Profile. World leader in the production of seamless steel tubes and specific tubular products for industrial applications

Transcription

1 Annual Report 2004

2 Profile World leader in the production of seamless steel tubes and specific tubular products for industrial applications Profile 2-3 Statement by the Chairman of the Supervisory Board 4 Statement by the Executive Board 5 Corporate governance 6 Shareholder information 7 Key figures 8-9 The Group s markets Reference document 15

3 Vallourec, an integrated industrial group, controls the whole of its manufacturing process, from the production of steel to the manufacture of finished products. It offers a portfolio of high value-added tubular products, original and unique in its diversity. Indeed, Vallourec has specialized in particular in the most complex and highly-demanding industrial applications (temperature, pressure, corrosion, etc.). With its decentralized organization, the Group combines the dynamism and flexibility of its various entities, which are strongly rooted in their local industrial fabric (particularly in France, Germany, Brazil and the Unites States), with the advantages associated with a major group: wide-ranging career opportunities for staff, extensive training programmes, significant R&D expenditure, high-level specialist skills, a Total Quality policy, etc. The acquisition currently in progress to take full control of V & M TUBES (its main subsidiary which is currently only 55%-owned by the Group) represents a major step in the construction of the Vallourec group and is expected to bring substantial benefits at both operational and financial level sales: 3,038 million 51.8% in the energy sector (oil & gas, and power generation) 48.2% in non-energy sectors (automotive industry, mechanical engineering, chemicals and petrochemicals, and others) 57.0% outside the European Union 27 industrial companies organized in 6 divisions by product or by market 40 production units in10 countries Approximately18,000 staff Production Sales and Services Vallourec has high-performance production facilities in North and South America, Europe and Asia. These are complemented by a comprehensive network of sales offices and service centres. Vallourec therefore has the major competitive advantage of being able to offer its customers high-quality and local services. Vallourec 2004 Annual Report

4 Statement by the Chairman of the Supervisory Board Dear Shareholders, In 2004, Vallourec returned to forward gear with great vigour, as illustrated by its performances in terms of sales and results. It is worth noting that all the Group s units contributed to this excellent performance, including V & M STAR, which, this year, clearly exceeded expectations. Jean-Paul Parayre 2005 will be marked by the acquisition of Salzgitter / Mannesmannröhren-Werke s stake in V & M TUBES. On completion of this long-planned move, Vallourec will own the entire share capital of its main subsidiary, and that company s subsidiaries in turn, with the sole exception of V & M STAR, which is 19.5%-owned by our partner, Sumitomo. Our Group will thus achieve greater coherence, whilst commitments associated with the creation of V & M TUBES will come to an end. With full access to the substantial cash flow generated by its subsidiary, Vallourec will be able to achieve further strong organic growth, while adopting a more flexible approach to seizing opportunities and establishing new sources of growth. It is for these very reasons that we have opted to partially finance this acquisition, which will immediately enhance earnings, by a capital increase capped at 125 million, to which our two main shareholders intend to subscribe. We trust that you will support Vallourec in this move and demonstrate your confidence in the Group s future. I congratulate the Executive Board and the Group s staff for having so successfully mastered a complex environment in 2004, thereby maintaining the high quality service offered to our customers. Jean-Paul Parayre Chairman of the Supervisory Board 4 Vallourec 2004 Annual Report

5 Statement by the Executive Board Dear Shareholders, If 2004 should be remembered for one particular thing, it is Vallourec s capacity to respond quickly to changes in the market was characterized by a sharp increase in volumes, which the Group succeeded in taking advantage of, but also by several constraints that it had to manage: an unexpected and spectacular surge in the cost of the raw materials used by Vallourec, the dollar s persistent weakness, and higher energy and transport prices. Furthermore, outside the United States, oil exploration and production programmes picked up pace only very gradually. Pierre Verluca Overall, Vallourec succeeded in neutralizing the impact on EBITDA of higher raw material costs and the dollar s decline by increasing its selling prices. The higher volumes and, to a lesser extent, the improvement in the product mix, were the main causes of the increase in EBITDA, which soared by 93% to 425 million. The EBITDA/sales ratio reached 14%, i.e. close to our top-of-the-cycle target. The good performances posted by the Group in 2004 were due not only to an economic environment that was generally in our favour, but also to the appropriateness of the strategy implemented in recent years. We were thus able to benefit from our upstream integration, with our two steel production processes enabling us to better withstand the increase in raw material costs. By placing greater emphasis on high value-added products, we obtained a competitive edge over our competitors, and thanks to the flexibility of our production facilities, we were able to very quickly meet our customers demands. These good results were also the consequence of our portfolio of activities being wellbalanced, both in terms of industrial outlets and geographical distribution. The acquisitions made in previous years, i.e. V & M do BRASIL in 2000 and V & M STAR in 2002, have continued to strengthen the Group s results while at the same time, through the greater sales diversification they provide, reducing the impact of the uncertainties inherent in the markets in which we operate. François Fabre As early as 9 March 2005, the Group released information concerning the slightly positive impact on the 2004 financial statements of the first-time application of IFRS, the new International Financial Reporting Standards. Lastly, the intended acquisition of the minority stake in V & M TUBES, announced in January 2005, forms an integral part of our strategy by giving Vallourec even greater room for manoeuvre at both operational and financial level for the years to come. Pierre Verluca Chairman of the Executive Board François Fabre Member of the Executive Board Vallourec 2004 Annual Report 5

