Speech by Mr. Aloïs Michielsen
Chairman of the Board of Directors
Slide 1
Ladies and Gentlemen,
Thank you for coming in such large numbers to be with us today. For our Group, the loyalty of its shareholders is both an asset and a key objective. The fact that we are now approaching our 150th anniversary we owe in large part to this loyalty. Allow me to say a special word of welcome to our Honorary Chairmen and our former directors who are here to day, and to whom we owe so much.
2007 proved a good year for the global economy in general and for Solvay in particular, despite a number of pluses and minuses.
Can we, indeed, speak of a bad year in 2007 when the world economy grew by 3.7% and Solvay published record results? Of course not. We shall also be marking this record result with a record dividend. I shall revert to this later.
Slide 2: Growth of the global economy
But let’s come back to 2007.
Last year the global economy again benefited from the manna of globalization. Growth remained strong at 3.7%, following the figures of 4.0% recorded in 2006 and 3.5% in 2005. One day, it is quite possible that economists will speak of the first years of our present millennium like we still speak of the Golden Sixties of the previous century.
This period of growth was marked by low inflation – something which is beginning to change – and by wide availability of capital from new entrants into the world of globalization, due to their high rates of savings – which has not changed. These capital amounts are so large that they are contributing to maintaining several large western banks in financial health. We can truly talk here of a change of tide between the major economic blocks. For me this is a good thing. Asia’s economic power is a reality, and we need to take it into account.
You may well tell me that these good growth figures are a thing of the past. It is true that rising inflation, higher energy prices and the subprime crisis are hurting and do not encourage optimism.
It is true that growth is slowing, but is it not still strong? Globally, the forecast this year is still for 2.6% growth. Which is not a little. In China, economists are continuing to forecast annual growth rates of around 10 % for the next three years. Will these rates continue after the Olympic Games and the Shanghai Fair? We can ask the question, and many people know my answer.
We need, however, to remain confident.
The US recession will need to be long and deep to shake our confidence. Long it could be, but today most economists do not see it as structural
There are also certain encouraging signs:
the financial crisis may well have further surprises in store, but its consequences have already been largely anticipated by financial markets. This crisis is also increasingly under control. Let us hope, even so, that governments and central banks will continue to intervene wisely and not upset the rules of the open market.
long-term interest rates remain low;
with its low prices, China could partially offset generally rising prices in western countries;
the amount of capital available around the world remains high.
Slide 3: inflation
In my view the greatest threat is global inflation:
this is very bad for Europe, where many income and cost items are indexed. This may please some, but let's not forget that indexation feeds the inflationary spiral and damages competitiveness. The existence of the euro also blocks corrective devaluations;
it is bad for the USA where inflation widens social disparities, in particular as it goes hand in hand with a dramatic fall in the USD;
it is bad for Asia, where inflation can produce social, political and economic unrest. Events in China need to be tracked closely. Rising prices for basic foodstuffs provoke famine in certain countries, which is unacceptable
Pending a global restoration of confidence, business is getting harder. We will need to exhibit a lot of creativity to remain on course, but that’s our vocation. I must say that Solvay has shown itself capable of this and that we have always had a clear-sighted policy, in particular by keeping careful watch on our debt levels. The Group remains strong, with a very healthy financial situation. Our balance sheet is solid and able to face what will be more difficult days, without questioning our fundamental strategies.
Our focus on emerging countries, which are growing and are well placed in terms of access to raw materials, is a felicitous initiative. We are determined to maintain, if not increase, our excellent market shares in our main product lines.
The fact that our Pharma earnings have held up in an increasingly difficult environment shows that we have got our strategy right in this area. Moreover, mobilizing our entire organization around Innovation is bearing fruit and is motivating our people, not to mention its concentration on a policy of sustainable development, which in my opinion requires a certain size.
It is with this confidence that we are proposing to you a reasonable increase in the dividend:
you know our policy here: to increase our dividend whenever possible, and if possible never reduce it.
Slide 4: dividend policy
The dividend in respect of 2007 (EUR 2.20 net per share) is up 4.8%. It has increased by 42% over the past 10 years and 22% between 2003 and 2007. It has never been reduced in the past 26 years.
