As filed with the Securities and Exchange Commission on October 24, 2003

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F/A

[  ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2002
OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File number: 1-14110

(Exact name of Registrant as specified in its charter)

N/A
France
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)

7, Place du Chancelier Adenauer, 75116 Paris, France
Telephone: +33 (1) 56 28 20 00

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

      Name of each exchange  
  Title of each class:   on which registered  
  Common Shares "A", nominal value   New York Stock Exchange  
  15.25 Euros per Common Share      
  American Depositary Shares   New York Stock Exchange  

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Common Shares "A", nominal value € 15.25 per share ...................................................................................................................................................
81,422,639
Preferred Shares "B", nominal value € 15.25 per share ...................................................................................................................................................
1,091,044

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes:[X]
No: [  ]

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17: [  ]
Item 18: [X]

  1

»Tables of Contents

Explanatory Note p.3  
Presentation of Information p.3  
     
Cautionary Statement Regarding p.4  
Forward Looking Statements    
     
Item 1 p.5  
Item 2 p.6  
Item 3 p.7  
Item 4 p.15  
Item 5 p.73  
Item 6 p.103  
Item 7 p.121  
Item 8 p.123  
Item 9 p.125  
Item 10 p.133  
Item 11 p.161  
Item 12 p.163  
Item 13 p.164  
Item 14 p.165  
Item 15 p.166  
Item 16 p.167  
Item 17 p.168  
Item 18 p.169  
Item 19 p.170  
     
2

»Explanatory Note

This Annual Report on Form 20-F/A amends the Annual Report on Form 20-F filed by Pechiney on March 25, 2003.

The amendment includes restated financial information as of December 31, 2001 and 2000 and for each of the years ended December 31, 2002, 2001 and 2000.

The principal effect of the restatement of financial information is to include Pechiney's subsidiary Pechiney Far East within the scope of consolidation for the years ended December 31, 2000 and 2001. For further information, see Notes 1 and 25 to our Consolidated Financial Statements.

 

As a result, recorded net sales have increased by €458 million (or 4.1%) in 2001 and by €195 million (or 1.8%) in 2000, recorded net loss has increased by €5 million (or 10.0%) in 2002 and recorded net income has increased by €1 million (or 0.4%) in 2001 and by €4 million (or 1.3%) in 2000.

The filing of this Annual Report on Form 20-F/A should not be understood to mean that all statements contained in this document are true or complete as of any date subsequent to March 25, 2003. You should not consider this amendment to be a reaffirmation or reiteration of any forward-looking statements from the original filing that may be reproduced in this amendment.

»Presentation of Information

The Company publishes its Consolidated Financial Statements in euros ("euros" or "€"). However, the Company’s financial statements for 1998 were originally prepared in French francs, and have been translated into euros for purposes of this document at the rate of FF 6.55957 = € 1.00, the applicable rate established on January 1, 1999. The euro did not exist during 1998, and the conversion rate used may not reflect the FF/euro exchange rate that would have applied if the euro had existed at such times. Solely for the convenience of the reader, this document contains translations of certain euro amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the converted amounts actually represent such U.S. dollar amounts or could have been (at the relevant date) converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise stated, the translations of euros into U.S. dollars have been made at the rate published by the European Central Bank (the "ECB Rate") of € 1.00 = $1.0487 (or $1.00 = € 0.9536) on December 31, 2002, the last trading day for the year 2002. See "Item 3. Key Information - Exchange Rate Information" for information regarding the euro/U.S. dollar exchange rate from January 1, 2002 to the present.

In this document, references to "United States" are to the United States of America, references to "U.S. dollars" or "$" are to United States dollars and references to "tons" or "t" are to metric tons (1,000 kilograms or 2,204 pounds). References to "Euronext Paris" are to the integrated national dealing system through which listed securities are traded in France. References to "LME quotations" are to three-month forward quotations on the London Metal Exchange.

 

As used herein, the term "Company" refers to Pechiney without its consolidated subsidiaries and the terms "Pechiney" and "Group" refer to the Company together with its consolidated subsidiaries. References to "Common Shares "A"" are to the Company’s Class "A" shares, nominal value € 15.25 per Share, and references to "Preferred Shares "B"" are to the Company’s Class "B" Shares, nominal value € 15.25 per Share. References to "share capital" are to the nominal amount of Common Shares "A" and Preferred Shares "B" and references to "voting rights" are to the rights to vote in general meetings of the holders of Common Shares "A" or Preferred Shares "B" (see "Item 10. Additional Information - Description of Share Capital").

As used herein, the term "Consolidated Financial Statements" refers to the Company’s audited consolidated financial statements as at and for the three years ended December 31, 2002.

Various amounts and percentages set out in this document have been rounded and, accordingly, may not total.

Except as otherwise noted herein, references to "Europe" do not include Russia or Turkey. Data regarding primary aluminum production in the "Western World" refers to worldwide production excluding China, CIS, and Eastern and Central European countries.

 

3

»Cautionary Statement Regarding Forward Looking Statements

Certain of the statements contained in this document that are not historical facts, including, without limitation, certain statements made in the sections entitled "Item 3. Key Information - Risk Factors", "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects", are statements of future expectations. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "is expected to", "will", "will continue", "should", "would be", "seeks" or "anticipates" or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Although the Company believes its expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties. Risks that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other things:

  • changes in exchange rates, including particularly the exchange rate of the euro to the U.S. dollar;
  • changes in aluminum prices;
  • changes in economic trends and seasonality;
 
  • increasing levels of competition in France and other international aluminum markets;
  • customers and market concentration;
  • pricing and availability;
  • changes in laws and regulations;
  • risks and uncertainties attendant to doing business in numerous countries which may be exposed to, or may have recently experienced, economic or governmental instability;
  • general competitive and market factors on a global, regional and/or national basis;
  • raw materials and energy.

Readers are urged to carefully review and consider the various disclosures made by the Company that attempt to advise interested parties of the factors affecting the Company’s business, including the disclosures made under the captions "Item 3. Key Information - Risk Factors", "Item 4. Information on the Company" and "Item 5. Operating and Financial Review and Prospects" in this annual report, as well as the Company’s other periodic reports on Form 6-K filed with the Securities and Exchange Commission.


»Cautionary Statement Regarding Market Shares

Unless otherwise indicated, statistical and market trend information, as well as statements related to market position and competitive data, are based on the Company’s internal statistics and/or estimates, which are in turn

 

based on the Company’s own research and various publicly available sources.

4

 

 

»Identity of Directors, Senior Management and Advisers

Item 1

 

 

Not Applicable.

 

5

 

 

»Offer Statistics and Expected Timetable

Item 2

 

 

Not Applicable.

 

6

 

 

»Key Information

Item 3

Selected Financial Data

The following table sets forth selected consolidated financial data for the Group for the periods indicated. These data were derived from the Consolidated Financial Statements of the Group prepared in accordance with French generally accepted accounting principles ("GAAP"), which differ in certain significant respects from U.S. GAAP. This information is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements, the related Notes thereto, and "Item 5. Operating and Financial Review and Prospects" included elsewhere in this Annual Report.

Beginning with the financial statements for fiscal year 2001, Pechiney has prepared its financial statements in accordance with French GAAP only, and provides a description of the principal differences between French GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of consolidated net income and shareholders’ equity. The use of a single set of accounting principles prevents any confusion that may be generated by the simultaneous publication of two different sets of financial statements and

 

notes and comments thereto. The application of French GAAP is consistent with the standards used by the Company’s internal reporting system.

The impact of the differences between French GAAP and U.S. GAAP is presented in Note 25 to the Consolidated Financial Statements for a description of the principal differences between French GAAP and U.S. GAAP, as they relate to the Company and its consolidated subsidiaries and for a reconciliation to U.S. GAAP of net income and shareholders’ equity.

In addition, the Company has changed its presentation of goodwill amortization in its Consolidated Financial Statements for the 2002 fiscal year with respect to previous years, impacting several line items on the Company’s income statement. Accordingly, income from operations and other line items for the fiscal years 2001, 2000 and previously have been reclassified in this Annual Report to conform to the new accounting treatment.

 

7

»Key Information

SELECTED CONSOLIDATED DATA                        













Year ended and as at December 31 (1)2002   (1)(2)2002   (1)2001   (1)2000   (1)1999   (1)1998  
(in millions, except per share, per cip                        
and per ads data)
(€)
($)
(€)
(€)
(€)
(€)
 
 
(Restated)(5)
(Restated)(5)
(Restated)(5)
(Restated)(5)
         













Income Statement Data:                        
Net sales 11,909   12,489   11,512   10,874   9,507   9,836  
Other operating revenues 144   151   155   153   139   176  
Cost of goods sold (excluding depreciation) (10,611)   (11,128)   (10,070)   (9,411)   (8,147)   (8,442)  
Selling, general and administrative expense (610)   (640)   (620)   (564)   (529)   (529)  
Research and development expense (90)   (94)   (97)   (90)   (79)   (92)  
Depreciation and amortization (335)   (351)   (328)   (303)   (311)   (318)  
Long-lived assets writedown (102)   (107)   (19)   (13)   (13)   (8)  
Restructuring expense (43)   (45)   (56)   (16)   (25)   (7)  
Other income (expense) (103)   (108)   10   (8)   (193)   (3)  

 













Income (loss) from operations 159   167   487   622   349   613  
Financial expense, net (49)   (51)   (68)   (68)   (95)   (142)  

 













Income (loss) 110   116   419   554   254   471  
Income tax (expense) benefit (39)   (41)   (130)   (172)   15   (98)  

 













Income (loss) from consolidated companies 71   75   289   382   269   373  
Equity in net earnings of affiliates 3   3   24   (13)   41   10  
Minority interests 0   0   (28)   (31)   (11)   (20)  

 













Income (loss) from continuing operations 74   78   285   338   299   363  
Goodwill amortization (129)   (135)   (51)   (20)   (39)   (52)  
Discontinued operations -   -   -   -   -   -  
Cumulative effect of accounting changes -   -   -   -   -   -  
Net income (loss) (55)   (57)   234   318   260   311  

 













Per Share "A", Share "B"/CIP and ADS Data:(3)                        
Net income (loss) available for distribution (55)   (57)   234   318   260   311  
- Per Common Share "A" (0.72)   (0.76)   2.94   3.94   3.17   3.80  
- Per Preferred Share "B"/CIP 0.73   0.77   4.39   5.39   4.62   5.25  
- Per ADS (0.36)   (0.38)   1.47   1.97   1.58   1.90  
Cash dividends declared(4)                        
- Per Common Share "A" 1.00   1.05   1.00   1.00   0.81   0.80  
- Per Preferred Share "B"/CIP 1.65   1.73   1.79   3.31   0.81   1.96  
- Per ADS 0.50   0.52   0.50   0.50   0.40   0.40  

 













Amounts in accordance with U.S. GAAP                        
Net sales 11,918   12,498   11,501              
Income from operations 175   184   441              
Net income (9)   (9)   195              
Basic earnings per share "A"
(0.13)
(0.14)
2.43
Diluted earnings per share "A"
(0.13)
(0.14)
2.92

 













Balance Sheet Data:                        
Cash and marketable securities 436   457   445   463   468   1,033  
Property, plant and equipment - net 2,832   2,970   2,997   2,476   2,381   2,770  
Total assets 8,234   8,635   8,699   8,087   7,687   9,282  
Long-term debt less current portion 1,465   1,536   971   734   903   1,307  
Shareholders’ equity (Group share) 3,014   3,161   3,400   3,277   3,026   2,624  
Minority interests 149   156   169   169   153   149  
Share capital (in billions) 1.26   1.32   1.25   1.25   1.25   1.25  
Number of shares 82,513,683   82,513,683   81,626,190   81,585,190   81,576,212   81,560,387  

 













(1) Derived from the Group’s audited Consolidated Financial Statements prepared in accordance with French GAAP. For the year ended December 31, 1998 amounts have been translated from French francs to euros using the official rate as of January 1, 1999.
(2) The U.S. dollar amounts in this column have been translated solely for the convenience of the reader at an exchange rate of
€ 1.00 = $1.0487 (the exchange rate on the balance sheet date).
(3) Per Share data is calculated based upon the weighted average number of Shares outstanding during each period presented (see Note 12(h) to the Consolidated Financial Statements).
(4) Does not include the French avoir fiscal.
(5) For additional information, see Notes 1 and 25 to our Consolidated Financial Statements.

8

 

 

»Key Information

Item 3

Exchange Rate Information

Under the provisions of the Treaty on European Union negotiated at Maastricht in 1991 and signed by the 12 member states of the European Union in early 1992, a European Monetary Union (known as the "EMU") was implemented on January 1, 1999, and a single European currency, known as the "euro", was introduced. The following 12 member states participate in the EMU and have adopted the euro as their national currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. The legal rate of conversion between French francs and euros was established on January 1, 1999 at FF 6.55957 = € 1.00.

For a discussion of the impact of currency fluctuations on the Group’s financial condition and results of operations, see "Item 5. Operating and Financial Review and Prospects - General Information - Currency Fluctuations".

 

The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate in New York City, as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") for cable transfers:

  • in French francs for 1998 (expressed in French francs per $1.00, and converted for informational purposes into U.S. dollars per € 1.00 at the French franc/euro conversion rate established on January 1, 1999);
  • in euros for subsequent periods (expressed in U.S. dollars per € 1.00).

These rates are provided solely for the convenience of the reader and are not the rates used by the Company in the preparation of its Consolidated Financial Statements included elsewhere in this Annual Report. The Group uses the ECB Rate for its internal financial reporting and for the presentation of certain U.S. dollar/French franc and U.S. dollar/euro translations set forth herein (see "Presentation of Information"). No representation is made that French francs or euros could have been, or could be, converted into U.S. dollars at these rates or at any other rate.