6 Supervisory Board (7 June 2005) Honorary Chairman Arnaud Leenhardt Chairman Jean-Paul Parayre Vice Chairman Patrick Boissier Members Luiz-Olavo Baptista Vincent Bolloré Corporate governance Since June 1994, Vallourec has been governed by an Executive Board and a Supervisory Board, which together provide for balanced management that safeguard the shareholders best interests. At the initiative of the Executive Board, in July 2004 Vallourec established a new, restricted Executive Committee in order to introduce greater operational dialogue between the Group s various divisions, enhance its flexibility and enable it to better adapt to the economic and geopolitical climate. With a view to improving the focus and organization of the various departments around its strategic objectives,vallourec sought to supplement its management structures through the creation of a Strategy Group consisting of three members of the Executive Committee and six members representing the entity s major functional departments.the main objective of this Strategy Group is to implement Vallourec s decentralized management approach so as to provide the Group with greater cohesion. Other main appointment: Member of the Supervisory Board of PSA Peugeot-Citroën, Director of Stena Line and Stena International Chairman and CEO of Chantiers de l Atlantique Lawyer and Professor of International Law Chairman and CEO of Bolloré and Chairman of the Board of Directors of Bolloré Investissements Chairman of the Executive Board of Mannesmannröhren-Werke GmbH Director of BP FRANCE Vice-President and Managing Director of UIMM Managing Partner of Rothschild & Cie Banque and Rothschild & Cie Chairman of the Executive Board of Salzgitter AG, Mannesmannröhren-Werke GmbH s parent company Member of the Executive Board and CFO of Mannesmannröhren-Werke GmbH Wolfgang Eging Michel de Fabiani Denis Gautier-Sauvagnac François Henrot Wolfgang Leese Kunibert Martin Jean-Claude Verdière COO and member of the Executive Board of Vallourec until 30 June 2001 Société Financière de Sainte Marine,represented by Thierry Marraud CFO of Bolloré group Executive Board Pierre Verluca François Fabre Chairman and CEO Chief Operating Officer Executive Committee Bert Becher Chairman of the Executive Board, V & M DEUTSCHLAND GmbH Vice-President Sales & Marketing, Hot-Rolled Tubes Division Bertrand Cantegrit Chairman, Automotive and Industry Division Marco Antônio Castello Branco Chairman, Hot-Rolled Tubes Division Chairman, V & M do BRASIL SA François Fabre Member of the Executive Board and COO, Vallourec Alain Honnart Chairman, Stainless Steel Division Vice-President, Industrial Policy, Vallourec Marc Karako Chief Financial Officer, Vallourec: Finance, Legal and External Communication Jean-Pierre Michel Vice-President, Controlling, Marketing and Purchasing, Vallourec Vice-President, OCTG activities Pierre Verluca Chairman of the Executive Board and CEO, Vallourec 6 Vallourec 2004 Annual Report

7 Shareholder information 14.3 Dividend As proposed by the Executive Board, the Supervisory Board at its meeting held on 18 April 2005 decided to submit a resolution to the General Meeting of 7 June 2005 for payment of a dividend of 3.20 per share, i.e. twice the amount of the dividend paid in respect of 2003 ( 1.60 per share) * Group share of net income, per share (in ) Dividend per share (in ) *Proposed dividend Share price (at 25 April 2005) Vallourec share price in euros SBF 120 relative to Vallourec share price at 2 January 2003 Pay-out ratio 21.9% 23.1% 31.5% 39.2% 23.3% Vallourec SBF VALLOUREC SHARE Listed on the Euronext Paris Eurolist Part of the deferred settlement section (SRD) ISIN code: FR Indices: SBF 120, CAC Mid 100 and NEXT 150 FTSE classification: Engineering and machinery Market capitalization: 1.7 billion at 25 April 2005 SHAREHOLDER CALENDAR /03 04/03 07/03 10/03 01/04 At 2 January 2003 At 25 April 2005 Change Vallourec : 56.0 Vallourec : % SBF 120 : 2,234.0 SBF 120 : 2, % The Vallourec share price rose sharply in January 2005 following the announcement of the intended acquisition by the Group of the minority stake in V & M TUBES.The share price has tripled in value since 2 January 2003 while the SBF 120 has increased by 27% over the same period. Capital breakdown 04/04 07/04 10/04 01/05 04/05 Number of shares at 31 December 2004: 9,869,956 7 June 2005: Annual General Meeting 27 July 2005: Release of 2005 Q2 sales figures 15 September 2005: Release of 2005 first-half results 27 October 2005: Release of 2005 Q3 sales figures 1 February 2006: Release of 2005 Q4 sales figures SHAREHOLDER AND INVESTOR CONTACT Henri Redig : +33 (0) You may also refer to our website: Directly held by Vallourec 2.7% 0% Mannesmannröhren-Werke GmbH & Salzgitter AG 22.6% 32.5% Bolloré group 25.2% 22.7% Employee shareholders 1.7% 1.5% Public 47.8% 43.3% Number of identified shareholders: 12,284 (holding 100% of the capital) Number of voting rights published in BALO on 12 January 2005: 10,932,595 Sources: Identifiable bearer shares and registered shares as at 14 January As a % of capital As a % of voting rights Vallourec 2004 Annual Report 7

