Pharmaceuticals Sector - Solvay

Expenditure on the future by Sector
(EUR million)
27
27
261
261
79
79
293
293
14
14
13 17
13 17
351
351
1 346
1 346
R&D expenditure
(EUR 472 million)
SENSITIVITY TO ECONOMIC
FACTORS
An amendment to Belgian legislation (Companies
Code) issued in January 2006 requires a description of
the principal risks to be included in the management
report. For 2005, this analysis can be found in the
different sections of the present annual report:
- provisions and Group policy with respect to insurance
(see note 29 on provisions)
- management of foreign exchange and interest rate
risks (see note 31 on derivative financial instruments)
- sensitivity to economic factors as presented below.
The Group takes various measures to reduce its
sensitivity to external economic factors such as foreign
exchange fluctuations and energy prices.
Foreign exchange fluctuations
Pharmaceuticals = 351
Chemicals = 27
Plastics = 79
Unallocated = 14
Capital expenditure
(EUR 1 930 million)
Pharmaceuticals = 1 346
Chemicals = 261
Plastics = 293
Unallocated = 13
Discontinued operations = 17
Foreign exchange fluctuations, particularly of the
US dollar, can affect earnings. In 2005 the average
EUR / USD exchange rate remained unchanged.
Nonetheless, the exchange rate at the end of 2005
was significantly different from that at the end of 2004.
The geographic distribution of the Group’s activities
throughout the world enables it to diversify its currency
risk. In many of its activities the Group produces and
sells on local markets.
The Group’s policy of hedging the EUR / USD
exchange risk 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 hedging
budgeted foreign currency cash flows on certain of its
activities.
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.
(see also note 31: “Derivative financial instruments” ).
Energy situation
The Solvay Group is relatively well protected against
sharp price fluctuations in certain energy sources.
Solvay has a four-pronged energy policy of:
- long-term contracting (electricity in particular)
- having diversified and flexible primary energy sources,
- developing cogeneration plants,
- more recently, a combined cycle generation plant
at Rosignano (Italy), providing savings on electricity
transportation costs.
Over the past several years the Group has installed,
alone or with third parties, a growing number of
cogeneration units. In 2005 the group had around
900 MW of installed cogeneration capacity in 13 of its
plants, including 12 in Europe, covering a considerable
portion of its needs for steam.
2005 saw very sharp increases in fuel prices, in
particular for gas. Here the Group’s specific energy
policy enabled it to limit the rise in its energy bill to well
below that of market prices. The net energy bill for
2005 represents around 8% of sales.
It should also be noted that the impact of fluctuating
energy costs varies considerably from one activity to
another, with the Chemicals Sector being the most
sensitive. Depending on each SBU’s particular market
conditions, price rises have been negotiated with our
customers to offset these impacts.
In 2006 energy prices remain very high.
Raw materials
Sensitivity to raw materials prices varies from one
activity to another. As with energy, the Group
negotiates supply contracts for its raw materials, in
particular ethylene, and passes on price variations
when market conditions permit.
The Chemicals Sector is very highly integrated in
terms of raw materials, with its own salt and limestone
deposits (for soda ash, caustic soda and other products)
and fluorspar mine (for fluorinated products), etc.
Solvay Global Annual Report 2005
55