 

   
Period-end rate
 
(1)Average rate
Euro High Point
Euro Low Point
   
($/€)
 
(FF/$)
 
($/€)
 
(FF/$)
 
($/€)
 
(FF/$)
 
($/€)
 
(FF/$)

 
 
 
 
 
 
 
 
October 2003 (Through October 17)
1.16
-
1.17
-
1.18
-
1.16
  -
September 2003  
1.17
  -  
1.13
  -  
1.17
  -  
1.08
  -
August 2003  
1.10
  -  
1.11
  -  
1.13
  -  
1.09
  -
July 2003  
1.12
  -  
1.14
  -  
1.16
  -  
1.12
  -
June 2003  
1.15
  -  
1.17
  -  
1.19
  -  
1.14
  -
May 2003  
1.17
  -  
1.16
  -  
1.19
  -  
1.12
  -
April 2003  
1.12
  -  
1.09
  -  
1.12
  -  
1.06
  -

 
 
 
 
 
 
 
 
2002  
1.05
  -  
0.95
  -  
1.05
  -  
0.86
  -
2001  
0.89
  -  
0.89
  -  
0.95
  -  
0.84
  -
2000  
0.94
  -  
0.92
  -  
1.03
  -  
0.83
  -
1999  
1.01
  -  
1.06
  -  
1.18
  -  
1.00
  -
1998       FF 5.62  
  FF 5.90  
  FF 5.39       FF 6.21

 
 
 
 
 
 
 
 
(1)
 
The yearly averages of the Noon Buying Rates for French francs or euros, as the case may be, were calculated using the average Noon Buying Rate on the last business day of each month during the relevant period. The monthly averages were calculated using the average of the daily Noon Buying Rates for euros within each month.

9

»Key Information

Risk Factors

Risk factors relating to our industry and markets

Our business is subject to fluctuations in world aluminum prices which could negatively affect our earnings.

We are exposed to the risk of fluctuations in the price of aluminum on the London Metal Exchange (LME) (see "Item 5. Operating and Financial Review and Prospects - General Information - Volatility of World Aluminum Prices"), which determines the price at which we are able to sell aluminum in the market. If the price of aluminum on the London Metal Exchange declines substantially, our operating results may deteriorate. Since the world price of aluminum (quoted on the LME) is denominated in U.S. dollars, and a substantial portion of our Primary Aluminum sales is linked to U.S. dollars, the negative impact on our operating results of a decline in the world price of aluminum is generally amplified when the U.S. dollar declines in value vis-à-vis the euro, while it is usually attenuated if the U.S. dollar is strong vis-à-vis the euro. Conversely, the positive impact of a rise in the world price of aluminum on Primary Aluminum’s earnings from

 

operations can be significantly attenuated by a weak U.S. dollar vis-à-vis the euro. In addition to the effort made to reduce our sensitivity to the effects of currency fluctuations, we may occasionaly, through specific short-term hedging operations, anticipate fluctuations in the world price of aluminum (see "Item 5. Operating and Financial Review and Prospects - General Information - Sensitivity of the Group’s Industrial Operations to Fluctuations in Aluminum Prices - Primary Aluminum"). Even when we have entered into hedging arrangements to protect ourselves from this fluctuation risk, we may cease to engage in hedging arrangements in the future, and any existing or future hedging arrangements may not be successful. Fluctuations in aluminum prices could thus result in lower profits and a reduction in any dividends, and could cause the trading price of our shares to decline.

Our business is subject to the price and availability of other raw materials.

The principal raw materials we use in manufacturing our products are alumina, aluminum and plastics. The prices of many of the raw materials we use depend on supply and demand relationships at a worldwide level, and are therefore subject to variation. The price of aluminum and other raw materials that we use, and demand for aluminum volumes, depend upon a number of factors, including general economic conditions, cyclical trends in our end-use markets and imbalances in supply. Prices for the raw materials we require may increase and, if they do, we may not be able to pass on the entire cost of the increases to our customers, which may cause our profitability to decline.

 

There is a potential time lag between changes in prices under our purchase contracts and the point when we can implement a corresponding change under our sales contracts with our customers. As a result, we cannot necessarily protect ourselves from fluctuations in raw materials prices since during the time lag period we may have to temporarily bear the additional cost of the change under our purchase contracts, which could have a temporary negative impact on our profitability.

Our business is subject to fluctuations in energy prices.

We consume large volumes of energy, mainly electricity, particularly in producing aluminum and ferroalloys. Aluminum smelters generally require an uninterrupted supply of intense electrical energy, and any interruption of more than four hours, whatever the cause, may have a major technical, commercial and financial impact on the activities of the facility concerned.

 

If energy costs were to rise, or if energy supplies or supply arrangements were disturbed, our profitability may decline, which could lead to a reduction in any dividends and cause the trading prices of our shares to decline.

10

 

 

»Key Information

Item 3

We may be subject to unforeseen environmental costs and liabilities that could adversely affect our financial condition and results.

We are subject to a broad range of environmental laws and regulations in each of the jurisdictions in which we operate. These laws and regulations impose increasingly stringent environmental protection standards on us that relate, among other things, to air emissions, wastewater discharges, the use and handling of hazardous materials, waste disposal practices, and cleanup of environmental contamination. Such laws and regulations expose us to the risk of substantial costs and liabilities, including liabilities associated with assets that we have sold and activities that we have discontinued.

It is our policy to identify and, to the extent possible, quantify the costs associated with the potential clean-up of sites where we could incur liability. There can be no assurance, however, that the amounts we have budgeted and provisioned will enable us to satisfy our environmental obligations, especially in light of several factors: the rapid development of increasingly

 

stringent environmental laws and regulations and of their interpretation by the courts; governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress; and potential liability of the Group to remediate sites for which provisions have not been established. Our accounting reserves may not be sufficient to cover future environmental liabilities. The amounts of these liabilities could result in lower profits, lead to a reduction in any dividends and cause the trading prices of our shares to decline.

In addition, future developments, such as changes in law or new information regarding environmental conditions, could result in increased environmental costs and liabilities that could have a material adverse effect on our future financial condition and results of operations or our consolidated financial position.

We may be subject to liability related to the use of hazardous substances in production.

We use a variety of materials and chemicals in our manufacturing activities. In the event that any of these substances, such as aluminum or solvents such as glycol ethers, proves to be toxic, we may be liable for increased costs for health-related claims or removal or retreatment of such substances.

Although we do not currently use asbestos or its derivatives as raw materials in our manufacturing process, there is some risk of asbestos exposure associated with the use of consumer goods in the manufacturing

 

process, as well as with maintenance work on our buildings or ovens. We have implemented a strict system by which residual asbestos materials, such as fibrocement, are identified. We have also implemented a program that assures the protection and medical surveillance of the workforce. In the event that the provisions we have set aside to eliminate asbestos in our facilities is insufficient, our financial condition and results of operations could be harmed.

Risk Factors Relating to our Group

Fluctuations in the euro/U.S. dollar exchange rate may lead our financial results to decline.

Fluctuations in the euro/U.S. dollar exchange rate could result in lower profits and a reduction in any dividends, and could cause the trading prices of our shares to decline.

In 2002, 40% of our production was located in North America and in countries whose currency is linked to the U.S. dollar. In addition, a substantial portion of Primary Aluminum sales is denominated in or linked to U.S. dollars and is therefore subject to fluctuations in the euro/U.S. dollar exchange rate. Since most of our sales are denominated in currencies other than the euro, foreign exchange rate fluctuations have a significant

 

impact on our operating income. We strive to reduce our sensitivity to the effects of currency fluctuations, in particular the fluctuations between the euro and the U.S. dollar or between the euro and currencies linked to the U.S. dollar, by financing our foreign investments in the currency of the country in question, on the one hand, and by hedging our foreign exchange risks, primarily through centralized management of such risks, on the other (see "Item 5. Operating and Financial Review and Prospects - General Information - Derivative Financial Instruments - Currency Fluctuations").

We are exposed to market and credit risk in derivatives.

We use derivatives both to hedge our exposure to changes in exchange rates, interest rates and metals prices, among other things, and in our trading activities. With respect to our use of derivatives, we bear the risk of market movements and the risk of default by our counterparties. We have in the past experienced losses with respect to our use of derivatives. For

 

further discussion of these matters, please refer to "Item 5. Operating and Financial Review and Prospects - General Information - Derivative Financial Instruments". Future losses of this nature nature could result in lower profits, which could lead to a reduction in any dividends and cause the trading prices of our shares to decline.

11

»Key Information


We are exposed to risks in trading.

We engage in substantial trading activities, including the purchase and sale of forwards, futures and options, both on and off exchanges. Although we believe we have established appropriate risk management procedures, trading activities involve elements of forecasting, and we bear the risk of market movements and the risk of default by our counterparties. For further

 

discussion of our trading activities, please refer to "Item 4. Information on the Company - International Trade". Any of these risks could result in lower profits, which could lead to a reduction in any dividends and cause the trading prices of our shares to decline.

Changes in interest rates could increase our cost of borrowing.

A major portion of our financial debt is subject to variable interest rates. This results in exposure to interest rate fluctuations, which we strive to anticipate by using certain interest rate derivative instruments. (See "Item 5. Operating and Financial Review and Prospects - General Information - Derivative Financial Instruments - Interest Rate Fluctuations".) There can be no

 

assurance that our risk management initiatives can adequately compensate for adverse changes in interest rates. An increase in interest rates could increase the cost of financing our existing debt and make future borrowings more expensive, which could harm our financial condition and results of operations.

Uninsured damage to or loss of industrial property could have a negative impact on our financial results.

Our ability to insure against the risk of industrial property damage or loss is subject to prevention audits commissioned by our insurance companies. Insurance companies evaluate the quality of risk control at industrial facilities to determine appropriate insurance premiums and coverage. Negative evaluations resulting from these prevention audits could limit the availability of our insurance coverage, or significantly increase the cost of our premiums. The percentage of physical assets designated as Highly Protected Risks decreased this year from 68% as of January 1, 2002 to 55% as of January 1, 2003, with the loss of rating of six major facilities in 2002.

 

While we have implemented action plans for 2003 designed to regain Highly Protected ratings for our facilities, there can no assurance that these efforts will be successful in increasing the coverage or decreasing the cost of insurance, or in reducing the probability and seriousness of financial loss in the event of an accident.

Increased cost or other difficulties in obtaining insurance could harm our financial condition and results of operations.

We are exposed to risks in developing countries,
which could lower our profitability and affect the value of our assets there.

Our operations in developing countries may be more vulnerable to risks of war, civil disturbances and adverse governmental action than our operations in the rest of the world. Governmental action, for example, may disrupt or impede operations and markets, restrict the movement of funds, impose limitations on foreign exchange transactions or result in the

 

expropriation of assets. Certain of the countries in which we operate have been subject to economic instability in recent periods. Any of these factors could adversely affect our operations in those countries and result in lower profits, which could lead to a reduction in any dividends and cause the trading prices of our shares to decline.

Certain of our business areas have a relatively small number of customers.
The loss of one or more of them could result in lower sales.

Our Aerospace business, and to a lesser degree the Pechiney Automotive division, both of which are included in the Aluminum Conversion segment, rely, to varying degrees, upon a relatively small number of major customers for a significant portion of their sales. Although we believe we have good working relationships with these customers, if our existing relationships with them are discontinued in the

 

future, or we do not replace them if we lose them as customers, our financial results may be harmed, which could lead to a reduction in any dividends and cause the trading prices of our shares to decline.

Our technology may become obsolete.

We are committed to protecting our trade secrets and investing in research and development in order to maintain the benefits of our technology in the future. However, we may not be able to protect, or continue to develop, some of our proprietary information in the future. In addition, we may be

 

subject to litigation in the future regarding the use of proprietary information that we have developed. For further discussion of our investments in technology, please refer to "Item 4. Information on the Company - Business Overview - Intellectual Property" and "- Litigation".

12

 

 

»Key Information

Item 3

Risk factors relating to our shares and ADSs

We may not be able to pay dividends on our common shares.

Whether we are able to pay dividends in the future, and if so, at what time, will depend upon our future earnings and financial condition. In addition, the holders of our Preferred Shares "B" are currently still entitled to a cumulative preferential dividend of € 1.45 per share per year, together with additional priority dividends based on the Company’s net income excluding certain nonrecurring items, and these payments must be made from available funds before we can make any decision whether to pay dividends to holders of our Common Shares "A" and the corresponding ADSs. For further discussion of these rights, please refer to "Item 10. Additional Information - Description of Share Capital - General Provisions Applicable to Shareholders - Dividend and Liquidation Rights". The number of outstanding Preferred Shares "B" is much

 

smaller than the number of outstanding Common Shares "A" and corresponding ADSs, and certain holders of Preferred Shares "B" have proposed a resolution which, if adopted, would lead to the conversion of the remaining Preferred Shares "B" into Common Shares "B" and the consequent disappearance of the preferential and priority dividend rights associated with the Preferred Shares "B". Unless and until that resolution is approved, however, the rights associated with our Preferred Shares "B" could, under certain circumstances, lead us to declare reduced dividends or no dividends to holders of our Common Shares "A" and the corresponding ADSs, which could cause the trading prices of our Common Shares "A" and the corresponding ADSs to decline.

The trading prices of our ADSs depend in part on the U.S. dollar exchange rate.

Our Common Shares "A" trade in euros and our ADSs trade in U.S. dollars. Any dividends we declare are also denominated in euros. As a result, the trading prices of our ADSs in U.S. dollars may fluctuate as the U.S. dollar/ euro exchange rate fluctuates, and any material decrease in the value of the euro in relation to the U.S. dollar may cause the trading prices of our ADSs to decline.