8 Key figures 2004 Vallourec reported sharply higher results in 2004, due notably to substantially higher business volumes. The Group managed to neutralize the impact on its EBITDA of higher raw material costs and the dollar s decline by increasing its selling prices. (in million) 3,038 CONSOLIDATED SALES 3,038 million EBITDA million Consolidated sales Vallourec posted record sales in The 27.9% increase stemmed from a combination of a volume effect (14.6%) and a mix, price and currency effect (11.6%). The volume effect accounted for the bulk of the growth in the first half, whereas the second half benefited from higher volumes as well as the increase in selling prices agreed earlier. 2,204 2,500 2,550 2, % of sales OPERATING INCOME million 10.9% of sales 2004 sales by market Sales generated in the energy sector, in oil & gas drilling as well as in tubes for power plants, increased sharply in 2004 such that its share of Group sales rose from 48.2% to 51.8%. Automotive 16.5% Mechanical engineering 14.1% Chemicals and petrochemicals 11.0% Other 6.6% Oil & gas 36.4% Power generation 15.4% 2004 sales by geographic region The Group is continuing to internationalize its activities in order to achieve a better balance of sales by geographic region. The proportion of sales generated in Europe continues to decline, in favour primarily of North America and Asia: sales outside the European Union now represent 57.0% of total sales. France 12.7% Germany 17.2% Other EU** 13.1% * including Mexico ** enlarged EU of 25 members Rest of world 5.2% North America * 22.6% South America 13.2% Asia and Middle East 16.0% 8 Vallourec 2004 Annual Report

9 14.0% 13.6% 14.0% 9.4% 9.3% EBITDA/Sales ratio At 14.0%, the EBITDA/sales ratio is close to the top-of-thecycle target of 15% set by the Group, which illustrates the excellent performance achieved by Vallourec in This ratio reached 11.3% in the first half and 16.2% in the second half TOTAL NET INCOME (in million) million Gross cash flow from operations Higher volumes and, to a lesser extent, the enhanced product mix, enabled Vallourec to post a sharp increase in gross cash flow from operations to million, up from million in 2003, while at the same time keeping tight control over its working capital requirements % of sales NET INCOME, GROUP SHARE million NET DEBT Investments (in million) million Over a five-year period, investments have amounted to 501 almost 1 billion, reflecting the Group s development strategy, entailing notably the major acquisitions of V & M do BRASIL and V & M STAR. It should be noted that this investment programme was financed without recourse to the market Net debt (in million) Vallourec has a particularly healthy financial structure. At 31 December 2004, the Group had a net cash position of 54.6 million, which facilitates the financing of the acquisition of the 45% stake in V & M TUBES Vallourec 2004 Annual Report 9

10 The Group s markets Share of oil & gas in Vallourec s 2004 sales: 36.4% Vallourec s main products: Oil Country Tubular Goods OCTG (casing and tubing) API and Buttress threading VAM special joints Drill pipes Special line pipes Oil & gas Sales trend: oil & gas (in million) +27.9% 1,106 The tubes that Vallourec designs and develops for the oil & gas industry are essentially seamless threaded tubes, called Oil Country Tubular Goods (OCTG). These tubes, together with the special joints also marketed by Vallourec, are used for drilling operations and for the equipment of oil and gas wells. Vallourec is the specialist in products for deep, difficult, corrosive and deviated drilling and for gas drilling, which necessitates a perfect sealing mechanism on drill pipes. The Group also offers a range of related services to oil companies to assist in their exploration, development and production activities. As last year, this business accounted for more than 36% of Group sales Sales to the oil & gas industry grew sharply in 2004 (an increase of 28% compared with 2003), mirroring the Group s overall growth. The global OCTG market grew by around 20% in volume terms. Demand in North America for oil tubes grew even faster (up 31% in volume terms). Against this backdrop, V & M STAR and the threading subsidiaries located in Houston and Veracruz, which account for the bulk of Vallourec s sales in the region (United States, Canada and Mexico), were able to operate their production facilities at full capacity and recapture all the market share lost in the previous year in an environment of falling prices. In 2004, V & M STAR was gradually able to secure acceptance from its customers of tariff increases that fully offset the increases in raw material costs. In the rest of the world, oil industry activity also grew, but at a slower rate due to a wait-and-see attitude adopted by the major oil companies. Oil & gas prices and demand remain high, a situation that is likely to cause oil companies to maintain a strong level of activity during the current year, resulting in an increase compared with In the first few months of 2005, the Group has not observed any slowdown in demand, and selling prices, expressed in US dollars, remain on a satisfactory trend. 10 Vallourec 2004 Annual Report

