Form 20-F 2005

Item 5. Operating and Financial Review and Prospects
The following discussion and analysis should be read in conjunction with “Item 3. Key Information—Selected Financial Data” and
our Consolidated Financial Statements. The discussion of our results of operations includes certain information on a comparable
basis to eliminate the impact of changes in the scope of consolidation and the translation effect of exchange rate fluctuations.
See “Presentation of Financial and Other Information” for an explanation of the basis of calculation of this information, as well as
an explanation of how we calculate the effect of changes in volume and price on our operating results. This discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our results could materially differ from those discussed in
these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those
discussed below and elsewhere in this Annual Report, including in “Item 3. Key Information—Risk Factors”. The Consolidated
Financial Statements have been prepared in accordance with IFRS, with a reconciliation of net income and shareholders’ equity to
U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to us, and a reconciliation of
net income and shareholders’ equity to U.S. GAAP, see Note 39 to the Consolidated Financial Statements.
Overview of 2005
The highlights of our financial performance in 2005 include:
8.4% growth in net sales to €5,085 million, sustained by significant price increases in all activities;
operating profit of €97 million, compared with a loss of €188 million in 2004;
net loss of €616 million, compared with €641 million in 2004, substantially impacted by the disposal of underperforming
businesses and restructuring and refinancing costs;
improvement in our financial structure due to a successful capital increase, with an 11.3% decline in our net debt to
€2,089 million at the end of 2005;
continued refocusing of our business portfolio on segments in which we hold leading worldwide positions and divestments
of businesses with weak or unprofitable positions;
registration by the UN of greenhouse gas emission reduction projects in South Korea and Brazil; we have announced our
initial decisions in order to maximize the value of the emission allowances obtained in the long term.
Certain Factors Affecting Our Financial Condition and Results of Operations
Certain factors affecting our financial condition and results of operations are described below. For further discussion of these and
certain other factors, see “Consolidated Results of Operations for 2005 and 2004”.
Exchange Rate Fluctuations
We publish our Consolidated Financial Statements in euro. Because a substantial portion of our assets, liabilities, sales and earnings
are denominated in currencies other than the euro, we are exposed to fluctuations in the values of these currencies against the
euro. These currency fluctuations, especially the fluctuation of the value of the U.S. dollar, the Brazilian real and the pound sterling
against the euro, have had and may continue to have a material impact on our financial condition and results of operations.
We estimate that the effects of currency fluctuations in 2005 resulted in a decrease in our consolidated net sales of approximately
2.9% and decrease in our operating income of approximately 4%. Currency fluctuations can also have a significant impact on our
balance sheet, particularly shareholders’ equity, when we translate the financial statements of our subsidiaries located outside of
the euro zone into euros.
An appreciation of the euro compared with the dollar lessens the euro-value of sales generated in dollar zone countries, and lowers
the competitiveness of products manufactured by us in Europe against products produced in, or exported from, the United States
and other dollar zones. This effect is partially offset by the decreased cost in euro of a significant portion of our raw material and
energy purchasing requirements denominated in non-euro currencies.
Form 20 - F 2005 - Rhodia
37