Moreover, there is currently a resolution proposed by two of the Pechiney's shareholders to convert Preferred Shares "B" into Common Shares "A" after the payment date of the dividend proposed in respect of the 2002 fiscal

 

year, and this resolution will be presented to the annual General Shareholders' Meeting scheduled to take place on April 3, 2003. For a more detailed description of this proposed resolution, see "Item 9. The Offer and Listing - Price History of the Shares - Preferred Shares "B".

In addition, for a discussion of our business exposure to fluctuations in currency exchange rates, please refer to "– Risk factors relating to our Group – Fluctuations in euro/U.S. dollar exchange rate may lead our financial results to decline".

 

 

13

»Key Information

 

14

 

 

»Information on the Company

Item 4

Overview of the Pechiney Group

The Pechiney Group operates in two core businesses, in which it ranks among the global market leaders(1): the production of primary aluminum and fabricated aluminum products and the production of packaging materials. The Group believes that it is Europe’s second and the world’s fifth largest producer of primary aluminum on the basis of 2002 obtainable production capacities and one of the leading European producers of flat-rolled aluminum products on the basis of 2002 sales volume, with strong positions in aerospace, cansheet, automotive and foil & thin foil markets. Its aluminum technology is recognized as some of the most efficient in the world. The Group believes that it is also one of the world leaders in the production of packaging materials for the food, healthcare and beauty industries on the basis of 2002 sales. It is the world’s largest producer of collapsible tubes. The Group’s other activities include the production of ferroalloys and international trade.

 

Through its unrelenting efforts to reduce indebtedness and improve competitiveness over the last few years, Pechiney believes it has the resources it needs to finance its development. Since April 2000, the Group committed, on an average annual basis, more than € 500 million per year to growth projects, in addition to maintenance expenditures. This strategy is primarily designed to ensure the Group of leading positions in each of its businesses in terms of market share and technological expertise. Nevertheless, this strategy will only be fully effective if the Group makes improving its cost position a constant priority. The Continuous Improvement System, whose mechanisms and objectives were presented in December 2001, is the cornerstone of profitable growth and the priority of Pechiney.

The figures relating to the fiscal years 2000, 2001 and 2002 presented in this document were prepared in euros.

 

 

(1) Positions and market shares presented in this item or based on internal estimates.

15

»Information on the Company

Selected Consolidated Financial Data

millions of euros (except net income, and dividend paid per share in euros ) 2002   2001   2000  
(Restated)(1)
 
(Restated)(1)
(Restated)(1)
 






 
Net sales 11,909   11,512   10,874  
Net income (55)   234   318  






 
Basic net income per common share "A" (0.72)   2.94   3.94  
Net cash provided by operating activities 629   588   396  
Net cash used in investing activities 580   947   546  
Net cash used in financing activities (104)   354   (361)  
Dividend paid for the year per common share "A" (net) 1.00   1.00   1.00  






 
Capital stock 1,258   1,245   1,244  
Shareholders’ equity (Group share) 3,014   3,400   3,277  
Shareholders’ equity and minority interests 3,163   3,569   3,446  
Net indebtedness 1,437   1,473   869  
Non-current assets 4,840   5,031   4,258  






 
Total Assets 8,234   8,699   8,087  






 
Other measures            
Earnings from Operations(2) 407   552   659  






 
(1)    For additional information, see Notes 1 and 25 to our Consolidated Financial Statements.
(2)    Earnings from Operations consists of Net Sales, Other Operating Revenues, Cost of Goods Sold (excluding depreciation), Selling, General and Administrative Expense, Research and Development Expense and Depreciation and Amortization (excluding Goodwill Amortization). Earnings from Operations does not include Goodwill Amortization, Long-lived Assets Writedown, Restructuring Expense or Other Income (expense). These items are considered to be operating income/expenses. Management believes that Earnings from Operations is useful to investors since it is permitted by the French accounting standard setter and is used by many French public companies, is used by management as a key indicator of the performance of the Group's segments and is closely monitored by analysts in France.
Earnings from Operations is reconciled to Net income as follows :
           
2002   2001   2000  
  (Restated)   (Restated)   (Restated)  






 
Net income (55) 234 318  
             
Add back income (expense):            
Exceptional Goodwill Amortization (98)   (22)   0  
Goodwill amortization (31)   (29)   (20)  
Minority interests 0   (28)   (31)  
Equity in net earnings of affiliates 3   24   (13)  
Income tax (expense) benefit (39)   (130)   (172)  
Financial expense, net (49)   (68)   (68)  
Other income (expense) (103)   10   (8)  
Restructuring expense and long-lived asset write-downs (145)   (75)   (29)  






 
Earnings from Operations 407   552   659  






 

Aluminum

The Group’s Aluminum sector is comprised of two segments: Primary Aluminum and Aluminum Conversion.

Primary Aluminum is Europe’s second and the world’s fifth largest producer of primary aluminum on the basis of 2002 obtainable production

 

capacity (1,240,000 metric tons). It also holds interests in companies that produce bauxite and alumina. Primary Aluminum also licenses alumina and aluminum production technology and related equipment and believes that approximately 80% of world smelting capacity recently put into operation in Western World uses the Group’s technology.

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»Information on the Company

Item 4

Aluminum Conversion includes the activities of four divisions, which regroup activities organized around industrial or commercial goals shared in common:

  • The Aerospace, Transport, Industry division regroups the production of aluminum rolled products for transport markets (aerospace, sea and ground, excluding automotive) and industry, as well as the production of hard alloy extrusions;
  • The Cans, Automotive, Standard Rolled Products division regroups the production of aluminum rolled products at Neuf Brisach for the can, automotive and standard rolled products market;
  • The Foil and Thin Foil / Specialty Products division includes Pechiney
 
  • Eurofoil’s foil and thin foil activities at Dudelange, Flémalle and Rugles, as well as different specialty activities (circles, precoated sheets, etc.);
  • The Extrusions, Casting Alloys, Automotive division manufactures and markets aluminum soft alloy sections for the construction, transport and equipment markets, as well as casting alloys used almost exclusively in the automotive market. The division is also in charge of Pechiney Automotive, a cross-division structure specially dedicated to the automotive market.
On the basis of 2002 production, the Group believes it is one of the main European producers of aluminum rolled products.
Packaging

In 2002, the Group’s Packaging sector regrouped the following activities:

  • Plastic Packaging, an important North American and European producer of flexible packaging for the food, healthcare and specialty markets;
  • Cebal Tubes Europe and Cebal Tubes Americas, which together are the world leader in the manufacture of flexible plastic, laminated and aluminum tubes for the cosmetics, personal care and healthcare markets on the basis of 2002 production;
 
  • Cebal Aerosols, the world’s largest manufacturer of seamless aluminum aerosol and spray cans;
  • Techpack International (TPI), one of the world’s principal producers of plastic packaging for makeup, perfume and cosmetics on the basis of 2002 sales;
  • Pechiney Capsules, which produces caps and overcaps for wines and spirits.

Ferroalloys and Other Activities

Pechiney Electrométallurgie, a wholly-owned subsidiary of the Group, mainly produces silicon and ferroalloys as well as abrasives and refractories.

 

 

International Trade

International Trade operates three lines of business: a worldwide network of sales agencies which market products manufactured by the Group and

 

third parties; trading of non-ferrous metals and other basic materials; and the distribution of semi-finished aluminum products.

New organization

In order to ensure that the organization of the Pechiney Group reflects its different businesses, it was decided, as announced in December 2002, to divide aluminum activities into two distinct sectors:

  • the Primary Aluminum sector, which now regroups in a single entity bauxite-alumina-aluminum production activities and ferroalloys;
  • the Aluminum Conversion sector, comprised of rolled products, extrusions and casting alloys used in a wide variety of markets: aerospace, automotive, sea transport, rail, industry, industrial equipment, construction and beverage cans.
 

This new organization of aluminum activities in two sectors, each of which has expertise to share, illustrates the Group’s business-based strategy - the two sectors are distinct and respond to very different industrial and commercial approaches.

The Group expects this organization to provide more simplicity and responsiveness through the continued deployment of the Pechiney Continuous Improvement System and profitable growth projects. The new organization took effect as of February 1, 2003.

17

»Information on the Company

The following table sets forth the Net Sales of each of the Group’s segments for the periods indicated.






 
         
Year ended December 31
         
net sales by segment (millions of euros)        
         
 
2002
 
2001
 
2000
 
     
(Restated)(2)
 
(Restated)(2)
 












 
Primary Aluminum 1,605   13.5%   1,851  
16.1%
  2,039   18.8%  
Aluminum Conversion 2,618   22.0%   2,676  
23.2%
  2,600   23.9%  
Packaging 2,342   19.7%   2,418  
21.0%
  2,085   19.2%  
Ferroalloys and Other Activities 308   2.6%   358  
3.1%
  377   3.5%  
Net Sales from Industrial Operations 6,873   57.8%   7,303  
63.4%
  7,101   65.3%  
International Trade 5,036   42.2%   4,209  
36.6%
  3,773   34.7%  












 
Total Net Sales 11,909   100.0%   11,512  
100.0%
  10,874   100.0%  












 
(2) For additional information, see Notes 1 and 25 to our Consolidated Financial Statements.
                         
The following table sets forth the Net Sales of the Group by geographic region of production for the periods indicated.





 
net sales by geographic region of production (1)        
Year ended December 31
         
         
         
(millions of euros)
2002
 
2001
 
2000
 
     
(Restated)(2)
 
(Restated)(2)
 












 
France 4,972   41.7%   4,719  
41.0%
  4,725   43.5%  
Rest of Europe 1,830   15.4%   1,834  
15.9%
  1,576   14.5%  
North America 3,546   29.8%   3,695  
32.1%
  3,598   33.1%  
Rest of the World 1,561   13.1%   1,264  
11.0%
  975   9.0%  
Total 11,909   100.0%   11,512  
100.0%
  10,874   100.0%  










 
 
(1)    The breakdown of Net Sales by geographic region of sales in 2002 was as follows: 14% in France, 35% in the rest of Europe, 25% in the United States and 26% in the rest of the world.
(2) For additional information, see Notes 1 and 25 to our Consolidated Financial Statements.
The following table sets forth the Earnings from Operations of each of the Group's segments for the period indicated.
     
Year ended
December 31
     
     
     
earnings from operations by segment(1)(millions of euros)
2002
2001
2000
 
     
(Restated)(2)
(Restated)(2)
 

 
Primary Aluminum
276
   
423
   
509
   
Aluminum Conversion
16
   
23
   
78
   
Packaging
129
   
136
   
100
   
Ferroalloys and Other
3
   
0
   
0
   
International Trade
73
   
58
   
65
   
Holdings
(90)
   
(88)
   
(93)
   

 
Total
407
   
552
   
659
   

 
(1)   Earnings from Operations takes into account Net Sales, Other Operating Revenues, Cost of Goods Sold (excluding depreciation), Selling, General and Administrative Expense, Research and Development Expense and Depreciation and Amortization (excluding Goodwill Amortization).
Earnings from Operations do not take into account Goodwill Amortization, Long-lived Assets Writedown, Restructuring Expense and Other Income (Expense). These items are considered to be operating income/expenses.
(2) For additional information, see Notes 1 and 25 to our Consolidated Financial Statements.

18

 

 

»Information on the Company

Item 4

 

 

19

»Information on the Company

History and Development of the Group

Pechiney is the successor company of Pechiney Ugine Kuhlmann, itself created through the merger of two French manufacturing companies, Compagnie Pechiney and Ugine Kuhlmann, which for over a century had been developing new technologies for the conversion of natural resources and basic materials into a wide range of metal and chemical products.

At the end of the 19th century, Pechiney developed a technique for the production of aluminum by electrolysis, to which it dedicated an increasing portion of its capital expenditures. To be more competitive in the post World War Environment, Pechiney reorganized its production activities by merging with Société Electrométallurgique Française. Beginning in 1950, due to the need to access new energy sources and raw materials, Pechiney decided to participate in the consolidation of the chemical industry in France, to integrate more closely its non-ferrous metal conversion activities and to work in foreign countries to develop its upstream aluminum activities.

Compagnie Pechiney and Ugine Kuhlmann merged in 1971, creating an industrial group with diversified and complementary activities.

Included in 1982 in the nationalization plan adopted by the French State, Pechiney Ugine Kuhlmann sold its specialty steel and chemical activities in 1982 and 1983 respectively, and adhered to a strategy of concentrating the Group’s resources in those areas in which its technical and market positions enabled it to rank among the world’s leaders. In 1983, after the reorganization of its activities, the Company readopted the name "Pechiney". In 1987, Pechiney sold its copper conversion activities.

As part of this strategy, Pechiney also made certain acquisitions, including, most notably, the acquisition of American National Can (ANC) at the end of 1988, which enabled the Group to become one of the world’s largest packaging manufacturers. Following the acquisition of ANC, the Group consolidated its packaging activities, turbine component activities and principal international aluminum assets in its subsidiary Pechiney International, 25% of which was then sold on the Paris Bourse in 1989 in an initial public offering.

In 1992, the Group implemented a program aimed at rebalancing its portfolio of activities, part of which included the transfer from Pechiney International to Pechiney of its Aluminum and International Trade activities. Concurrently, Pechiney’s shareholding in Pechiney International was further reduced to 67%. That same year, the Group sold its nuclear fuel assembly and zirconium/titanium activities.

In 1995, upon the completion of an extensive strategic internal analysis, Pechiney restructured its portfolio of activities around two core sectors - Aluminum and Packaging - and implemented a disposition program which

 

significantly reduced its financial indebtedness. Following the sale of a controlling stake in Carbone Lorraine and Ugimag at the end of June 1995, the Group disposed of three business segments: Food Metal and Specialty North America, Beverage Glass North America and Turbine Components, in July, September and December 1995, respectively. The combined divestitures allowed the Group to reduce its indebtedness by 1.6 billion euros.