11 Share of power generation in Vallourec s 2004 sales: 15.4% Power generation Vallourec supplies tubes capable of withstanding extreme conditions of temperature and pressure used in fossil fuel power plants (both conventional and combined cycle) as well as in nuclear power plants. Vallourec provides tubes of all sizes and in a range of materials: ordinary steel, carbon steel, alloy steel, stainless steel and titanium. The Group is present in all phases of the industry: from the construction of new power plants to the upgrading and maintenance of existing plants. Vallourec is the world leader in this sector, far ahead of its two main competitors, which have considerably lower sales. This activity represents more than 15% of Group sales. Vallourec s main products: Stainless and carbon steel tubes for fossil fuel and nuclear power generation plants Boilers Superheaters Steam generators Feedwater heaters Steam headers Welded titanium tubes In 2004, sales generated by the power generation activity reached 467 million, up 66% compared with A large proportion of sales are generated in China due to this country having fallen behind in the construction of power plants. Vallourec produces stainless steel and titanium tubes locally in China, although the majority of its sales are made out of Europe in the form of high value-added products, which face less competition than standard tubes. In the rest of the world, the Group observed an increase in demand in This trend covered the other Asian countries, such as South Korea, India and Taiwan, as well as the United States, where demand for refurbishment and maintenance programmes picked up, and Europe is shaping up well, with programmes for the construction of power plants in China continuing at a high level and the Group s order book already being full to the year end.the upward trend observed in the rest of the world in 2004 has continued into the current year in terms of volumes. Over the medium term, the outlook remains good, with the Group anticipating significant growth in global power generation capacity, mainly in emerging countries and concerning conventional power plants. Sales trend: power generation (in million) % Vallourec 2004 Annual Report 11

12 The Group s markets Share of automotive products in Vallourec s 2004 sales: Automotive industry 16.5% Vallourec supplies tubes and automotive components to the main carmakers and parts manufacturers in Europe and Latin America. The Group works with customers research units to develop innovative and customized solutions. This activity represents 16.5% of Group sales. In 2004, sales to the automotive sector reached 501 million, up 10.8% compared with the previous year, due in particular to a good level of production of seamless tubes in Brazil. New vehicle registrations in Europe grew by only 2%, but the Group was able to maintain its volumes, then increase its prices as from the second half of The future looks promising as the proportion of vehicle weight represented by tubes (measured in terms of kilos per vehicle) continues to grow steadily and Vallourec supplies parts for popular vehicle models. Share of mechanical engineering in Vallourec s 2004 sales: Mechanical engineering 14.1% Vallourec is present in all segments of the mechanical engineering sector: machine tools, agricultural machinery, lifting equipment, etc. The majority of sales are made through European distributors. This activity represents 14% of Group sales. Sales posted by the mechanical engineering activity increased by 30% in 2004 to 428 million. Volumes were substantially higher than in 2003 due to the more favourable economic climate in Europe. Vallourec gradually passed on the increases in raw material costs in its selling prices and this catching up, not yet complete, will continue into Demand remained at a very satisfactory level in the first few months of Share of chemicals and petrochemicals in Vallourec s 2004 sales: Chemicals and petrochemicals 11.0% The Group develops an extensive range of products in carbon, alloy and stainless steel as well as in titanium. These products are mostly used in pipework in chemical and petrochemical installations, particularly refineries. These products are used worldwide for both new plants and maintenance of existing plants. Sales recorded by the chemicals and petrochemicals activity grew by more than 22% in 2004 and represent 11% of Group sales. Demand remains strong among distributors in the United States and Brazil and for projects in Asia and the Middle East. Limited 0by its production capacity, Vallourec focused in 2004 on its most profitable products and most loyal customers. 12 Vallourec 2004 Annual Report

13 Vallourec s main products: Seamless tubes Welded tubes Rings and components Sales trend: automotive products (in million) +10.8% Applications: Chassis, suspension and transmission parts Structural parts and passive safety features Shock absorbers Bearings Airbags HGV axles Vallourec s main products: Tubes in standard or specific grades, and standard or customized sizes Hot-rolled Cold-drawn Cold-forming machines Sales trend: mechanical engineering (in million) +30.5% Applications : High-pressure hydraulic line tubing Mechanical tubes Tubes for double or single acting, or telescopic hydraulic cylinders Parts and shafts for mechanical units and machines Drill rods Tubes for pump bodies Vallourec s main products: Line-pipes for refineries Furnace tubes Heat exchanger tubes Fittings Dished ends Sales trend: chemicals and petrochemicals (in million) +22.3% Vallourec 2004 Annual Report 13

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15 Reference Document Year ended 31 December 2004 Ordinary and Extraordinary General Meeting on 7 June 2005 The original version of this Reference Document (document de référence) in French was deposited with the French financial markets authority (Autorité des Marchés Financiers - AMF) on 20 April 2005 in accordance with Articles to of its general regulations. It may be used in connection with a financial transaction if completed by an Information notice authorized by the AMF. VALLOUREC GROUP This document is a translation of the Annual Report of the Vallourec group for the year ended 31 December Its purpose is to assist English speaking readers. The greatest attention has been paid to its preparation. However, the only official document is the 2004 Annual Report in French, filed with the French financial markets authority (Autorité des Marchés Financiers - AMF) on 20 April Vallourec 2004 Annual Report 15

