end of 2003 we launched our three Innovation challenges for the next three years:
1/5 (20%) of our revenue should be from products, markets and applications created over the past five years.
1/2 (50%) one innovative project in two should be generated in interaction with external partners such as customers, universities or public authorities.
1/1 (100%) Every Group entity (100%) should be involved in at least one officially recognized innovative project.
This will further strengthen the thrust that we launched 7 years ago and which is now bearing its fruits. The third “Innovation Trophy” awards in 2003 recognised and honoured projects that are important for our Group. The high yield Hydrogen Peroxide project, super-low emission fuel systems (PZEV project) and the new UDEL special polymer for membrane manufacturing are just some of the outstanding projects. The advances we made in Pharmaceuticals in 2003 were all with compounds from our own research. All these developments allow us to look to the future with confidence.
9. THE QUICKENING PACE OF CHANGE
One undoubted feature of recent years is the quickening pace of change in our manufacturing and market environments.
This is the context for the recent changes in our organization.
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The Group has just made two major adjustments to its organizational structure.
First of all, in the Pharmaceuticals field, ownership of the Group’s various pharmaceutical entities will be regrouped in a new company, Solvay Pharmaceuticals, which will be held by Solvay.
Its CEO will be Mr J. Ernst, a director and a member of the Solvay Executive Committee, who heads up the Pharmaceuticals Sector until the end of December this year. After this he will be followed by Mr W. Cautreels, currently in charge of Pharma R&D, and who will succeed him as CEO and a member of the Executive Committee.
This operation is very positive for our Pharmaceuticals Sector from various aspects:
simplifying its organization and main processes. This will make it more competitive,
giving it greater autonomy. This will enable it to make better decisions concerning its future development, both internally by managing the Research pipeline, and externally by acquisitions and other growing-accelerating agreements.
better alignment of the legal (ownership) and operational (management) structures, with shorter, more efficient and less onerous decision-making and operational paths.
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The merging of our current Plastics and Processing Sectors into a single new Plastics Sector, effective 1 June 2004, is also a positive management operation:
making our Group more compact, more competitive and more efficient, and helping the effort to reduce operating costs,
giving it an industrial logic structured round the vinyl chain consisting of PVC, PVC Compounds, a substantial portion of the Pipelife pipes and fittings business, and industrial foils on the one hand, and Specialty Plastics and Fuel Systems on the other,
offering even more opportunities for innovation through the pooling of expertise from different and complementary environments.
At this point I would like to say a special word of thanks to Henri Lefèbvre, a member of the Executive Committee, who has been in charge of the Plastics Sector until the end of May and who has made a major contribution to evolving this Sector towards more specialties, in particular through the successful acquisition and integration of the BP Special Polymers and Ausimont.
This new Plastics Sector has been managed, from June 1, 2004, by Mr J. van Rijckevorsel, a member of the Executive Committee, until then in charge of the Processing Sector, and who is also the Group’s Innovation sponsor.
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What will become, you will ask me, of the Chemicals Sector, the cradle of the Solvay Group? As you will have discovered in our annual report, focusing on three major areas will enable us to concentrate even better on the three main chemical professions in which our know-how lies:
“minerals”, consisting of carbonate and derivatives, barium/strontium carbonates and Advanced Functional Minerals, in particular calcium carbonate
“halogens”, that is Electrochemistry and Fluorinated Gases
“oxygen”, including hydrogen peroxide, detergents and caprolactones.
10. BALANCE BETWEEN THE THREE SECTORS
Slide 13
Reorganized in this way, the Group confirms its vocation as a hybrid Chemicals and Pharmaceuticals company, operating in three sectors, each providing, in a balanced fashion, around 1/3 of earnings. This balance gives us confidence in the Group’s stability and in its future performance.
Reorganized in this way, our Group will continue to honour its commitments, particularly those of constant progress in health, safety and the environment.
These are formalized in our “Responsible Care” programme, which is one of the cornerstones of our response to the need for more sustainable development which can reconcile socio-economic development with the long-term sustainability of our activities.
11. finally, the Group continues its geographic diversification:
in Asia, where we are working on several projects, including a major Soda Ash investment in China;
in Central and Eastern Europe, many countries of which have now joined the European Community and where we already have a solid presence, as you can see from this slide with an impressive list of companies in these countries.
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12. RESEARCH, DEVELOPMENT AND INVESTMENTS
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In 2003, the Group invested EUR 555 million. Investment projects in each Sector were subject to a very severe selection process. R&D expenditure reached EUR 404 million, including EUR 284 million (70% of the total) in the Pharmaceuticals Sector alone.
Our 2004 investment and R&D budgets amount to EUR 620 million and EUR 466 million respectively. The Pharmaceuticals Sector will spend EUR 335 million on R&D, which is 72% of Group R&D expenditure, and up sharply from 2003. These additional expenditures are necessary for developing the compounds in our portfolio.
13. OUTLOOK
Slide 16
Talking about the outlook for the future is ever a hazardous exercise. This was true in 2003, and it is equally true in 2004.
The geopolitical situation remains unsettled, and a portion of the uncertainties which prevailed in 2003 unfortunately remain.
Everything remains highly volatile: the EUR/USD exchange rate, and oil prices, the recent historical peak prices of which do not help restore confidence.
Nor is it impossible that we will be faced in the coming months with the consequences of the bursting of a “Chinese bubble”.
Where will these various elements take us? In all, we see only moderate growth in Europe. In the USA, Mercosur and Asia, on the other hand, business is very strong.
Slide 17
Our results for the first months of 2004 have shown a steady improvement in many activities, particularly vinyls and above all in specialty polymers. In the Chemicals Sector, even if the situation is improving from one month to the next, sales prices and energy costs will be a decisive factor in the second half. Restructuring measures are continuing here.
The Pharmaceuticals Sector is entering into a transition period until the launch of its very promising new products. It remains subject to major pressures on its markets, particularly in Europe. On the other hand, earnings in this Sector are benefiting from the major financial impact of the agreements concluded with Wyeth and, more recently, with Bristol Myers Squibb.
“What then will be the outcome in 2004?
Today we forecast that our full-year results for 2004 will compare positively with those of 2003.
14. THANKS
Slide 18
Ladies and Gentlemen, it would be wrong for me to finish my presentation without thanking you, as shareholders, and you the representatives of the press, for your interest in our company.
A company that has changed profoundly in recent years and which, as you can see, is solidly prepared to face the future with confidence. Our strategy, applied with determination, has proved pertinent and robust, as our earnings results show.
The confidence we have in the future, even in a world of political uncertainty and economic slowdown, is the fruit of many things: a realistic vision, a set of solid values, our desire to place Innovation and Competition as “leitmotifs” of our strategy. To this I would add the imposing and precious store of the many competences which our Group has acquired since its foundation, in all areas linked to its business, all welded together by an enterprise culture which is shared by all.
Thank you for your attention.