Pechiney was privatized in December 1995 through an offering of shares. In addition, two public exchange offers were undertaken for the Certificats d’Investissements Privilégiés (CIP) and shares in Pechiney International. On December 16, 1997, Pechiney International, of which the Group had held 97.3% since January 1996, was merged into Pechiney. The French State sold its remaining interest in Pechiney in April 1998, retaining only the shares necessary to grant free shares to Group employees on February 5, 1999.

In July 1999, Pechiney launched an initial public offering on the New York Stock Exchange of the majority of the capital of its worldwide Beverage Cans activities. This transaction generated additional financial resources enabling the Group to pursue the selective and profitable development of its activities.

Since the end of 1999, in addition to continuing to implement its cost control policy, Pechiney has targeted an active strategy of internal and external growth, with the objective of strengthening the Group’s leadership in high value added segments and expanding its geographic coverage. This strategy of profitable growth has been illustrated by many acquisitions since April 2000, including the following notable examples:

  • in Primary Aluminum, the acquisition of an additional 15.5% equity interest in Tomago, which makes Pechiney the main partner of one of the world’s most efficient primary aluminum smelting operations;
  • in Aluminum Conversion, the acquisition of Workington and Eurofoil;
  • in Packaging, the acquisition of Anchor Cosmetics (a subsidiary of Moll Industries), JPS Packaging and Soplaril, which allows the Group to strengthen its positions in different growth markets in the packaging sector and expand its geographic coverage.

In December 2001, Pechiney announced the effective launch of the Pechiney Continuous Improvement System, a program which targets not only cost reductions but also improved product quality, the multiplication of customer services, the optimization and heightened reliability of production tools and processes, safety, etc.

By making processes more reliable and reducing costs, the Group aims to attain annual Continuous Improvement Gains, gross of inflation, of € 450 million by 2004.

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»Information on the Company

Item 4

Pechiney is a société anonyme à conseil d’administration (a corporation with a board of directors) incorporated under the laws of France. It is governed by the provisions of Titles I to IV of Book II of the legislative part of the new French Commercial Code (previously provisions of the French Companies Law no. 66-537 of July 24, 1966, now codified pursuant to Decree (ordonnance) no. 2000-912 of September 18, 2000) and the provisions of Decree no. 67-236 of March 23, 1967, by other applicable provisions of French law, as well as by its by-laws (statuts).

Pechiney was incorporated on November 17, 1922. The duration of the corporation, which was extended on November 10, 1951, will expire on November 30, 2051, unless an Extraordinary General Meeting of Shareholders decides to extend the duration or wind up the Company. Pechiney’s registered office is located at 7, Place du Chancelier Adenauer, 75116 Paris, France, and the telephone number is +33 1 56 28 20 00.

Capital expenditures in Aluminum totaled € 263 million in 2002, compared with € 188 million in 2001 and € 150 million in 2000. Capital expenditures in Packaging totaled € 196 million in 2002, compared with € 177 million in 2001 and € 106 million in 2000. For the Group’s other activities and Holdings, capital expenditures represented € 20 million in 2002, compared with € 24 million in 2001 and € 31 million in 2000. These expenditures principally related to the modernization of existing facilities, in particular:

  • in Primary Aluminum, the increase of production capacity in existing facilities;
  • in Aluminum Conversion, the expenditures related to the modernization plan for industrial facilities, especially the Ravenswood plant in the United States;
  • in Packaging, the modernization of production facilities, especially in plastic packaging.

In 2002, proceeds from divestitures totaled € 43 million and principally concerned the sale of investments in non consolidated companies. In 2001, proceeds from divestitures totaled € 30 million and principally concerned the sale of Société de Gerzat. In 2000, proceeds from divestitures totaled € 496 million and mainly included proceeds from the sale of the residual interest in the ANC Group, Inc. held by Pechiney.

Tender Offer by Alcan Inc.

On July 7, 2003, Alcan Inc., a Canadian corporation (“Alcan”) announced an unsolicited bid for Pechiney’s Common Shares “A”, American Depositary Shares, Bonus Allocation Rights and “OCEANE” convertible bonds (collectively, the “Pechiney Securities”). On July 8, 2003, Pechiney’s Board of Directors decided that this unsolicited offer was uncertain and that the price proposed by Alcan was clearly inadequate, when taking into account Pechiney’s industrial, technological and intangible assets, and in no way reflected its true strategic value.

On September 11, 2003, following successive increases in the value of its bid, each of which was rejected by Pechiney’s Board of Directors, Alcan made a new revised proposal to increase the offer price to the following:

  • up to €48.50 per Common Share “A”, consisting of €47.50 per Common Share “A” plus €1.00 in cash per Common Share “A” if at least 95% of Pechiney’s share capital and voting rights on a fully diluted basis are tendered into the offer (including any reopened offer pursuant to Article 5-2-3-1 of the General Rules and Regulations of the French Conseil des marchés financiers (“CMF”)) and
 
  • €83.40 in cash per OCEANE plus €0.40 for each OCEANE tendered if at least 95% of Pechiney’s share capital and voting rights on a fully diluted basis are tendered into the offer (including any reopened offer pursuant to Article 5-2-3-1 of the General Rules and Regulations of the CMF).

On September 12, 2003, Pechiney’s Board of Directors determined that this new revised proposal constituted the best value alternative available to the holders of Pechiney Securities and determined to recommend to holders of Pechiney Securities to accept this proposal, which it viewed as being in the best interest of Pechiney’s shareholders, employees, partners and customers.

On September 29, 2003, the CMF declared Alcan’s new revised proposal acceptable (recevable) and published a declaration to that effect (avis de recevabilité). On that same day, Alcan issued a press release announcing that the European Commission had granted clearance under European merger regulations and that it had reached an agreement with the U.S. Department of Justice (the “DOJ”) and, accordingly, the statutory waiting period under the U.S. Hart-Scott Rodino Act was to expire that evening.

In connection with the receipt of clearance from the European Commission, Alcan announced that it had undertaken to divest either its 50% share in the AluNorf, Gottingen and Nachterstedt rolling mills or Pechiney’s rolling mills at Neuf-Brisach, Rugles and, if necessary, the Annecy rolling mill. Alcan’s Latchford casting operations may also be added to either the AluNorf or Neuf-Brisach packages. In addition, Alcan announced that it had agreed to undertakings for the licensing of alumina refining technology, alumina smelter cell technology and anode baking furnace designs and agreed to eliminate the overlap in Alcan’s and Pechiney’s activities in aluminum aerosol cans and aluminum cartridges. Pursuant to an agreement and a related consent decree with the DOJ, Alcan has agreed to divest Pechiney’s aluminum rolling mill located in Ravenswood, West Virginia. Pechiney was not a party to the negations between Alcan and the European Commission and Alcan and the DOJ.

On October 2, 2003, the French Commission des opérations de bourse (the “COB”) granted its approval with respect to Alcan’s offer documentation in France. On October 7, 2003, Alcan formally commenced its offer to holders of Pechiney Securities (other than American Depositary Shares) who are either located in France or located in other jurisdictions (except the United States and Canada) if, pursuant to local laws and regulations, they are permitted to participate in the offer.

On October 9, 2003, Pechiney issued a press release announcing that the Pechiney Board had made a formal recommendation (avis motivé) to the holders of Pechiney Securities to accept Alcan’s offer.

Under U.S. securities regulations, Alcan’s offer to all holders of Pechiney American Depositary Shares worldwide, as well as to any holders of other Pechiney Securities who are located in the United States or Canada, is expected to commence following issuance by the U.S. Securities and Exchange Commission of its declaration of effectiveness of the Registration Statement on Form S-4 filed by Alcan with respect to the offer.

 21
»Information on the Company

Strategy

Create value for Shareholders: profitable growth and the Pechiney Continuous Improvement System

During the period 2000-2002, many acquisitions were finalized, made possible by the Group’s low level of indebtedness and its solid cash flow. Pechiney’s strategic acquisitions included Eurofoil in thin foil, Soplaril in flexible packaging in Europe, and acquisitions targeting products or markets which are complementary to Pechiney’s own, such as Alufin (technical alumina), Euromin (trading), Envaril and Molplastic in South America (packaging), Tiger in Indonesia (cosmetics packaging), Harken’s production lines and Phœnix’s assets in medical packaging in the United States.

 

These acquisitions may be considered as successes for the Group - teams have been integrated; know-how has been transferred; and synergies identified at the time of acquisition have taken concrete form. This has produced visible results at the level of each of the activities concerned and therefore of the Group itself.

Improve profitability: the Pechiney Continuous Improvement System

One of the two major focuses of Pechiney’s strategy is the constant improvement of the Group’s performance in all fields through the

 

implementation of the Pechiney Continuous Improvement System throughout the Company.

Objectives of the Pechiney Continuous Improvement System

The Pechiney Continuous Improvement System targets four main objectives:

  • to enhance safety, since the safest plants are the most efficient;
  • to ensure the reliability of production processes and reduce controlled costs;
  • to provide quality customer service;
  • to improve the performance of acquisitions by standardizing and sharing best practices.

The Pechiney Continuous Improvement System is implemented in all the Group’s activities, applying a common point of reference and indicators to monitor performance. The progress achieved is regularly measured and reported savings have been published quarterly since January 1, 2002. In

 

2002, two-day Continuous Improvement evaluations were conducted at 48 facilities which are representative of all of the divisions. Focused on the priorities defined by the divisions, the Pechiney Continuous Improvement System reviews make it possible to verify that implementation and results are in line with commitments, and to identify best practices, which will be incorporated into the frequently consulted Continuous Improvement Intranet base.

With €130 million in cumulated Continuous Improvement Gains, gross of inflation, at the end of 2002, Pechiney aims to realize, in the medium term, on average € 150 million per year.

  22

 

 

»Information on the Company

Item 4

 

Cumulated Continuous Improvement Gains at the end of 2002 (millions of euros)

Continuous Improvement Gains as of December 31, 2002 (millions of euros)



 
Gains linked to the increase in volume in Primary Aluminum (aluminum and metallurgical alumina) 1  
Reduction (net of inflation) of controlled costs 75  
Estimated impact of inflation on the basis of controlled costs 54  


 
Total cumulated Continuous Improvement Gains 130  


 

More growth, more efficiency: the Pechiney Continuous Improvement System is the ideal way to achieve the Group’s objectives of sustained and profitable growth over the long term.

The Pechiney Continuous Improvement System is based on the mobilization of expertise and the commitment of all our people in a

 

learning, responsive organization focused on satisfying customers’ needs. It fosters industrial excellence by sharing best practices and applying the highest standards, especially with regard to safety and environmental protection. It promotes a corporate culture based on initiative and excellence that is open and stimulated by change.

  23
» Information on the Company

The foundation of the Pechiney Continuous Improvement System

People mobilization and employee involvement are the foundation of the Pechiney Continuous Improvement System. Continuous Improvement success will be driven by management’s commitment to unleash the potential of the workforce. In 2002, a common set of Human Resources standards were defined to drive the people mobilization needs of the

 

organization. The five new Roadmap elements (visual communication, the role of management, the development of expertise and technical skills, suggestion systems and employee recognition) are based on best practices throughout the Pechiney organization.

Training

Training is a key component in the deployment of the Pechiney Continuous Improvement System. It allows employees to improve their performance and develop skills so that they can contribute to the success of the Group’s strategy, and to rally teams around shared values, methods and objectives. In 2002, Pechiney continued to adapt training programs to the needs of its different businesses and their developmental needs.

 

1,000 managers to be trained in Pechiney Continuous Improvement System management

To facilitate effective implementation of the Pechiney Continuous Improvement System, Pechiney launched a program for plant managers, from unit heads to supervisors. Training takes place at production sites. It lasts a week and is organized in groups of 16 people.
Alternating theory and practice, it teaches managers how to analyze situations, draw up an action plan and lead projects. The plant’s basic issues and priorities are focuses from the beginning and practical applications are important. Two- and three-day projects are undertaken in small groups with the participation of the plant’s operating staff. One-third of the managers targeted took this course in 2002.

PCIS Reviews

Pechiney Continuous Improvement System (PCIS) reviews will be organized at all of the Group’s industrial facilities. Fifty plants will be concerned in 2003, and an PCIS review frequency of two years is targeted. These PCIS reviews are conducted using standards of industrial excellence in the Company’s businesses. The first objective is to evaluate the pertinence of action plans in line with the plant’s priorities. The PCIS review helps identify best practices at the facilities and in the divisions and contributes to the use of Pechiney Continuous Improvement System standards.

 

The PCIS reviewers and the plant’s management work together to prepare the PCIS review, which lasts two full days. During this time, improvement suggestions are collected; the main recommendations are circulated throughout the unit and monitored quarterly.
The PCIS reviewers are confirmed managers, who represent the Group’s operating and functional divisions, coordinated by the Pechiney Continuous Improvement System division. Its standards will be improved in 2003, in order to better account for the Group’s priorities, as well as practices already developed by the most advanced facilities.

Best practices and standards

Best practices in the framework of review standards are systematically detected and described in PCIS reviews. They are communicated to all of the Group’s workforce over the Intranet. Successive PCIS reviews enrich this data base, which thus becomes a real deployment assistance tool. In priority areas concerning both technical (e.g., process control, equipment

 

maintenance) and operating (recognition systems, the role of production supervisors) issues, groups of experts have defined common standards for all the entities. Their deployment is piloted in the divisions and systematically verified during PCIS reviews. Individual improvement objectives are defined for managers concerning their implementation.

  24

 

 

»Information on the Company

Item 4

Safety and the Pechiney Continuous Improvement System

The safest plants are the most efficient. Improving health and safety conditions is a major priority in the Pechiney Continuous Improvement System. This effort is based on a risk prevention policy that applies standardized practices for priority risks, involves employees at all levels and promotes multi-year action plans with objectives defined in each facility. The Group aims to reduce the Lost Time Rate (LTR) per million hours worked to 2, and the Total Incidence Rate (TIR) per million hours to 7 (based on the French reporting system).