16 Contents SECTION I: PERSONS RESPONSIBLE FOR THE REFERENCE DOCUMENT AND FOR THE AUDIT 1.1 PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT ATTESTATION BY THE PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT PERSONS RESPONSIBLE FOR THE AUDIT STATUTORY AUDITORS REPORT ON THE REFERENCE DOCUMENT PERSON RESPONSIBLE FOR THE INFORMATION 23 SECTION II: NOT APPLICABLE In the event of a transaction requiring the authorization or assessment of, or registration by, the AMF, information relating to this section would be the subject of a specific transaction memorandum. SECTION III: GENERAL INFORMATION ON VALLOUREC AND ITS CAPITAL 3.1 GENERAL INFORMATION ON VALLOUREC Company name and registered office Legal status Applicable laws Date of formation and dissolution Objects Trade and Companies Registry Consultation of legal documents Financial year Mandatory allocation of net income General Meetings GENERAL INFORMATION CONCERNING THE CAPITAL By-laws concerning changes to the capital and rights attached to shares Share capital Authorized capital not yet issued Securities not representing capital Securities giving access to capital Share subscription options Share purchase options Changes in capital over the last five years Vallourec 2004 Annual Report

17 Contents 3.3 BREAKDOWN OF CAPITAL AND VOTING RIGHTS Company s shareholders Own shares held Changes in breakdown of capital in the last three financial years Other persons exercising control over Vallourec Description of the Vallourec group (Organization chart) MARKET FOR THE COMPANY S SHARES Listing market Other regulated markets Volumes traded and share price performance Vallourec shares % bond loan, July Pledging of shares of the Issuer DIVIDENDS 33 SECTION IV: INFORMATION ON THE ACTIVITIES OF THE VALLOUREC GROUP 4.1 PRESENTATION OF VALLOUREC COMPANY AND GROUP Changes in the Vallourec group s structure in recent years Description of main business activities Production and production volumes Sales by markets and geographic regions Location of main establishments Not applicable Exceptional events influencing the information given in paragraphs to DEPENDENCY ON THE ECONOMIC, INDUSTRIAL AND FINANCIAL ENVIRONMENT Breakdown of raw material and consumable supplies Main customers CHANGE IN AVERAGE NUMBER OF GROUP EMPLOYEES INVESTMENT POLICY Research and development Main investments made NOT APPLICABLE NOT APPLICABLE 46 Vallourec 2004 Annual Report 17

18 4.7 RISKS Market risks (interest-rate, exchange-rate, share price and credit risk) Legal risks Industrial and environmental risks Insurance - cover for potential risks Other specific risks AGREEMENT BETWEEN VALLOUREC AND MANNESMANNRÖHREN-WERKE CONCERNING THE JOINT VENTURE V & M TUBES AGREEMENT BETWEEN VALLOUREC AND MANNESMANNRÖHREN-WERKE CONCERNING THE ACQUISITION OF THE 45% HOLDING IN V & M TUBES 52 SECTION V: FINANCIAL STATEMENTS 5.1 CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS Consolidated financial statements Company financial statements Total earnings per share for the last three financial years AUDITORS REMUNERATION CONSEQUENCES FOR THE VALLOUREC GROUP OF THE TRANSITION TO IFRS 113 SECTION VI: CORPORATE GOVERNANCE 6.1 COMPOSITION AND OPERATION OF ADMINISTRATION, MANAGEMENT AND SUPERVISORY BODIES Composition of Administration, Management and Supervisory bodies Executive Board Supervisory Board Executive Committee Operation of Administration, Management and Supervisory bodies Internal regulations of the Supervisory Board Meetings of the Supervisory Board during the year ended 31 December Independent members and members associated with the Company Committees set up within the Supervisory Board Remuneration principles MANAGERS INTERESTS Remuneration and benefits in kind Options granted over Vallourec shares Transactions with members of the Administration, Management and Supervisory bodies Loans and guarantees Vallourec 2004 Annual Report

19 Contents 6.3 EMPLOYEE PROFIT SHARING Profit sharing and incentive plans Options Employee shareholders 141 SECTION VII: INFORMATION ON RECENT DEVELOPMENTS AND OUTLOOK 7.1 RECENT DEVELOPMENTS OUTLOOK 143 SECTION VIII: SPECIFIC DOCUMENTS FOR THE ORDINARY AND EXTRAORDINARY GENERAL MEETING ON 7 JUNE EXECUTIVE BOARD REPORTS Management report of the Executive Board to the Ordinary and Extraordinary General Meeting on 7 June Special report on options REPORT OF THE CHAIRMAN OF THE SUPERVISORY BOARD 175 on the conditions governing the preparation and organization of the Supervisory Board s work and on the internal control procedures 8.3 STATUTORY AUDITORS REPORTS Statutory Auditors general report on the annual statutory accounts Statutory Auditors special report on certain related party transactions Statutory Auditors report on the consolidated financial statements Statutory Auditors report on the report of the Chairman of the Supervisory Board on internal control procedures Statutory Auditors special report on the consolidated financial statements for the year ended 31 December 2004 restated in accordance with IFRS Statutory Auditors special report on the allocation of bonus shares, which must be existing shares SUPERVISORY BOARD REPORT RESOLUTIONS PROPOSED BY THE EXECUTIVE BOARD SUBSIDIARIES AND PARTICIPATING INTERESTS AS AT 31 DECEMBER COMPANIES CONTROLLED DIRECTLY OR INDIRECTLY AS AT 31 DECEMBER EVALUATION OF SECURITIES PORTFOLIO AS AT 31 DECEMBER FIVE-YEAR FINANCIAL SUMMARY 196 Vallourec 2004 Annual Report 19