Slide 5: dividend history
This distribution corresponds to a payout of 23%. Some will call it low, other reasonable given the more difficult environment and our self-financing policy. Let’s not forget that during the past two years we have invested around EUR 800 million/year out of a net cash flow of EUR 1.4 billion/year.
Slide 6: CAPEX and R&D expenditure
It is good news that we are able to invest this much. This shows that we have attractive projects that will support tomorrow’s growth. Management is highly selective here.
Slide 7: Appointments
With regard to appointments to the senior management of the Group, we propose that you renew, for a four year term, the mandate of Mr Jean-Marie Solvay as an independent director. Mr Jean-Marie Solvay is also a member of the New Business Board.
Two younger employees have also joined the Executive Committee, replacing Mr Belli and Mr Degrève.
The first is Mr Jean-Michel Mesland, a Frenchman. After managing the Strategic Business Unit Electrochemistry and Derivatives in Brussels, and then the Tavaux plant in France, Mr Mesland has taken over as General Manager Research & Technology and a member of the Executive Committee since 1 September 2007.
Mr Roger Kearns, a US national, has held various positions of responsibility in the United States and Brussels. He will become General Manager of the Asia-Pacific Region and a member of the Executive Committee from 1 July 2008, upon Mr Christian De Sloover’s retirement from the Group.
This gives me the opportunity of thanking Mr Belli and Mr De Sloover on your behalf for their extraordinary contributions. Mr Degrève¬ will remain with us for a few more years as General Manager NAFTA. .
When it comes to Corporate Governance, we have opted in our Annual Report to give a full run-down of our rules and how we apply them, rather than merely report on the differences with 2006. We should bear in mind that Corporate Governance is an evolving process, requiring us to adopt constantly to our environment.
Recent developments are:
We have begun replacing our bearer shares with dematerialized shares. This operation, which began on 1 January 2008 and will end on 30 June 2011, is already 95% complete.
To bring ourselves into line with the Lippens Code, we have stated that if shareholders representing 5% of capital ask the Board in good time to place an item on the agenda of the Ordinary General Meeting, and this is not detrimental to the company, their request will be received and examined favourably. Let me remind you that the legal threshold here is 20%.
At the request of the Banking, Finance and Assurance Commission, we have explained why we have such a large number of Board members, and our reasons for judging certain of them to be independent.
Last but not least, our main shareholder Solvac last year raised its holding to above the 30% threshold, thereby buttressing our stability and our long-term vision.
Finally, I am certain that you will have looked at our remuneration figures. You will have read our policy here in the annual report and you will have observed that our company has not been criticized in the press on this item; rather the opposite, my dear Christian.
It is time for me to hand the floor to Christian, but let me take a few minutes more to tell you:
that the Group’s strategy has been and remains good. We have not yielded to financial fads and fashions. Our average annual return over the past ten years has been around 7%/year. The fall in 2007 is due largely to the share price, which has picked up well in recent months. We have had difficult choices to make, but we have taken the right options.
Slide 8: annual return on the share
We are constantly seeking to adapt to changes in the macroeconomic climate and to the major structural evolutions.
and to tell you also that we wish to thank all the Group's stakeholders:
our shareholders, for their trust which we need to earn day by day;
our employees, of whom we ask a lot in a difficult environment;
the civil authorities. Solvay maintains its credibility, which is a big asset in all kinds of dialogue.
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oOOo
“Ready for tomorrow”
Speech by Mr. Christian Jourquin
Chairman of the Executive Committee
Slide 1
Ladies, Gentlemen and Shareholders,
Thank you for demonstrating your loyalty to our Group by joining us here today.
I suppose that, like most of us, you like good news. You have not been disappointed at the previous shareholders’ meetings, as each of the past three years has been a record one.
Well, this year I am pleased to confirm that 2007 was yet another record year.
Slide 2: 2007: a new record year
Results and review of the Sectors
With sales approaching EUR 10 billion, our strategy of seeking sustainable, profitable growth again paid off in 2007 in all three Sectors.