The Success Stories trophy rewards the unit or department that achieved the best implementation of the Pechiney Continuous Improvement System

 

during the year. In 2002, the winner was Cebal Tubes Europe’s Kolin facility in the Czech Republic, which has not reported an accident in two years. The mobilization of the unit’s 300 employees enables them to find a solution for any problems. Practical solutions include protection guards on all the machines, Plexiglas barriers to keep fingers out of the polisher motors, safety wire to facilitate the emergency shutdown of welding equipment, activated on simple contact, ergonomics, systematic wearing of hearing protection devices, standard and shared tools, and ecological washing solvents. These solutions are often not expensive and ensure protection and productivity at the same time.

A selective and profitable growth strategy

The second focus of Pechiney’s strategy is to ensure selective and profitable growth. The criteria which guide this growth strategy are simple:

  • selectivity: growth must be based on the Group’s strong points, in profitable markets; it must help strategically bolster Pechiney’s positions and business portfolio;
  • profitability: each project must correspond to strict profitability levels applied to the investment. Pechiney targets internal profitability of more than 13% after taxes.
Each of the Group’s activities represents different challenges in terms of growth. In aluminum rolling, alumina and primary aluminum, the size of the investment required leads to relatively few individual growth projects. As a leader in primary aluminum production technology, Pechiney plans to promote and operate a new AP50 technology smelter in the years to come, and to ensure that its needs in alumina are covered. The project to build the first AP50 smelter in South Africa continues to move forward; a certain number of major contracts have been finalized or are being finalized, and partners have expressed an affirmed interest in investing in the project. With a front-ranking position in technical rolled products, Pechiney aims to strengthen its global position, particularly in the aerospace and transport markets.
 

In plastic packaging, growth opportunities are more numerous and often of smaller size. They may aim to consolidate positions, expand the product line or access new geographic markets, in particular regions with low labor costs. Pechiney is determined to participate in the consolidation of this industrial sector - which it believes is a sure way to create value - while focusing on specialty products.

Internal growth is primarily based on selectivity in the choice of markets, customers and products. This selectivity presupposes a thorough understanding of the markets, which the Challenge Revenues program helped build. Ongoing innovation in the range of products offered, particularly in the packaging sector, where customers are stepping up the pace of their product launches, also provides opportunities for growth, since these launches, which are organized on broader geographic bases, lead to an increasingly demanding selection of suppliers.

This dynamic, which aims to strengthen ties with the Group’s customers, whether they be on a contractual basis, co-development, integrated logistics or "Just in Time", is a fundamental thrust in all the Group’s businesses. Pechiney believes it is positioned to meet these needs.

  25

» Information on the Company

Business of the Pechiney Group

Simplified Organizational Chart of the Pechiney Group as of December 31, 2002 (% of capital and voting rights).

For a complete list of Pechiney's subsidiaries, see Note 23 to the Consolidated Financial Statements.

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»Information on the Company

Item 4

Primary Aluminum

Primary Aluminum was comprised of two operating segments as of December 31, 2002:

  • Bauxite Alumina;
  • Aluminum Metal.

As announced in December 2002, the Ferroalloys division, presented at the end of Item 4. became part of the Primary Aluminum sector in February 2003.

 

Primary Aluminum specializes in the production and sale of primary aluminum, and also produces bauxite and alumina. The Group believes that its industrial and commercial positions, together with its smelter technology, place it at the forefront of the aluminum industry. The Group believes that it is Europe’s second and the world’s fifth largest producer of primary aluminum on the basis of 2002 obtainable production capacity.

The following table sets forth certain selected Primary Aluminum data.


Selected Primary Aluminum Data 2002   2001   2000  


 
 
 
Consolidated Net Sales (millions of euros) 1,605   1,851   2,039  
Earnings from Operations (millions of euros) 276   423   509  
Assets Excluding Cash and Cash Equivalents (millions of euros) (1) 1,984   2,019   1,935  


 
 
 
Number of Employees (as of December 31) 6,495   6,151   5,877  


 
 
 
Primary aluminum (thousands of metric tons) (2)            
Production capacity at year end 1,240   1,230   1,145  
Production controlled by the Group 1,182   1,140   1,122  
Consolidated production(3) 876   820   807  
Bauxite/alumina production (thousands of metric tons)(2)            
Bauxite 2,448   2,457   2,521  
Alumina 2,050   2,032   2,042  


 
 
 
Net sales by business (millions of euros, before elimination of intragroup sales)          

 
 
 
Primary aluminum            
Sale of consolidated production 1,430   1,506   1,566  
Other sales(4) 513   744   685  


 
 
 
Alumina(5), sale of technology and other activities(6) 300   260   424  


 
 
 
Total consolidated net sales 2,238   2,505   2,674  


 
 
 
(1) French accounting standards. The definition of Assets is not equal to the item "Capital Employed" used by Pechiney in calculating Return on Capital Employed.
(2)
On the basis of percentage of output obtained , before elimination of intragroup sales.
(3) Production from fully consolidated facilities (plus Bécancour and Tomago).
(4) Sales of aluminum produced by Aluminium Dunkerque and Alucam, purchased and resold to third parties by Aluminium Pechiney, as well as income from trading activities (metal purchased from third parties and resold in different locations and /or in different forms, sometimes after conversion).
(5)
Income from the sale of alumina to third parties (primarily technical alumina) or to Group facilities accounted for by the equity method.
(6)
Income from the sale of alumina and aluminum production technology and from ECL (Electricité Charpente Levage).
  27
»Information on the Company

In the Primary Aluminum segment, the bauxite mines send their output to the alumina plants. This output for the most part satisfies the plants’ aluminum production requirements. A portion of the production of alumina is used in non-metallurgical applications. Such technical alumina is primarily used in the production of various chemical products, refractory materials and ceramics.

Primary Aluminum produced by smelting is cast into a number of different products, from basic aluminum ingots, rolling ingots, extrusion billets and wire for conductors, to specialized products such as mechanical wire and welding wire.

Finally, Primary Aluminum also licenses alumina and aluminum production technology, know-how and equipment.

In 1999, Pechiney created two new divisions, Bauxite-Alumina and Aluminum Metal. Each division has responsibility to adopt best practices in cost reduction in its business on a systematic basis and to consolidate and increase the Group’s market share by applying all profitable and possible developments.

 

The operating units that report to these two divisions were broken down as follows:

  • Bauxite-Alumina division: the Aluminium Pechiney plant in Gardanne (France), the bauxite-alumina activities of Aluminium de Grèce (Greece), the Alufin unit acquired in 2002, the Group’s equity interest in Queensland Alumina (Australia) and in Compagnie des Bauxites de Guinée, alumina technology sales activities and Sogerem (fluorspar);
  • Aluminum Metal division: the facilities of Aluminium Pechiney at Saint-Jean-de-Maurienne and in the Pyrénées (France), Pechiney Nederland (Netherlands), the primary aluminum and casting activities of Aluminium de Grèce (Greece), the Group’s equity interest in Tomago (Australia), Aluminerie de Bécancour (Canada), Aluminium Dunkerque (France) and Alucam (Cameroon), smelter technology sales activities and ECL.
Each unit is individually responsible for meeting customer needs in its respective market sector and has autonomy in operations, marketing and human resources.

Bauxite - Alumina

Bauxite

In 2002, the Bauxite-Alumina division obtained approximately 2.4 million metric tons of bauxite from the bauxite mines in Greece and Guinea in which it has an equity interest (see "- Primary Aluminum - Selected Data). These facilities supplied all of the bauxite requirements of the Gardanne (France) alumina refinery, and a significant portion of the requirements of the Saint-Nicolas (Greece) refinery. The average utilization rate of these mines in 2002 was 95%.

 

In addition to the Group’s share of output from these mines, the Bauxite-Alumina division purchases bauxite, pursuant to long-term supply contracts, for the supply of Aluminium de Grèce (“ADG“) from Greek mines and suppliers of tropical bauxite, and for the Gladstone refinery (Australia) from Comalco, one of the Group’s partners in the Gladstone refinery.

  28

 

 

»Information on the Company

Item 4

Production Facilities
The following table sets forth certain bauxite mine data.

Bauxite Mine Data      
 
Total Production Capacity at the End of 2002
Equity Interest of the Group in Operating Companies
Share of Output Obtained by the Group in 2002
Share of Capacity Obtainable by the Group as of December 31,2002(1)
 
 (thousands of metric tons
per year)
(%)
(%)
(thousands of metric tons
per year)





Guinea        

Boké mine (owned by Compagnie des Bauxites  de Guinée - CBG”)(2)

 12,700
5.1% 12.2% 1,550





Greece        
Parnasse mines (owned by Delphi-Distomon)(3)
970
60.2% 100.0% 970
Total       2,520





(1) On the basis of obtainable production capacity, including bauxite purchased pursuant to long-term contracts with mining companies in which the Group holds an indirect equity interest and, in certain cases, bauxite that the Group obtains for its own use or for resale as manager of a mine.
(2) The Group owns 10% of Halco Mining Inc., which in turn holds 51% of CBG (with the remaining 49% held by the Republic of Guinea). The Republic of Guinea has granted to CBG a long-term bauxite mining concession. Pursuant to a long-term contract expiring in 2011, CBG has agreed to sell 12.2% of its bauxite output to Aluminium Pechiney.
(3) The Group owns 60.2% of ADG, which in turn owns 100% of Delphi-Distomon. As the majority shareholder and manager of ADG, the Group obtains all of the production of Delphi-Distomon ’s Parnasse mines.

Alumina Production

The share of capacity obtainable by the Bauxite/Alumina division from the alumina refineries which it owns or in which it has an equity interest amounts to approximately 2.2 million metric tons per year. Its production of metallurgical alumina is generally sufficient to satisfy more than 80% of the alumina requirements of its smelters (with the balance supplied pursuant to

 

long-term contracts). The average utilization rate of these facilities in 2002 was 95%. In addition, part of Aluminum Metal’s share of alumina produced at Gardanne is sold to third parties as non-metallurgical alumina.

 

  29

» Information on the Company

Production Facilities      
The following table sets forth certain alumina refinery data.      
     
Alumina Refinery Data
Total Production
Capacity
at the End of 2002
Equity Interest of the Group in Operating Companies
Share of Output Obtained by the Group in 2002(1)
Share of Capacity Obtainable by the as of December 31, 2002
 
(thousands of metric tons
per year)
(%)
(%)
(thousands of metric tons
per year)
     





Australia        
Gladstone (owned by Queensland Alumina Ltd.)(1) 3,750 20% 20% 750
France        
Gardanne (owned by Aluminium Pechiney) 650 100% 100% 650
Greece        
Saint-Nicolas (owned by ADG)(2) 750 60.2% 100% 750
Total       2,150





(1)
 
Through its Australian subsidiary, Pechiney Resources Pty Ltd., the Group holds a 20% equity interest in Queensland Alumina Ltd. (QAL). QAL operates, as a cooperative for the benefit of its shareholders, the tolling activities of the Gladstone refinery. The Group’s share of QAL’s production is principally used to supply alumina to the Tomago and Bécancour smelters. Consequently, the Group’s share in the results of QAL is included in the Group’s cost of goods sold.
(2)
As the majority shareholder and manager of ADG, the Group obtains all of the alumina production of Saint-Nicolas.

In 2002, deployment of the Pechiney Continuous Improvement System was pursued in the BXA division. The focus on standard and technical PCIS audits was broadened to include process control and employee mobilization.

At ADG (Greece), improved performance led to a new production record, with an increase of 5% over 2001.

 

At Gardanne (France), technical difficulties at the beginning of the year resulted in a 2% decline in production compared with 2001. Sales of technical alumina again increased, rising 3% from 2001.

The QAL plant (Australia) was not able to maintain its level of production (- 1.3%) in 2002, owing to the accidental interruption of the facility’s electricity supply at the end of the year. The investment in new calcination furnaces will help improve the plant’s environmental performance in 2003.

Sale of Alumina Technology

Pechiney believes it is one of the world leaders in the sale of technology and in technical assistance for alumina production facilities. Its main achievements in this area in 2002 were as follows.

  • The debottlenecked installations at the Pingguo alumina facility in China were successfully started up. Guaranteed performances were achieved and the reception of the contract was obtained without reserve. The construction of the plant’s second unit is under way, and a new licensing agreement was signed in 2002. The technology chosen remains that developed by Aluminium Pechiney for attack and decomposition;
  • The startup of the new Guizhou attack unit in China took place at the beginning of 2002;
 
  • The feasibility study commissioned by the government of Vietnam for an integrated bauxite/alumina/aluminum facility in the province of Lam Dong was completed in the third quarter of 2002;
  • The third potline at the Nalco alumina plant in India was started up in the first quarter of 2002, and nominal capacity of 1,575,000 metric tons per year was attained by mid-2002. The technical reception of the oxalate removal unit took place at the end of September;
  • The conditions precedent to the realization of the agreement signed with CVG in 2000 for the modernization of the Bauxilum complex in Venezuela were satisfied in 2002. The full agreement is retroactively in effect. Technical assistance continued and led to a rise in production. Debottlenecking studies advanced.


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»Information on the Company

Item 4

Markets and distribution

The alumina market (1)

Unless otherwise indicated, statistical and market trend information are based on the Company’s own statistics, which are in turn based on the Company’s own research and various publicly available sources.

In 2002, the production of alumina in the western world totaled 43.4 million metric tons, up 1.0 million metric tons from the previous year.

During the year, the alumina market, which had experienced a considerable surplus in 2001, progressively returned to a more balanced level, owing to significant purchases by Chinese buyers. The reductions in

 

production introduced the previous year were partially lifted. A new production line was started up at a plant in India. Improvement was reported in the utilization rate of many facilities, particularly in Latin America.