20 Section I Persons responsible for the Reference Document and for the audit 1.1 Person responsible for the Reference Document Mr Pierre Verluca, Chairman of the Executive Board and Chief Executive Officer. 1.2 Attestation by the person responsible for the Reference Document To the best of our knowledge, the information given in this Reference Document is correct; it includes all the information necessary for investors to reach an opinion on Vallourec s assets, business activity, financial position, results and prospects; and there are no omissions likely to change its import. Boulogne-Billancourt, 19 April 2005 Pierre Verluca Chairman of the Executive Board and Chief Executive Officer 20 Vallourec 2004 Annual Report

21 Section I 1.3 Persons responsible for the audit STATUTORY AUDITORS: Barbier Frinault & Autres (Ernst and Young network) Cabinet Calan, Ramolino et Associés (Deloitte network) represented by Mr Alain Gouverneyre represented by Mr Bertrand de Florival 41, rue Ybry 191, avenue Charles de Gaulle Neuilly-sur-Seine Neuilly-sur-Seine ALTERNATIVE AUDITORS: Mr Jean-Marc Besnier Société BEAS 41, rue Ybry 7-9, Villa Houssaye Neuilly-sur-Seine Neuilly-sur-Seine Cedex Alternative for Barbier Frinault & Autres Alternative for Cabinet Calan, Ramolino et Associés Barbier Frinault & Autres were first appointed as Statutory Auditors by the General Meeting held on 14 June 1994 and were reappointed by the General Meeting held on 15 June 2000 for a further period of six years ending with the General Meeting called to approve the financial statements for the financial year Mr Jean-Marc Besnier, Alternative Auditor for Barbier Frinault & Autres, was appointed by the General Meeting held on 10 June 2004 (eighth resolution) as a replacement for Mr Francis Scheidecker, who had resigned. The terms of office of Mr Besnier and Mr Scheidecker will expire at the end of the General Meeting called to approve the financial statements for the financial year Following Mr Thierry Karcher s resignation with effect from the General Meeting held on 11 June 2002, Cabinet Calan, Ramolino et Associés, which had until that date been the Alternative Auditor, became the Statutory Auditor. The seventh resolution submitted to that General Meeting provided for the appointment of BEAS as Alternative Auditor for Cabinet Calan, Ramolino et Associés. Their terms of office will expire on the date of the General Meeting held to approve the financial statements for the financial year Vallourec 2004 Annual Report 21

22 1.4 Statutory Auditors report on the Reference Document This is a free translation into English of the Statutory Auditors report on the Reference Document (Document de référence) issued in the French language and is provided solely for the convenience of English speaking readers. The Statutory Auditors reports on financial statements and consolidated financial statements, referred to in this report, include information specifically required by French law in all audit reports, whether qualified or not, and this is presented after the opinion on the financial statements. This information includes explanatory paragraphs discussing the Auditors assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the annual and consolidated financial statements taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the annual and consolidated financial statements. This report should be read in conjunction with, and construed in accordance with French law and professional auditing standards applicable in France. In our capacity as Statutory Auditors of Vallourec and in compliance with Article of the AMF general regulations, we have verified the information in respect of the financial position and historical financial statements included in the accompanying Reference Document, in accordance with professional standards applicable in France. Mr Pierre Verluca, Chairman of the Executive Board of Vallourec, was responsible for the preparation of this Reference Document. It is our responsibility to issue an opinion on the fairness of the information contained therein with respect to the financial position and the financial statements. We conducted our review in accordance with French professional standards. This review consisted in assessing the fairness of the information on the financial position and financial statements and verifying their consistency with the audited accounts. We also reviewed other financial information contained in the Reference Document in order to identify any significant inconsistency with information in respect of the financial position and financial statements and to bring to your attention any obvious misstatements we noted based on our general understanding of the Company gained through our audit. Where information concerning sales or EBITDA is in the form of forecast data prepared in accordance with a structured forecasting process, our review of it took account of the management assumptions used and their translation into figures. The Company financial statements and the consolidated financial statements for the year ended 31 December 2002 were prepared by the Executive Board and were audited by Barbier Frinault & Autres and Calan Ramolino et Associés, in accordance with professional standards applicable in France, and have been certified without qualification and with an observation relating to the change of accounting method resulting from the application for the first time, as from 1 January 2002, of CRC regulation no on accounting for liabilities. The Company financial statements and the consolidated financial statements for the year ended 31 December 2003 were prepared by the Executive Board and were audited by ourselves, in accordance with professional standards applicable in France. The Company financial statements have been certified without qualification. The consolidated financial statements have been certified without qualification and we draw attention to the change of accounting method resulting from the accounting for the first time of long-service awards. The Company financial statements and the consolidated financial statements for the year ended 31 December 2004 were prepared by the Executive Board and were audited by ourselves, in accordance with professional standards applicable in France. The Company financial statements have been certified without qualification and we draw attention to the change of accounting method regarding actuarial surpluses and deficits. The consolidated financial statements have been certified without qualification and no specific comments were made. The consolidated financial statements for the financial year 2004 restated in accordance with the IFRS framework, as adopted in the European Union, were audited by ourselves, in accordance with professional standards applicable in France. In our report on these financial statements, we expressed an unqualified opinion on all material aspects of their compilation, in accordance with the preparation rules described in the accompanying notes, whilst drawing the reader s attention to: Note 2.2, which details the reasons why the comparative information disclosed in the consolidated financial statements for the financial year 2005 could differ from the restated consolidated financial statements attached to our report, 22 Vallourec 2004 Annual Report