Notwithstanding the unfavourable impact of the USD and JPY exchange rates, our external sales rose by 2% to reach EUR 9 572 million precisely. REBIT increased by 9% to EUR 1 192 million and the operating results of each of the three Sectors hit new records. In terms each time of operating result, Chemicals grew by 9%, Plastics by 8% and Pharmaceuticals by 1%. Group net income also passed the record level of 2006 to reach EUR 828 million (+ 1%). Cash flow advanced by 6% to EUR 1 421 million. Finally our ROE (return on equity) was 18.4% compared with 19.4% in 2006.
Slide 3: Achieving of our financial objectives
These excellent results confirm that we have the right strategy. They also allow us not only to achieve, but exceed our financial targets: we have reached our objective of 10% average annual growth of net Group income with an average of 10.5% over the past 10 years. We have also exceeded our objective of 15% Return on Equity. In terms of our net debt to equity ratio, at 29% we are well below the limit of 45% we have set ourselves not to exceed on a long-term basis. Finally, with our dividend up by 4.8% to EUR 2.93 gross (EUR 2. 20 net), we are honouring our policy of increasing our dividend whenever possible and, if possible, never reducing it. This dividend has increased step by step since 1981 without ever reducing.
All this reflects the hard work of 28 300 people who have, each and every one of them, contributed to this performance. We owe it to ourselves and to them to emphasize this, and we thank them for it.
Slide 4: CAPEX and R&D expenditure
These excellent results also enable us to continue to expand the Group.
For this, the Research and Development budget for 2008 has been set at EUR 578 million, compared with EUR 556 million in 2007. 75% of this budget is allotted to the Pharmaceuticals sector.
Our Capital Expenditure, essential for the dynamic management of the Group’s portfolio of activities, was EUR 777 million in 2007, and for 2008 we have increased our budget to EUR 1 billion in order to support our strategy of sustainable, profitable growth in those activities over which we have good control. This involves enlarging our product portfolio and also establishing solid geographic bridgeheads from which to develop and strengthen our worldwide presence.
Slide 5: Chemicals Sector: the path of growth
In the Chemicals Sector, we are seeking to maintain our competitiveness by intensifying our geographic expansion, developing our specialties, and pursuing technological innovation and targeted restructurings.
Last but not least, we are emphasizing Sustainable Development and what is now coming to be known as “green chemistry”.
Slide 6: Investment expenditure in the Chemicals Sector
Our Chemicals activities have continued to move forward thanks to globally favourable market conditions, despite high energy costs. Our efforts to improve our competitiveness have paid off. Our good old “carbonate” mainstay has met our expectations.
Let me point you here to our decision to build two hydrogen peroxide megaplants, the first of which, in Belgium, will start production this year. Our keenness for technological innovation, with an accent on green chemistry, is also illustrated by the first pilot plant producing epichlorohydrin using the Epicerol® process in France (an innovative process that uses glycerine derived from the biodiesel industry). In both cases, for hydrogen peroxide and for epichlorohydrin, new industrial-scale units will be set up in Thailand.
These initiatives are aimed at extending our portfolio of environmentally-friendly products, developed using the most modern technologies, patented and fully mastered by our Group. They are also part of our philosophy of Sustainable Development.
Slide 7: Plastics: enriching our product portfolio and maximizing value
The Plastics Sector is seeking to draw full value from its strengths and to expand its activities portfolio to reduce the cyclicality of its business. It is also looking to speed up its geographical expansion, in particular in Russia, Asia and South America.
With Specialty Polymers and Inergy Automotive Systems, both high added value activities, it is prioritizing the development of its “Specialities” cluster, which is today one of the biggest contributors to Group earnings. And in what could well be a world first, it is beginning to produce PVC from “green” feedstock.
Slide 8: Investment expenditure in the Plastics Sector
Capacity extensions are planned in Specialty Polymers to respond to growing demand from the electronics, aeronautics, medical, automotive and other markets. The selective growth of our vinyls cluster is taking the form also of numerous projects in South-East Asia, in Mercosur and, since recently, in Russia. Here we have concluded an agreement with Sibur, a subsidiary of Gazprom, to build the first fully integrated world scale vinyls plant.