Spot prices rose moderately, from U.S.$130 per metric ton at the beginning of the year to U.S.$160 per metric ton in December. This situation nevertheless had a limited impact on medium-term contracts which cover most of the volume of alumina traded and are generally indexed on the price of aluminum on the London Metal Exchange (LME).

Aluminum Metal

Primary Aluminum production

At the end of December 2002, primary aluminum obtainable capacity (expressed in tons of metal under control) amounted to approximately 1,240,000 metric tons per year.

Approximately 40% of the Group’s primary aluminum production capacity is located in France at facilities owned by Aluminium Pechiney (a wholly-owned subsidiary of the Company and Aluminum Metal’s principal

 

operating company in France) and Aluminium Dunkerque (a 35%-owned affiliate). The remaining aluminum production capacity is located in Greece, the Netherlands, Australia, Canada and Cameroon.

The following table sets forth selected data regarding the aluminum smelters in which the Group has an interest. The average utilization rate of these facilities in 2002 was approximately 95% of capacity.

(1) Based on Pechiney’s internal estimates.

31

» Information on the Company

               
Primary Aluminum Smelter Data
Equity Interest of the Group in Operating Companies
Total Capacity in at Year End 2002
Share of Output Obtained by the Group
Share of Capacity Obtainable by the Group at Year End 2002 (1)
Year of Start-up of Current Structure
Year of last Major capacity Increase or Modernization
 
(%)
(thousand of
(%)
(thousand of
     
 
metric tons per
metric tons per
     
 
year)
year)
     










France                  
Auzat (owned by                  
Aluminium Pechiney)100% 100%   50 100%   50   1973 1981
                   
Lannemezan (owned by                  
Aluminium Pechiney) 100%   50 100%   50   1978 --
                   
Saint-Jean-de-Maurienne                  
(owned by Aluminium Pechiney) 100%   132 100%   132   1980 1986
                   
Dunkerque (Aluminium                  
Dunkerque, partly ownedby 35%   245 100%   245   1992 --
Pechiney)(2)(4)                  










Total France           477      










                 
Rest of the World                  
Saint-Nicolas (owned by ADG, 60%   163 100%   163   1966 1971
Greece)(3)                  
                   
Vlissingen (owned by PNL C.V., 85%   192 85%   163   1971 --
Netherlands)                  
                   
Edéa (owned by Alucam, 47%   95 100%   95   1980 --
Cameroon)(3)(4)                  
                   
Tomago (owned by Tomago 51.5%   470 51.5%   242   1983 1998
Aluminium Pty., Australia)                  
                   
Bécancour (owned by Aluminerie 25%   400 25%   100   1986 1990
de Bécancour, Canada)(5)                  










Total Rest of the World           763      










Total           1,240      










(1)
  
Includes the entire output of wholly-owned facilities in addition to, in the case of partly-owned facilities, aluminum purchased pursuant to long-term contracts with the operating companies of the facilities (entered into in connection with the Group’s indirect equity interest in such companies) and, in certain cases, aluminum that Aluminum Metal obtains for its own use or resale as manager of a smelting facility (the total of the foregoing being the "obtainable" production capacity of a facility).
(2)
  
Pechiney owns 35% of the capital of Aluminium Dunkerque, which owns the Dunkerque facility. The Group has entered into a long-term contract pursuant to which it is obligated to purchase the entire output of Aluminium Dunkerque. The assets of Aluminium Dunkerque are subject to pledges and other liens in favor of certain of the lenders that financed the construction of its smelters (see "Item 5. Operating and Financial Review and Prospects - Liquidity and Capital Resources - Contingencies -Option on Affiliate - Aluminium Dunkerque").
(3)
  
As the majority shareholder and manager of ADG and the major industrial shareholder and manager of Alucam, the Group effectively controls the marketing and sale of the aluminum production of their smelters.
(4) Accounted for by the equity method.
(5)
  
The Group owns 50% of Pechiney Reynolds Quebec Inc. (PRQ), which in turn owns 50.1% of the Aluminerie de Bécancour which operates the Bécancour facility as a cooperative. PRQ is obligated to take its share of Bécancour’s output and to cover its share of Bécancour’s expenses, as a result of which the Group’s share of PRQ’s results are included in the Group’s cost of goods sold.
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»Information on the Company

Item 4

The division pursued its efforts to base the management of its activities on the Pechiney Continuous Improvement System. The principal focuses are production systems and employee mobilization, within the more general framework of an approach that targets significant improvement in safety.

  • The standardization of work methods received special attention. This is achieved through the effective deployment of many standardized operating modes which are frequently audited on site, and through training (in 2002, the division significantly increased the number of hours of training each employee received);
  • In addition, the division’s units pursued and developed Pechiney Continuous Improvement System projects by focusing on priority objectives, particularly the control of raw materials and equipment reliability.

Pechiney’s share of total production increased by 42,000 metric tons between 2001 and 2002.

 

Highlights of the year included the following.

  • The Saint-Jean-de-Maurienne plant, where production was affected by a strike in August, continued to develop the production of wire for electrical and mechanical applications;
  • The Pechiney Nederland unit encountered operating difficulties in August and a series of problems due to exceptional weather conditions which struck the north of Europe at the end of October, causing an interruption of the energy supply for several hours. However, the point feeding cell conversion project went ahead as planned, and a potline had already been converted by the end of the year;
  • The Alucam facility in Cameroon was again affected by a lack of energy linked to poor hydraulics and the bad condition of the facilities operated by the local electricity producer. It nevertheless set new records for intensity and efficiency;
  • Despite labor difficulties caused by the introduction of an ambitious cost reduction program, the Tomago smelter increased production by more than 10,000 metric tons and launched a project to achieve a 10% rise in production within existing scheduling and budget limits.

AP 50 technology and project

Development teams attained the targeted objective of ensuring stable operating conditions for very high intensity (500kA) AP50 cells, acquiring sufficient experience to plan for the study and construction of an industrial unit with a capacity of at least 460,000 metric tons per year. The construction of the whole smelting facility around this technology aims to reduce the cost of investment per ton by 15%. In addition, operator safety will be enhanced through a new organization of flows within the plant.

 

A new unit was created and teams mobilized to complete this project. After the signing of an electricity supply agreement with Eskom in March 2002, the AP50 project focuses on South Africa, where advanced negotiations are being conducted with the South African government, potential partners and local elected officials. The feasibility of other locations continued to be examined throughout 2002. On September 30, 2003, Pechiney exercised the option provided for in the agreement, thus making the agreement effective. For further information, see "Item 4. Information on the Company - Recent Developments".

ECL

Electricité Charpente Levage (ECL), a wholly-owned subsidiary of Aluminum Pechiney, markets equipment for aluminum smelters. The Group believes that it is the world leader in its activity with more than 90% of its production exported throughout the world. ECL supplies all the major producers of primary aluminum. In 2002, the company did

 

record business, in particular supplying equipped superstructures for electrolysis cells in the expansion of the Mozal facility in Mozambique. ECL pursued the development of its service business through its subsidiaries (Canada, South Africa, Australia, Netherlands), which allow the company to make its expertise available to its main customers.

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»Information on the Company

Sale of Aluminum Technology

Primary Aluminum is active in the sale and licensing of primary aluminum smelting technology and know-how to third parties, an activity in which the Group believes it is the world leader. Major technology transfer contracts executed in 2002 include the following.

  • The startup of the extension of 80 AP18 cells at Talum (Slovenia) took place at the beginning of 2002 and was successfully completed in May;
  • The startup of the Alma plant in Quebec (Alcan), which has one and a half potlines of AP30 cells, was successfully completed. Performance test results were excellent. The mission of two experts was extended by four months in 2002; all the experts have now returned from this assignment;
  • The new Mozal facility in Mozambique, where the first AP30 potline was started up in 2000, launched a project to double capacity. Startup of the AP30 extension is scheduled for 2003;
  • The contract for an extension of 144 AP30 cells at Hillside in South Africa (Billiton), which was signed in 2000, was activated in April 2002. Construction is moving forward rapidly;

 

 
  • Technical assistance continued at Alba (Bahrein) and a contract for an extension of more than 300,000 metric tons per year was signed and activated in May 2002;
  • In July, Alouette signed a contract for a 330 cell extension of its Sept-Iles facility in Quebec. The contract also includes a license for the second phase of the anode furnace;
  • A contract to modernize furnaces at Alro (Romania) was signed in May 2001 and work has begun at the site;
  • Technology licensing contracts for a furnace at Hydro Aluminium / VAW Kurri Kurri (Australia) and for a furnace at Almahdi (Iran) were signed and activated in August and November, respectively.

In addition, the Chinese company Lanzhou Aluminium Co. and Aluminium Pechiney signed a preliminary agreement to develop major technical cooperation in China. The agreement provides for a detailed preliminary study on an aluminum smelting project of 260,000 metric tons per year with an integrated electric power plant. If the profitability of the project can be demonstrated, the parties will create a joint venture in 2004.

Markets and distribution

The global aluminum market (1)

Unless otherwise indicated, statistical and market trend information are based on the Company’s own statistics, which are in turn based on the Company’s own research and various publicly available sources.

The economic recovery, which had gotten off to a good start in 2002, particularly in the United States, lost momentum during the year. Compared with 2001, growth again slowed in Europe and remained close to zero in Japan. Asian economies (excluding Japan) reported strong growth owing to an upswing in world trade and significant internal demand. This was particularly the case in China, which demonstrated persistent economic dynamism.

The consumption of primary aluminum benefited from the moderate improvement in the world economy and picked up in 2002. Despite the continued shutdown of certain production capacities in North America, production rose significantly in 2002, especially in China. Overall, the market surplus observed in 2001 carried over into 2002 and continued to weigh on the price of aluminum, which decreased by 6% to U.S.$1,365 per metric ton (three month quotation on the LME). Expressed in euros, the average price decreased by 10% to € 1,457 per metric ton.

Demand for Primary Aluminum

Global demand for primary aluminum, which had been affected by the

 

slowdown in the world economy in 2001, rose in response to the economic recovery in 2002. At the global level, it increased by approximately 7% to 25.5 million metric tons.

  • Global performance owes much to the rise in consumption in China (+16%), backed by strong growth in industrial production;
  • In Asia (excluding Japan), consumption grew rapidly;
  • In Japan, aluminium consumption partially recovered from a sharp drop in 2001. Although down slightly, automobile production boosted aluminum consumption in the transport sector, while business in the construction sector further eroded in 2002;
  • Europe, experienced a growth in 2002 in spite of unfavorable underlying economic circumstances. This performance can be partially explained by a shortage of recycled material on the continent, which led to an extended use of primary aluminium instead of secondary. In the transport sector, the penetration of aluminum in the automotive market continued, offsetting the drop in automobile production. Construction activities generally stagnated. Aluminum consumption in packaging showed a moderate rise;
  • In the United States, the consumption of primary aluminum, which had fallen drastically in 2001, rose again in 2002. The increase in automobile production and a sustained high level of activity in the construction sector, at least in the residential segment, contributed to this upturn in aluminum consumption.

(1) Based on Pechiney’s internal estimates.
34

 

 

»Information on the Company

Item 4

Supply of Primary Aluminum

In 2002, primary aluminum production rose significantly (+6.6% to 26.1 million metric tons). Trends were contrasting in the different regions.

  • Production in the West was marked by a moderate increase (+3.3% to 17.2 million metric tons). In Canada, the new smelter started up in 2001 reported its first calendar year of production at full capacity. In Brazil, after the end of energy rationing, all the smelters were restarted in the first
 
  • quarter. In the United States, capacities shut down during the energy crisis were partially restarted. At the end of the year, despite these restarts, 1.3 million metric tons of installed capacity were temporarily stopped in North America due to energy supply issue;

  • In the East, production in Russia and central European countries increased moderately, whereas China’s production jumped 28% to 4.3 million metric tons, owing to the rapid startup of new smelting capacity.

Distribution

Shipments by Geographic Region and by Aluminum Source

The products marketed by Primary Aluminum are principally sold in the world’s three major regions of consumption (Europe, Asia/Pacific and North and South America). This international presence is made possible by the Group’s local facilities and its efficient international sales network. In the case of Alucam, ADG and Aluminium Dunkerque, in addition to selling its own share (based on equity interests in the operating companies) of the production output of the smelting facilities, the Group obtains, for its own use or for resale, the production output share of the other shareholders of these facilities.

 

In addition, in order to enhance the geographic efficiency of its operations and to meet customer requirements, the Group may purchase ingots from third parties for resale in different locations and in different shapes. Therefore, the Group’s sales of primary aluminum generally exceed its obtainable share of the annual production output of the smelting facilities in which it has an interest. In 2002, sales of primary aluminum originating from third parties represented 1% of total shipments.


Shipments by Geographic Region of Production 2002       2001      
(thousands of metric tons
%
  thousands of metric tons
%
 
  per year)       per year)      




 


 
Europe 859   71   905   73  
Canada 106   9   100   8  
Australia 236   20   228   19  




 


 
Total 1,201   100   1,233   100  




 


 
Shipments by Aluminum Source                
Output from smelters controlled by the Group                
Aluminum Metal 1183   99   1140   92  
Trading, metal conversion 18   1   93   8  




 


 
Total 1,201   100   1,233   100  




 


 

Shipments by Product

Aluminum Metal distributes a full range of primary aluminum products, from the most standard, such as aluminum and alloy ingots, slabs and

 

billets, to highly technical and specialized products such as welding and mechanical wire, high purity metals and thixotropic aluminum.


Shipments by Product 2002       2001      
  (thousands of metric tons   %   (thousands of metric tons  
%
 
  per year)       per year)  
 
 






 
Ingots 299   25   369  
30
 
Slabs 429   36   379  
31
 
Billets 321   26   322  
26
 
Other 152   13   163  
13
 








 
Total 1,201   100   1,233  
100
 








 
  35
»Information on the Company

In 2002, the product mix was enhanced by the production of slabs, compared with 2001, as the Challenge Revenues program was pursued. Over the past several years, this program has involved refocusing the product mix to concentrate on value added cast products.