23 Section I the fact that, as regards preparations for the transition to IFRS, as adopted in the European Union for the preparation of consolidated financial statements for the financial year 2005, the restated consolidated financial statements do not include the comparative information in respect of the financial year 2003, nor do they include all of the notes to the financial statements required under the IFRS framework as adopted in the European Union, that would be necessary to give, in accordance with this framework, a true and fair view of the assets, liabilities, financial position and results of the consolidated group of companies. We have nothing to report with respect to the fairness of the information relating to the financial situation and the financial statements as presented in this Reference Document. Neuilly-sur-Seine, 19 April 2005 The Statutory Auditors CALAN RAMOLINO ET ASSOCIES BARBIER FRINAULT & AUTRES ERNST & YOUNG Bertrand de Florival Bernard Scheidecker Alain Gouverneyre Additional information This Reference Document also includes: The Statutory Auditors general report and report on the consolidated financial statements for the year ended 31 December 2004 (section and respectively of this Reference Document) incorporating the justification of the Auditors assessment of the financial statements, prepared in accordance with the provisions of Article L of the French Code de Commerce; The Statutory Auditors report (section of this Reference Document), prepared in accordance with the last section of Article L of the French Code de Commerce, on the report of the Chairman of Vallourec s Supervisory Board describing the internal control procedures relating to the preparation and processing of accounting and financial information. 1.5 Person responsible for the information Mr Henri Redig Corporate Secretary / Investor relations VALLOUREC 130, rue de Silly Boulogne-Billancourt Tel: +33 (0) / +33 (0) Fax: +33 (0) henri.redig@vallourec.fr Vallourec 2004 Annual Report 23

24 Section III General information on Vallourec and its capital 3.1 General information on Vallourec Company name and registered office VALLOUREC 130, rue de Silly Boulogne-Billancourt Legal status A French limited liability company (Société Anonyme) having opted on 14 June 1994 for a management structure comprising an Executive Board and a Supervisory Board Applicable laws French Date of formation and dissolution The Company was formed in It will be dissolved on 17 June 2067, unless its life is extended or dissolved early Objects (Article 3 of the By-laws) The Company s object, in any country either on its own account or for a third party or directly or indirectly in partnership with third parties, is to carry out all industrial and commercial transactions relating to all methods of the preparation and manufacture, by all processes known or that could be discovered subsequently, of metals and any materials that may replace them in all their applications, and, in general, all commercial, industrial and financial transactions, and transactions in movable and fixed property, directly or indirectly associated with the above object Trade and Companies Registry The Company is registered with the Nanterre (Hauts-de-Seine) Trade and Companies Registry under no APE 741 J Consultation of legal documents The By-laws, minutes of General Meetings and other Company documents can be consulted at the registered office Financial year The Company s financial year covers a period of twelve months from 1 January to 31 December Mandatory allocation of net income (Article 15 of the By-laws) The distributable net income, as defined by law, is allocated by a General Meeting of shareholders. Unless there is an exception resulting from legal requirements, it is for the General Meeting to decide on how the net income should be allocated. A General Meeting may also decide to grant to each shareholder the right to choose, for all or part of the dividend to be distributed, between payment of the dividend in cash or in shares, in accordance with the legal and regulatory requirements at the time. 24 Vallourec 2004 Annual Report

25 Section III General Meetings Shareholders meetings are called in accordance with the conditions provided for by law. A General Meeting is open to all shareholders, irrespective of the number of shares held. Each shareholder attending the General Meeting has as many votes as shares owned or represented, unless there are legal requirements to the contrary. However, fully paid-up shares duly registered in the name of the same shareholder for four years have double the voting right conferred on other shares (Article 12 paragraph 4 of the By-laws). There are no special requirements in the By-laws concerning declarations when thresholds are crossed. The Company has the right to request the identification of holders of securities granting an immediate or future right to vote in its General Meetings and evidence of the quantities held, under the provisions of current legislation (Article 8 of the By-laws). 3.2 General information concerning the capital By-laws concerning changes to the capital and rights attached to shares An Extraordinary General Meeting may, within the provisions of the law, increase or reduce the share capital or delegate to the Executive Board the necessary powers to do so (Article 7 of the By-laws). However, on the basis of the Company s internal organization (Article 9 section 3 of the By-laws), the Executive Board may not carry out the following transactions without previous authorization from the Supervisory Board: any capital increase for cash or by incorporation of reserves authorized by a General Meeting, any other issue of securities that could later give access to the capital, authorized by a General Meeting. The shares are freely tradable and transferable in accordance with legislative and regulatory provisions Share capital The fully paid-up subscribed capital amounted to 197,399,120 as at 31 December 2004, divided into 9,869,956 shares of 20 par value Authorized capital not yet issued The Extraordinary General Meeting held on 25 February 2005 (first resolution) delegated to the Executive Board, subject to the prior approval of the Supervisory Board (see above), the powers required to increase the share capital by issuing ordinary shares or any other securities giving access to the Company s capital, retaining shareholders preferential subscription rights. The maximum nominal value of shares that may be issued in this way is limited to 60 million and that of securities representing amounts receivable from the Company is limited to 150 million. This authorization was granted for a duration of 26 months ending on 24 June It renders null and void the previous delegation resulting from the first resolution Vallourec 2004 Annual Report 25

