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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;

– the 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.

95

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

97

(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 :

98

- 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

99

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.

100

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.

101

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.

102

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.

103

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. Information 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.

104

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.

105

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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132

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.

134

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

136

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

600000

95

500000

90

400000

85

300000

80

200000

75

100000

70

0

J

Solvay Global Annual Report 2006

F

M

A

M

J

J

A

S

O

N

D


Corporate Governance

The Solvay share compared with the indexes (2006) 120 116

Solvay

112 Euronext 100

108 104

Stoxx 50

100 96 92 88 84 80

J

F

M

A

M

J

J

A

S

O

N

D

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

138

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

5 Solvay Global Annual Report 2006


Notes

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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)


Solvay S.A. Rue du Prince Albert, 33 1050 Bruxelles, Belgium t : 32 2 509 6111 f : 32 2 509 6617 www.solvay.com Germany Solvay GmbH Hans Böckler-Allee, 20 D-30173 Hannover t : 49 511 8570 f : 49 511 282126 www.solvay.de Austria Solvay Osterreich GmbH Stättermayergrasse, 28 1150 Wien t : 43 1 716 88 0 f : 43 1 710 24 26 Belgium Solvay S.A. Rue du Prince Albert, 44 B-1050 Bruxelles t : 32 2 509 6111 f : 32 2 509 6624 Brazil (+Argentina) Solvay do Brasil Ltda Rua Urussui, 300 – 5 andar – 04542-903 São Paulo – Brasil t : 55 11 3708 5000 f : 55 11 3708 5287 e-mail: grupo-solvay.mercosul@solvay.com Bulgaria Solvay Bulgaria AD 8th Floor, room 803 Administrative Building BG-9160 Devnya t : 359 51 99 5000 f : 359 51 99 5010

Spain Solvay Iberica S.L. Avenida Diagonal, 549 3rd & 6 th floors E-08029 Barcelona t : 34 93 3652600 f : 34 93 4197852 www.solvay.es e-mail: solvay.iberica@solvay.com United States (+Canada and Mexico) Solvay America, Inc 3333 Richmond Avenue Houston, TX-77098-3009 USA t : 1 713 5256000 f : 1 713 5257887 www.solvaynorthamerica.com France Solvay S.A. – France 25 rue de Clichy F-75009 Paris t : 33 140758000 f : 33 145635728 www.solvay.fr Great Britain Solvay UK Holding Company Ltd Solvay House Baronet Road Warrington Cheshire WA4 6 HB t : 44 1925 651277 f : 44 1925 655856 Italy Solvay S.A. – Italy Via Filippo Turati, 12 I-20121 Milano MI t : 39 02 290921 f : 39 02 6570581 Portugal Solvay Portugal – Produtos Quimicos S.A. Rua Eng. Clément Dumoulin P-2625-106 Povoa de Santa Iria t : 351 219534000 f : 351 219534490

Solvay S.A. Société Anonyme Registered Office: Ixelles (Brussels) Rue du Prince Albert, 33 t : 32 2 509 6111 f : 32 2 509 6617

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Photos: Solvay, Bernard Foubert, Getty Images, SolVin. Translation: Lomax S.P.R.L., Brussels

Switzerland Solvay (Schweiz) AG Zürcherstrasse, 42 CH-5330 Zurzach t : 41 56 2696161 f : 41 56 2696363 South East Asia and India Solvay (Thailand) Ltd. 17th Flr Wave Place 55 Wireless Road Lumpini Khet Pathumwan 10330 Bangkok Thailand t : +66-2-655 4445 f : +66-2-655 4840 e-mail: contactasia@solvay.com China Solvay (Shanghai) Co., Ltd. Pharmaceuticals Unit A&B/18Flr, Century Ba-Shi Building No.25, Chong Qing Road (M) Lu Wan District 200020 Shanghai P.R. China t : +86-21-6384 0099 f : +86-21-5383 2686 e-mail: contactchina@solvay.com www.solvay.cn Solvay (Shanghai) Co., Ltd. Chemicals & Plastics Building 7, No.899, Zu Chong Zhi Road, Zhangjiang High-Tech Park, Pudong New Area, 201302 Shanghai P.R. China t : +86-21-5080 5080 f : +86-21-5027 5636 e-mail: contactchina@solvay.com Japan and Korea Nippon Solvay K.K. 16th Flr Tabata Asuka Tower 1-1 Tabata 6-Chome Kita-ku 144-0014 Tokyo Japan t : +81-3-5814 0851 f : +81-3-5814 0855 e-mail: contactasia@solvay.com


Solvay Annual Report 2006