Slide 9: En route for the future Solvay Pharmaceuticals
On the agenda for the Pharmaceuticals Sector is its expansion and its strategic transformation, via the “INSPIRE” project, which has set objectives for the Sector of external sales of EUR 3,200 million and an operating margin of 20% by 2010. We will be steadily increasing our R&D resources, which will be allocated primarily to the priority therapeutic fields of Cardiometabolics and Neuroscience. Our agenda also includes a plan to achieve EUR 300 million of annual savings. Already in 2007, savings of the order of EUR 160 million were achieved.
Slide 10: Pharma R&D developments
In 2007 our Pharmaceuticals Research results were mixed. We advanced in cardiometabolics, in our fenofibrate franchise. In the fourth quarter, we filed for registration in the USA of our new generation fenofibrate SLV348. We also signed a co-promotion agreement with Abbott for Simcor®, a fixed dose fenofibrate+statin medicine.
We have suffered a setback in Neuroscience. Bifeprunox, our new schizophrenia therapy, has not yet received FDA approval. In our eyes this delay does not call into question either the value of this new compound, which offers major therapeutic benefits for patients, or the quality of the contributions of our Research and Development teams. After Wyeth’s decision, for reasons of its own, to terminate the collaboration agreement between ourselves, it is up to us, together with Lundbeck, to decide on the future of this compound.
Slide 11: Friendly acquisition proposal for Innogenetics
At the end of April 2008, Solvay Pharmaceuticals S.A. announced a friendly tender offer to acquire Innogenetics. This bid values the company at EUR 206 million for 100% of the shares and with Solvay taking over Innogenetics’ debt (value at 31 December 2007). The operation should close in the second quarter of 2008. Based on fruitful cooperation in research, Solvay intends to continue developing and expanding the diagnostics business. In addition both companies’ R&D competencies will be leveraged to accelerate the development of Solvay’s therapeutic pipeline through the implementation of biomarker, diagnostics and companion diagnostics technologies.
The pharmaceuticals industry is a difficult business, as regulatory bodies, physicians and patients all become increasingly exigent. To adapt to this changing environment is vital and our readiness to do so is visible in our everyday actions.
Slide 12: our Group is moving fast
Our Group is moving fast and constantly innovating
In this year in which Solvay celebrates is 145 years of existence, it is continuing to show itself in excellent health and to grow in an ever accelerating, and I would even say, exponentially accelerating world. Why? Because our Group is moving fast, very fast.
Slide 13: Sustainability & Innovation
We will not hesitate to invest in the companies, projects and transformations needed to keep our Group in the forefront of its fields of competence.
Let me give you two examples: the first is the acquisition of Fournier Pharma three years ago, the successful integration of which has made cardiometabolics today the leading area of our Pharmaceutics Sector in terms of sales. My second example is the successful creation of “3S” (which stands for “Solvay Shared Services”) in Lisbon, where we have opted to bring together a large part of the Group’s Finance functions.
Slide 14: Platforms for growth
We are also examining new areas in which we could develop in the future: this is the task of New Business Development, which was reorganized this year into two parts, with an objective set at EUR 500 million of sales by 2015. The first part, “Future Businesses” is working on organic electronics and renewable energies platforms. The second, “Advanced Technologies”, is tasked with detecting, acquiring and disseminating within the Group technological know-how which is of potential interest to Solvay.
I’m sure you all know of our Solar Impulse solar aircraft project. Solvay was the first main partner of this incredibly ambitious project, demonstrating our commitment to innovation and our desire, more than ever, to take carefully weighed risks and to develop leading edge technology partnerships. Today, the prototype is under construction, and could well be in the air by the beginning of next year. I can already confirm to you that final aircraft will include 12 Solvay products.
Slide 16: Growing presence on emerging markets
Geographic deployment
We are also continuing our geographic deployment: the fact is that what we refer to as “emerging” countries are becoming increasingly important in the global economy, to the extent that today they are fuelling global economic growth. It is therefore vital for Solvay to develop at high speed in these parts of the world, in particular in Plastics and Chemicals. Pharmaceuticals is there already.
In the Plastics Sector, four new plants will come into production this year in China (Special Polymers and Inergy) and in Russia (Pipelife and Inergy). In India, the PEEK industrial unit of our Panoli plant came onstream as planned at the start of this year. In Brazil, two capacity extensions are planned and due to start production in 2008 and 2009. In Russia we are building with Sibur a new integrated PVC plant, which should begin production in 2010. This partnership will, we believe, open many doors to us in this rapidly growing country, which has become an essential territory for us.