26 of the Ordinary and Extraordinary General Meeting held on 11 June 2003 which related to similar issues. The Ordinary and Extraordinary General Meeting held on 11 June 2003 (second resolution) delegated to the Executive Board the powers required to increase the share capital by issuing ordinary shares or any other securities giving access to the Company s capital, with the withdrawal of shareholders preferential subscription rights. This authorization expires on 10 August As matters stand, however, it may not be used as the General Meeting failed to rule on the principle of a capital increase reserved for employees. The Executive Board does not have any powers to implement capital increases reserved for employees since the resolutions to this effect submitted, in accordance with the prevailing legislation, to the Ordinary and Extraordinary General Meeting held on 10 June 2004 (tenth resolution) and the Extraordinary General Meeting held on 25 February 2005 (second resolution) were rejected by the shareholders Securities not representing capital At present there are no securities that do not represent capital (such as founder s shares, voting right certificates, etc.) Securities giving access to capital Share subscription options The first resolution of the Extraordinary General Meeting held on 15 June 2000 authorized the Executive Board to grant share subscription options to certain Group employees, managers or Company officers, if required, and up to a limit of 4% of the share capital. Under this authorization, which expires on 14 June 2005, a tranche of options was granted on 15 June 2000 at a price of 38 per share, corresponding to 95% of the average of the last 20 prices quoted during the 20 trading sessions before the date of granting the options, for a total of 178,500 options, each giving the right to subscribe for one Vallourec share, i.e. in total 1.92% of the total number of shares making up the capital at that date (see below). These options, which cannot be exercised until after the end of a holding period of four years, may be exercised during a period of three years from 15 June 2004 to 14 June 2007 inclusive. After taking into account the options cancelled (6,750) since the date they were granted (the holders having left the Group), and options exercised as from 15 June 2004, the number of share subscription options outstanding at 31 December 2004 amounted to 32,020, i.e. 0.3% of the share capital at that date Share purchase options The second resolution of the Extraordinary General Meeting held on 15 June 2000 authorized the Executive Board to grant share purchase options to certain Group employees, managers or Company officers, if required, and up to a limit of 10% of the share capital. Under this authorization, which expires on 14 June 2005, a tranche of options was granted on 11 June 2003 at a price of per share, corresponding to the average of the last 20 prices quoted during the 20 trading sessions before the date of granting the options, not discounted, for a total of 193,000 options, each giving the right to purchase one Vallourec share, i.e. in total 1.98% of the total number of shares making up the capital at that date (see below). These options, which cannot be exercised until after the end of a holding period of four years, may be exercised during a period of three years from 11 June 2007 to 10 June 2010 inclusive. After taking into account the options cancelled (2,250) since the date they were granted (the holders having left the Group), the number of share purchase options outstanding at 31 December 2004 amounted to 190,750, i.e. 1.93% of the share capital at that date. 26 Vallourec 2004 Annual Report

27 Section III Changes in capital over the last five years Transaction/ New shares created by: dates Exercise of Subscriptions Capital Issue Share Total number subscription options in cash increase premium capital of shares (1) in francs 01/01/00 FRF 926,803,100 9,268,031 31/12/00 FRF 926,803,100 9,268,031 01/01/01 (2) FRF 289,082,862 FRF 1,215,885,962 9,268,031 CONVERSION OF SHARE CAPITAL INTO EUROS in euros 01/01/01 185,360,620 9,268,031 05/07/01 (3) 462,195 9,243,900 10,450, ,604,520 9,730,226 31/12/02 194,604,520 9,730,226 31/12/03 194,604,520 9,730,226 31/12/04 (4) 139,730 2,794,600 2,515, ,399,120 9,869,956 (1) Nominal value FRF 100 until 31 December 2000, nominal value 20 as from 1 January (2) Incorporation of reserves prior to conversion of the share capital into euros. (3) Transaction reserved for employees of the Group s French and German subsidiaries (see below). (4) Exercise of subscription options (see above). 3.3 Breakdown of capital and voting rights Company s shareholders An analysis of identifiable bearer shares was carried out on 14 January This enabled 12,284 shareholders, representing 100% of the share capital, to be identified. At that date, the breakdown of share capital and voting rights was as follows: Shareholders Number of shares % of shares Number of voting rights % of voting rights Mannesmannröhren-Werke GmbH 2,235, ,556, Bolloré group 2,482, ,482, Free float 4,717, ,729, Group employees 164, , Held in treasury 269, Total 9,869, ,932, The percentages of voting rights are calculated by reference to the number of voting rights published in the BALO dated 12 January The analysis of identifiable bearer shares did not reveal any shareholders other than Mannesmannröhren-Werke GmbH and Bolloré group with holdings in excess of 5% of the share capital or voting rights. Mannesmannröhren-Werke GmbH is a wholly-owned subsidiary of the German company Salzgitter AG. The holdings of Group employees have arisen as a result of a capital increase reserved for employees of the French and German subsidiaries that took place on 5 July 2001 (see below). Vallourec 2004 Annual Report 27