Shipments by Customer Segment

The majority of the primary aluminum requirements of the Group’s European conversion activities are supplied by Aluminum Metal at prevailing market prices. From one year to the next, the corresponding volumes fluctuate based on changes in activity levels. They have historically accounted for 26% to 38% of Aluminum Metal’s annual production during the period 1992-2000. In 2002, intragroup sales accounted for approximately 40% of total shipments, or 476,000 metric tons.

 

In 2002, Aluminum Metal’s shipments made to companies outside the Group were spread among a large number of customers. More than three-quarters of such shipments are purchased by customers representing individually less than 1% of annual production volume. No single customer accounts for more than 5% of sales to third parties. Aluminum Metal will generally enter into long-term supply contracts with those customers requiring such arrangements (for a discussion of the Group’s policy with respect to forward sales and locking in of sales prices, see "Item 5. Operating and Financial Review and Prospects - General Information - Sensitivity of the Group’s Operations to Future Fluctuations in Aluminum Prices").


Shipments by Customer
2002
2001
 
 






 
 
(thousands of metric
%
(thousands of metric
%
 
 
tons per year)
tons per year)
     








 
Shipments to customers outside the Group
725
60
754
61
 
Shipments to Group companies
476
40
479
39
 








 
Total
1,201
100
1,233
100
 








 

Competition

Internationally, Aluminum Metal’s principal competitors are the main North American industrial groups such as Alcoa, Alcan and Kaiser Aluminum, as well as other major aluminum producers such as BHP Billiton, Rio Tinto, Russky Aluminiy and Sual (Russia), Dubai (UAE) and Alba (Bahrain). The Company’s principal competitors in Europe, in addition to Alcoa and Alcan, are Hydro Aluminium (which acquired VAW in 2002) and Corus.

 

Aluminum products also compete in many markets with steel, copper, plastic and other materials for which aluminum may substitute in downstream applications.

Aluminum Conversion

Selected Aluminum Conversion Division Data
2002
2001
2000







Consolidated Net Sales (millions of euros)

2,618
2,676
2,600
Earnings from Operations (millions of euros)
16
23
78
Assets Excluding Cash and Cash Equivalents (millions of euros)*
1,937
2,004
1,727







Number of Employees (as of December 31)
7,967
8,254
7,653







(*)
  
The definition of Assets is not equal to the item "Capital Employed" used by Pechiney in calculationg Return on Capital Employed.
  36

 

 

»Information on the Company

Item 4

The Group believes that it is one of the world’s leading producers of aluminum semi-finished products. The Group believes it is the second leading producer of hard alloy flat-rolled products and extrusions in the world and the third largest European manufacturer of rolled products. Its activities are organized in four divisions.

  • The Aerospace, Transport, Industry division groups the production of aluminum rolled products for transport markets (aerospace, sea and land, excluding automotive) and industry, as well as the production of hard-alloy extrusions;
  • The Cans, Automotive and Standard Rolled Products division groups the production of aluminum rolled products for the can, automotive and standard rolled products market of Neuf Brisach;
 

 

  • The Foil and Thin Foil / Specialty Products division includes Pechiney Eurofoil’s foil and thin foil activities at Dudelange, Flémalle and Rugles, as well as different specialty activities (circles, precoated sheets, refined products, etc.);
  • The Extrusions, Casting Alloys, Automotive division manufactures and markets aluminum soft alloy sections for the construction, transport and equipment markets, as well as casting alloys used almost exclusively in the automotive market. The division is also in charge of Pechiney Automotive, a cross-division structure specially dedicated to the automotivemarket.

Aerospace, Transport, Industry

Selected Aerospace, Transport, Industry Data 2002   2001   2000  






 
Net sales (millions of euros)(1) 973   1,013   1,186  
Shipments (thousands of metric tons)(2) 281   267   340  






 
(1)
Figures for 2000 not restated subsequent to the transfer, as of 2002, of the Mercus, Froges and Goncelin plants from the Aerospace, Transport, Industry division to the Foil and Thin Foil / Specialty Products division.
(2)
Including intragroup sales.

Activities

At its facilities located in France, the United Kingdom and the United States, the Aerospace, Transport, Industry division converts aluminum alloys into rolled products, extrusions and cast products. It serves four main technical markets: aerospace, industry, transport and heat exchangers for use in the automotive sector.

In 2002, the division sold 281,000 metric tons.

The average utilization rate of the division’s facilities in 2002 was approximately 68%.

 

The Aerospace, Transport, Industry division is organized by activities:

  • technical rolled products in North America (Pechiney Rolled Products with Ravenswood, West Virginia, and its subsidiary Pechiney Cast Plates in Vernon, California and an Aluminium Lithium foundry in Chicago);
  • technical rolled products in Europe (Pechiney Rhenalu facility at Issoire);
  • hard alloy extrusions (Pechiney Aviatube with facilities at Montreuil-Juigné and Carquefou in France, Issoire’s extrusions and Workington in the United Kingdom);
  • cast parts (Société des Fonderies d’Ussel).
  37

»Information on the Company

 

Facilities(*) Products Markets

Issoire Plate Aerospace, industrial equipment
  Shates and sheets Aerospace, tanks, dumpers, boats, high-speed ships
  Wide coils Shipping containers, trucks, buses, trailers
  Bars and wide sections Aerospace, transport, mechanical engineering
     
Ravenswood (**) Plate Aerospace, industrial equipment
  Sheets Boats, high-speed ships, rail, trailers
  Wide coils Shipping containers, trucks, buses, trailers
  Brazed products for exchangers Heat exchangers (automotive)
  Standard rolled products Construction, transport
     
Vernon (**) Cast plate Industrial equipment
     
Chicago (**) Aluminum lithium ingots and billets Aerospace
     
Montreuil-Juigné Bars, sections, tubes, wire Bar-machining, aerospace, mechanical
    engineering, transport, sports and leisure equipment
     
Carquefou Precision tubes Automotive, aerospace, spor ts equipment
     
Workington (***) Sections, bars Aerospace, mechanical engineering, transport
     
Ussel Cast parts Aerospace, transport, energy

(*) Société Métallurgique de Gerzat was sold on May 31, 2001, and the refined products facilities (Mercus, Froges and Goncelin) have been consolidated in the Foil and Thin Foil / Specialty Products division since September 1, 2001.
(**)
American facilities; Aluminum lithium cast products, facilities acquired in May 2002 from McCook Metals.
(***) British facilities.

Markets

The year 2002 was marked by an unfavorable economic environment linked to the combined effect of the low phase of the aerospace cycle and the consequences of the September 11, 2001, terrorist attacks on the general economy.

After a record year in 2001, the global aerospace market slid downhill in 2002, declining by 35% from the previous year.

Nevertheless, the situations of Airbus and Boeing cannot be compared. In addition, Pechiney's relative exposure is greater vis-à-vis Airbus, which was much less affected by this environment than Boeing.

In 2002, there were contrasting trends in the North American market.

  • Markets for heat exchangers and standard rolled products reported growth with, respectively, an increase in automobile production in North America and the rebuilding of inventories by distributors.
 
  • However, the transport market (road, rail) is still at the low point of the cycle and the industrial equipment market is still penalized by the lackluster situation in the electronics sector.

This difficult environment had an impact on the Group’s North American competitors - certain of them ceased their activity definitively (Scotsborro, McCook Metals), and others chose to file for bankruptcy under Chapter 11 (Kaiser).

This situation enabled Pechiney Rolled Products to increase its market share in the heat exchanger and industrial equipment segments, and to acquire some equipment from McCook Metals. Pechiney believes that this equipment allows it to become a world leader in the production of aluminum lithium for civil and defense aerospace applications. In addition, Pechiney has strengthened its relations with its large North American customers by supplying products for Lockheed Martin’s F16 program.

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Item 4

Operating priorities in 2002

Confronted by such an environment, Pechiney’s Aerospace, Transport, Industry facilities adjusted production capacities and reduced fixed costs, without, however, lessening their ability to respond to the coming upturn in the aerospace cycle.

- Two restructuring plans were implemented at the extrusion plants of Aviatube France and Workington, leading to a total staff cut of approximately 130 people.

- At Ravenswood, an ambitious recovery plan was launched:

  • approximately 200 jobs were eliminated;
  • the plant’s labor contract was extended for two years;
  • a task force was created in October 2002 to increase the plant’s productivity in all areas (production, administration, marketing and sales, support functions, etc.);
  • finally, the business reorganized its product / customer portfolio to focus on the most profitable segments and on those in which its differentiation potential is the greatest.
 

In 2002, Issoire decided to invest in new casting equipment to secure and ensure the reliability of sheet production for its customers and increase production capacity in anticipation of the coming upturn in the aerospace cycle.

All of the division’s facilities also launched a plan to reduce working capital requirements and set ambitious objectives to be met by the end of 2003. For example, significant results have already been achieved at SFU, and Issoire has taken advantage of the plan to improve respect for shipping deadlines and enhance customer service.

To speed the accomplishment of its strategic and operating objectives, the Aerospace, Transport, Industry division continued to apply new work methods based on the Pechiney Continuous Improvement System. This initiative focused on safety, employee mobilization, constant adaptation to change, process control and the reliability of the logistic chain.

Development of new products

Research and development activities continued to focus on conversion products and processes (casting, rolling and heat treatments). New modern methods promoting teamwork were introduced to facilitate exchanges within the Company or with customers and to accelerate the development of new products.

In the aerospace sector, the division continues to work in partnership with Airbus, Boeing, Dassault and other aerospace manufacturers. Focused efforts have been made to identify innovative solutions for future programs

 

(particularly with aluminum lithium). SFU launched production of the passenger door of Dassault’s Falcon jet; the first door was mounted in December 2002.

The alloys developed for the land and sea transport industry (industrial vehicles and high-speed ships) respond to customer demand for more resistant mechanical characteristics before and after welding, reduced thickness and easier cutting and forming. In 2002, Pechiney launched Sealium, an alloy for marine applications.

 

Competition

The division’s principal competitors are Alcoa and Alcan worldwide, Kaiser in the American market, and Corus in the European market.

 

 

  39
» Information on the Company

Cans, Automotive, Standard Rolled Products

Selected Cans, Automotive, Standard Rolled Products Data 2002 2001 2000

Net sales (millions of euros) 721 734 685
Shipments (thousands of metric tons)(1) 307 293 294.2

         
(1) Including intragroup sales.

The Cans, Automotive, Standard Rolled Products division regroups four activities: can stock for cans,automotive parts, heat exchangers and

 

standard rolled products. These activities areconducted at a single production facility, Neuf Brisach.


Activities Products   Markets

Cans Can stock, varnished and degreased ends  
Food packaging, beverage packaging
Automotive Car bodies, automotive parts, suspension systems  
Automotive
Heat exchangers Heat exchangers  
Automotive, construction, industry
Standard rolled products Standard coils and sheets, OAB and pre-anodized products  
Construction, industry, distribution


In 2002, the division consolidated its position as the leader in the European can market. Good conditions in the European market enabled the division to take full advantage of the partnership relations forged with its major customers (Rexam, Schmalbach-Lubeca and Crown Cork & Seal) to increase the volume of can stock shipped in 2002.

With a good position in the pet food segment, which reported strong growth in 2002, the division won market share in aluminum cans, confirming its role as a major player in this market segment, in partnership with customers such as Impress Metal Packaging.

The automotive business reported further growth in volume shipped in 2002 (+27%). Pechiney signed a long-term agreement with Daimler Chrysler, whose Class E has made it one of the largest aluminum consumers in the automotive market. Pechiney confirmed its position as the main supplier of PSA and Renault by providing most of the volume of aluminum parts for the new models Vel Satis, Espace and 807.

The heat exchangers business diversified its client portfolio and in this manner managed to increase its sales volumes.

 

In 2002, the standard rolled products business reported an increase of more than 17% in sales volume over 2001. The activity continued to promote high value added products (pre-anodized, OAB-AID, Laminium brand, etc.). By systematically focusing on high value added products and exploiting commercial inventories, the business was able to maintain a good level of profitability, in spite of a relatively depressed economic environment. During 2002, the standard rolled products business also developed its sales of rolled products made from recycled scraps from the heat exchangers business.

Finally, in 2002 the division continued to implement the strategic modernization of its manufacturing base with the acquisition of a new duplex furnace at Neuf Brisach which will provide additional production capacity of 53,000 metric tons per year. Startup took place in November 2002.

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Item 4

Markets

In Europe, the aluminum can stock market rose significantly (+6%), reflecting good market conditions for beverage cans and increased market share for aluminum vis-à-vis steel. In particular, growth was very strong in central Europe and Russia, which are 100% aluminum regions. The penetration of aluminum exceeded 58% in 2002 for a can stock market of 344,000 metric tons for all of Europe (including Turkey and eastern European countries).

Prospects for growth in the consumption of beverage cans in Europe remain strong (3% to 4% per year). However, the can stock market is expected to remain stable in light of the conversion to steel at Rexam’s Spanish facility.

In addition, the introduction of packaging deposit requirements in Germany poses a threat for the beverage can market. The impact should nevertheless be minimized for the aluminum sector, given its low level of penetration in the beverage can market in Germany (approximately 10%).

Demand for varnished and degreased products (ends) for beverage cans in 2002 is estimated at 133,000 metric tons with an average annualized growth rate of 2% between 2002 and 2005 in light of the many thickness reduction projects under way.

 

For food cans, the market for varnished and degreased products, was approximately 67,000 tons in 2002 and is expected to continue to grow regularly at a rate of 2-3% per year.