Slide 17: H2O2 mega plant
In our Chemicals Sector, I mentioned a moment ago the major developments in Belgium and Thailand in the form of the new mega-plants we are building there.
Finally we should add a new planet to the “Solvay galaxy”. Following the final auction on 27 March 2008, Solvay is now the preferred candidate for acquiring 80% of Alexandria Sodium Carbonate Co. (ASCC), a state-owned company that the Egyptian government is currently privatizing. The competent Egyptian authorities are in the process of formally validating the choice of Solvay. Formal validation and signing of all the agreements could take place in the coming months.
Slide 18: A dynamic, competitive Group
A dynamic, competitive Group
Ladies and Gentlemen, we are ready for tomorrow. The ship is solid and the crew is well trained and ready to confront all types of weather. Our course is set and our competitiveness will allow us to confront rough seas. To remain at the front of the race, we know how to adapt constantly to changes in the areas in which we are present, which is why we sometimes opt to redirect our activities, as is the case in refrigerating gases in Chemicals.
From this viewpoint of dynamically managing our portfolios of activities, we have sold our Solvay Engineered Polymers (USA) subsidiary and our Caprolactones activity in the UK, in order to concentrate on activities offering greater value-creating potential and where we have maximum control of the raw materials, in line with our strategy.
Slide 19: Dynamic portfolio management
With this practice of permanently reviewing our activities we are accomplishing our mission of constantly improving the long-term efficiency of the funds made available to us by our loyal shareholders.
Slide 20: Let us develop sustainably!
Let us develop sustainably, ready for tomorrow
In anticipating tomorrow's developments, our thoughts turn to the now vital element of sustainable development. This is a wide-ranging, complex concept, which everyone tries to appropriate, at times without discernment. We formalized our commitment here in 2007, in line with our own values and corporate culture. The strategy review we will be holding in June 2008, one month from now, will be totally dedicated to it. At this review we will be examining at the highest level the impact and opportunities linked to sustainable development in terms of our portfolio of products, technologies and processes, of integrating raw materials and energy, and of Research and Innovation.
At the same time we are continuing our programmes of reducing the emissions linked to our activities. For example we have projects to produce heat from recycled fuels at several European sites. At Bernburg (Germany), a new power station will be producing electricity and steam from residual solid fuels (plastics, wood, textile, paper). At our Santo Andre site in Brazil we are shifting from fuel oil to natural gas. We have also emphasized controlling the emission of greenhouse gases, the deployment of social actions and continuing to improve safety.
The challenge posed by our planet, which is running out of energy and which needs, very quickly, to be better managed, is fuelling our research and forcing us to change the way we do things.
At the same time, the adopting of a clear Code of Conduct by all our personnel is also contributing to the permanence of our Group.
Slide 21: Safety and personal development
Safety and personal development
For us, the safety of our employees and subcontractors is fundamental, and we attach the same importance to our safety figures as we do to our financial results. Our objective for 2008 is to lower the accident frequency rate to 1.5 per million hours worked. Even if this rate has fallen regularly in recent years, from 4.4 in 2003 to 2.4 in 2007, we will not be satisfied until we have reached 0 accidents.
I repeat, safety is and will remain at the top of our list of priorities.
Slide 22: Safety and personal development
In the field of our employees’ personal development, we remain attached to our model of dialogue and of close consultation with our social partners.
“Grow our people to grow our Group” is the direction of our new Human Resources strategy. The projects we have introduced in this area are beginning to bear fruit. Our HR policies are defined and communicated, the foundations of the “Solvay Corporate University” have been laid, a “Youth Employment” program is in place in collaboration with the European Works Council, and the Renaissance project, aimed at harmonizing the main HR processes and providing them with a shared, modern IT support, is advancing well. The good management of human resources is becoming even more important with the growing internationalization of Solvay, which is becoming more multi-cultural by the day.
Q1/08 results
Right now I am pleased to present to you, as the first to hear them, our results for the first quarter of 2008.
Slide 23: Q1/08 results
Group sales reached EUR 2.4 billion and is stable compared to the 1st quarter of 2007. At constant exchange rates, sales increase by 3 %. Demand for our main industrial products remained generally good but the unfavorable exchange rate penalized the evolution of sales.
Group operating results (REBIT) amounted to EUR 300 million and posted a drop of 8% compared to the high level of the 1st quarter of 2007 but were up by 12% compared to the 4th quarter of 2007.
The net income of the Group improved to 1% compared to the 1st quarter of 2007 and amounted to EUR 220 million.
Cash flow amounted to EUR 332 million (-3%). The net debt to equity ratio amounted to 33% at the end of March 2008, identical to that at the end of March 2007.
Slide 24: Q1/08 results by Sector
Sales in the Pharmaceuticals Sector were up by 4% compared to the 1st quarter of 2007. They would have increased by 10% at constant exchange rates. Sales of the major products, especially the drug Androgel® and the fenofibrates, as well as sales in emerging countries, well improved. Operating results were up by 9%. They included, on the one hand, higher R&D costs and, on the other hand, miscellaneous income (EUR 41 million) resulting from the sale of a non-strategic product and collection of a milestone for Luvox®CR. In the 1st quarter of 2008, Solvay Pharmaceuticals began to commit expenses linked to the marketing of Simcor®, as from April 2008, in the framework of the co-promotion of this drug with Abbott in the United States.
Results from the Chemicals Sector in the 1st quarter of 2008 were characterized, on the one hand, by generally sustained demand, and on the other hand, by increases in production and distribution costs. This cost increase was partially compensated by price increases. Sales were steady (+1%). Results from the Minerals cluster improved. In Electrochemistry, caustic soda remained at a good level but the other chlorinated products were significantly down. The fluorinated commodities began to benefit from the effects of restructuring. The Oxygen cluster is declining, taking into account a change in consolidation scope linked to sale of the caprolactone activities in 2007 and from pressure on prices of hydrogen peroxide in Europe. On the whole, the operational result of the Chemicals Sector declines by 11%, but increases by 20% compared to the fourth quarter.
Sales in the Plastics Sector in the 1st quarter of 2008 dropped by 3%, part of which was due to a change in consolidation scope linked to the sale of Solvay Engineered Polymers in February 2008. Demand remained generally sustained, both for the vinyls activities and in Specialties, but the weak American dollar penalized us. REBIT was down by 25%, compared to the high level reached in the 1st quarter of 2007. It is practically stable compared with the four quarter of 2007. Increased production costs in the vinyls activities in Europe could not be passed along in sales prices due to the American imports of PVC favored by a weak USD. Specialty Polymers experiences an 8 % growth in demand, but for theses activities also, the strong euro had an impact on the evolution of results.
Slide 25: 2008 outlook
I will end this comment on first quarter results by sharing with you the Group’s perspective for 2008 our 145th birthday year, It is obviously too early to deduce from this what awaits us for the rest of the year. We need to remain attentive to how macroeconomic conditions and currencies evolve. The subprime crisis, conflicts, the speculative upsurge of fossil fuel and commodities prices: everything, in the days of globalization, has an increased influence on our results. The international dimension of our Group and the combination of Pharmaceuticals, Chemicals and Plastics activities also preserve certain balances. Our objective remains to make sure that each of our activities is in good health.
The measures taken to improve competitiveness as well as our diversified portfolio, in terms of activities and geographic presence, enable our Group to resist to a less favorable macro-economic environment. In 2008, the operating result of the Pharmaceuticals sector should exceed the record level of 2007; the industrial activities should not reiterate the performances of the preceding year. On the whole for the year 2008 and taking into account the current level of the USD, the Solvay group is unlikely to reach the record results of the year 2007.
Conclusion
Slide 26: Solvay is 145 years old
Ladies and Gentlemen, in today’s ever more complex and tortuous political, economic and financial environment, be convinced that the major and constant concern of the Directors and Executive Management of the Group is to maintain our business alive and profitable, including to take our decisions with asense of responsibility towards you, towards our employees, towards our customers and suppliers and towards the society in which we live. We wish to deserve your trust by remaining faithful to our Values.
Thank you, all of you, for your loyalty to Solvay, and be assured: we are ready for tomorrow.