In the automotive sector, car manufacturers confirmed their choice of aluminum as the best material to lightweight car bodies. The market for aluminum rolled products used in car bodies more than doubled in two years, from 35,000 metric tons in 2000 to 78,000 metric tons in 2002. The use of aluminum in the automotive sector continues at a sustained pace.

After growth of more than 8% per year in the European market between 1999 and 2002, demand for heat exchangers is expected to increase by approximately 5% per year, owing to the development of automobile air conditioning systems.

In the markets for construction and industry, demand for standard rolled products in Europe was moderate (approximately 2.5% in 2002). However, certain countries like Germany were more seriously affected, particularly in the construction sector.

Research and development

Research and development pursued its efforts to develop:

  • products, in partnership with major customers, in applications for cans (thickness reduction, varnishes), automotive products (qualification of
 

alloys for car bodies), heat exchangers (qualification of new long-life anticorrosion alloys) and thin sheets (high resistance alloys);

  • traditional conversion processes (casting, rolling and heat treatments).

Competition

Pechiney’s main competitors in the European market are Alcan, Hydro Aluminium, Alcoa and Corus.

 

 

41

»Information on the Company

Foil and Strip / Specialties

Selected Foil and Strip / Specialties Data 2002   2001   2000  






 
Net sales (millions of euros)(1) 415   354   158  
Shipments (thousands of metric tons)(2) 141   111   78.3  






 
(1)
Figures for 2000 not restated subsequent to the transfer, as of 2002, of the Mercus, Froges and Goncelin plants from the Aerospace, Transport, Industry division to the Foil and Strip / Specialties division.
(2)
Including intragroup sales.

The Foil and Strip / Specialties division groups the manufacture of foil and strip, circles, precoated sheets, Rubanox refrigeration panels, heat exchangers, refined aluminium and foil and the sale of technology (Pechiney Aluminium Engineering). It operates eight production facilities located in France (Annecy, Chambéry, Froges, Goncelin, Mercus, Rugles), Belgium (Flémalle) and Luxembourg (Dudelange).

With plants at Rugles, Dudelange and Flémalle, Pechiney Eurofoil is a major player in the foil and thin foil market in Europe. The Group believes it is Europe’s third largest manufacturer of this type of product.

 

In addition, the Foil and Strip / Specialties division confirmed its position as the European leader in the refrigeration panel and circle markets. Pechiney Aluminium Engineering (PAE) believes it is the world’s leading supplier of continuous casting technology.

Lastly, with its Mercus, Froges and Goncelin facilities, Pechiney is the only global manufacturer to possess a full line of activities linked to the production of foil for electrolytic capacitors.


Activities Products Markets Facilities

Foil and thin foil Foil and thin strip Food, industriel and Rugles
  Thickness 5 to 200 µ pharmaceutical Dudelange
    packaging Flémalle




Circles, precoated sheets, Rubanox Circles, precoated sheets, Domestic appliances, Annecy
panels aluminum panels construction, automotive, Chambéry
  thickness 0.3 to 6 mm industry  




Heat exchangers Coated and uncoated sheets Automotive, construction, Rugles
  thickness 60 to 200 µ industrie Dudelange




Sale of technology Continuous casting, processing Aluminum conversion, Voreppe
  of liquid metal, technical assistance industry  




Refined products High-purity aluminum, etched Electronics, lighting Froges
  and formed foil for capacitors, Bandoxal   Goncelin
      Mercus




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»Information on the Company

Item 4

Foil and Strip

The integration of Eurofoil’s activities, acquired in June 2001, has begun to bear fruit. Technical synergies have prompted a recovery at the Rugles facility.

In 2002, Pechiney produced 95,000 metric tons of foil and thin foil with the majority of sales volume reported in western Europe. Demand in the

 

European market is evaluated at approximately 725,000 metric tons per year with annual growth estimated for the period 2002-2005 at 2%.

Pechiney’s main competitors in the European market for foil and thin foil are Alcan and Hydro Aluminium.

 

Specialties

Sales volume of specialty products was stable in 2002 in comparison with 2001:

  • Production of Rubanox refrigeration panels totaled 5,200 metric tons in 2002. Pechiney is the second largest operator in the European market, which grows at a rate of 2% per year. Pechiney has a market share of approximately 30%;
  • Production of circles represented 16,000 metric tons in 2002. Demand in this market remained generally stable;
  • The Satma facility at Goncelin, which produces etched and formed sheets sold to capacitor manufacturers mainly located in Asia, has a
 
  • world market share of 4%. Competition is mostly Japanese, but also Italian (Becromal). New Chinese competitors have also recently entered the market;
  • In the high purity aluminum market, which is very cyclical although it has an average rate of historical annualized growth of 7%, Froges sold 2,300 metric tons of high purity alloys in 2002 (market share between 8% and 20% depending on the type of alloy). Competition is mainly from Japanese companies and Hydro Aluminium. Almost half of sales are reported in Europe;
  • As for technology sale, Pechiney sold two continuous casters in 2002.

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»Information on the Company

Extrusions, Casting Alloys, Automotive

Selected Extrusions and Casting Alloys Data 2002   2001   2000  






 
Consolidated Net Sales (millions of euros) 509   575   571  
Shipments (thousands of metric tons)            
Extrusions 82   86   91  
Casting alloys 133   137   141  






 

Extrusions

The Extrusions division is involved in the manufacture and sale of aluminum alloy extrusions (precoating, anodizing, thermal brake and mechanical finishing).

In 2002, sales by French extrusions companies accounted for 53% of total gross sales, and the remaining 47% was accounted for by sales of German companies.

 

The Extrusions division has six production facilities, three located in France and three in Germany.


Facilities Capacity
  Markets
 
(thousands of metric tons per year)
   




France - Pechiney Softal        
Ham (Somme) 20     Construction
Nuits-Saint-Georges (Côte-d’Or) 23     Transport, industry
Aubagne (Bouches-du-Rhône) 9     Construction, distribution

Germany - PAP        
Landau 10     Construction, transport
Crailsheim 20     Transport, industry
Burg 14     Construction, industry


The Group’s Extrusions business manufactures and sells soft alloy extrusions which are used in a number of different applications in the construction industry, including doors, windows, curtain walling systems and interior building frames, as well as applications in other industries, including truck siding, mechanical applications and billboards.

The Group believes that Extrusions is a major producer in the European market for soft alloy extrusions on the basis of 2002 tonnage sold, and has a particularly strong position in France (through its wholly-owned subsidiary, Pechiney Softal) and in Germany (through its wholly-owned subsidiary, Pechiney Aluminium Presswerk - PAP).

After a period of growth between 1996 and 2000, 2001 and 2002 were marked by a downturn. The French market was down 5% in 2001 and recovered only 1% in 2002, for a total decline of 4%. The decrease was even greater in the transport and industry

 

market, which dropped 10% in two years, while the construction market remained steady.

In Germany, demand declined even more: 10% in 2001 and 4% in 2002, for a total of 14%. This trend was mostly due to poor conditions in the construction market, in which demand for extrusions fell 21% in two years. At the same time, the transport and industry market was down 6% between 2000 and 2002.

Tonnage sold by Pechiney (85,600 metric tons in 2001 versus 82,000 metric tons in 2002) decreased by 4%. Between 2000 and 2002, sales volume fell 6% in France and 12% in Germany, whereas, during this period, the market declined 4% in France and 14% in Germany. Although the trend in sales was negative, the division managed to stabilize its market share, with a small erosion in France and a small growth in Germany.

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Item 4

The introduction of the Pechiney Continuous Improvement System began to bear fruit. Industrial efficiency increased and gains are close to the objective. In addition, several extruded parts were started up in 2002

 

automotive applications, including for PSA, Renault and the new Audi A8. A major supply contract was signed with Renault and new preliminary studies were launched with PSA, Renault and Daimler Chrysler.

Primary and secondary casting alloys

The casting alloys business produces and sells primary and secondary aluminum alloys in the form of ingots or liquid metal used to manufacture cast parts, as well as forged billets.

The business operates two facilities in France.

Facilities Capacity
  Markets
 
(thousands of metric tons per year)
   




Aluminium Pechiney        
Sabart(Ariège) 45     Automotive, forge

Affimet        
Compiègne(Oise) 105     Automotive


The casting alloys business addresses the needs of the automotive market which absorbs approximately 80% of its production. The remainder is sold to many other sectors, principally linked to the transport and aerospace markets.

In 2002, in a depressed automotive market (car registration was down 5% in France), the good performance of Peugeot-Citröen and, to a lesser extent, Renault, maintained business volume at a satisfactory level, as aluminum continued to pursue its penetration into the automotive sector. The casting operations of PSA and its national and foreign subcontractors benefited from the joint production of diesel engine blocks for PSA and Ford (1.4 l and soon 1. 6 l).

 

With regard to secondary aluminum alloys, margins were, however, affected by the lack of aluminum waste available for recycling. This phenomenon pushed up the relative price of this commodity compared with the LME price for primary aluminum. As for primary aluminum alloys, 30% to 40% of production is exported and the business supplies approximately 50% of the French market. The business provides approximately 25% of the French market’s secondary aluminum alloys and exports less than 10% of its production.

Pechiney Automotive

Pechiney Automotive coordinates the development of sheets, profiles and casting alloys in partnership with car makers and parts manufacturers.

 

In 2002, Pechiney consolidated its activities with the principal car makers and parts manufacturers:

  • continued work on car bodies: aluminum hoods and door components (Renault’s Vel Satis and Espace, Peugeot’s 807);
  • Numerous developments in other applications: suspension systems (Peugeot), interior parts and energy absorption components;
  • successful launch of the PSA/Ford diesel engine block (Pechiney supplies a significant percentage of the aluminum alloys used).
 

In 2002, strong growth was reported in sales in Germany, consecrating development efforts at a certain number of German car makers and parts manufacturers:

  • supply of 38% of the aluminum sheet used in Daimler Chrysler’s Mercedes Class E car bodies;
  • supply of structural profiles for the new Audi A8 (formed by Thyssen Krupp);
  • supply of semi-finished products for many parts manufacturers (Wagon, Bilstein, Bos, etc.).
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»Information on the Company

Packaging

The Packaging sector is comprised of the following divisions: Plastic Packaging (Flexible Packaging Europe, Flexible Packaging North America,

 

Bottles), Cebal Tubes Europe, Cebal Tubes Americas, Cebal China, Cebal Aerosols, Techpack International and Pechiney Caps and Overcaps.


Selected Packaging Data 2002   2001   2000  






 
Net Sales (millions of euros) 2,342   2,418   2,085  
Earnings from Operations (millions of euros) 129   136   100  
Assets Excluding Cash and Cash Equivalents (millions of euros) (*) 2,120   2,396   2,065  






 
Number of Employees (as of December 31) 16,154   16,494   14,142  






 
(*) The definition of Assets is not equal to the item "Capital Employed" used by Pechiney in calculating Return on Capital Employed.

Plastic Packaging

Plastic Packaging is a worldwide business, encompassing flexible packaging and plastic bottle operations in North America and Europe, where Pechiney considerably strengthened its position in 2001 through the acquisition of Soplaril, one of Europe’s largest manufacturers of flexible packaging. The Plastic Packaging division also has a base in South America, where it acquired Envaril Plastic Packaging Srl in Argentina in 2001. It is also active in New Zealand through Danaflex Packaging.

 

As one of the major manufacturers of flexible packaging for the food, healthcare and specialty markets in North America and Europe, the Plastic Packaging division also produces single- and multi-layer plastic bottles in North America, the United Kingdom and Continental Europe.


Plastic Packaging Data 2002   2001   2000  






 
Net Sales (millions of euros) 1,291   1,237   1,021  
Breakdown of sales by product line (% of Total Division Sales)(1)            
Flexible Packaging 86   85   82  
Plastic Bottles 14   15   18  






 
Breakdown of sales by country (% of Total Division Sales)(1)            
United States 68   76   80  
France 15   11   7  
Rest of Europe 17   13   13  






 
             
(1) Including intragroup sales.            
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Item 4

Products

The Plastic Packaging division manufactures high value added flexible packaging and plastic bottles characterized by its high barrier properties, which enhance product shelf life. In the United States and Europe, the division produces a wide range of single- and multi-layer films and laminations, pouches, bags, lidstock and thermoformed trays. Flexible Packaging’s product line includes more than 2,000 products, which are continually updated and improved to meet evolving customer demand. In addition, Plastic Packaging activities include the production of a wide range of single- and multi-layer polyolefin and PET barrier bottles.

The division’s capacity for innovation, which is supported by very structured research and development teams, is critical to competitiveness, allowing the division to maintain a strong position in the field of co-extruded multi-layer barrier films and coated aluminum foil.

 

The Plastic Packaging division also has significant proprietary technology and expertise in extrusion blow molding of high-barrier containers. During 2002, the Plastic Packaging division continued to develop and commercialize its co-injection molding technology to manufacture high-barrier PET plastic preforms. The preforms are later blown into bottles suited for products requiring oxygen-barrier protection, such as natural juices, beer, sauces and ketchup. The Group believes the plastic bottle offers important advantages for products requiring high oxygen-barrier protection and has major potential for venues where glass is prohibited or not desirable. In 2002, the division commercialized two internally designed high output polyolefin lines at its Canadian facility in Brampton.


Production Facilities            
             
As of December 31, 2002, Plastic Packaging operated 37 production facilities.            
             
   Plastic Packaging
Number of plants
  Plastic Bottles
Number of plants







   North America       North America    
   United States (1)(2)(3)14     United States (2)3  
        Canada 1  







   Europe       Europe    
   France (6)6     United Kingdom (5)1  
   Spain 3     France 1  
   Italy 2          
   Portugal 1          
   Germany 1          
   Czech Republic 1          







   South America            
   Argentina 2          
   Australasia            
   New Zealand (4)1          







(1) Including the two JPS Packaging plants acquired in December 2000 and the Milwaukee plant (formerly Phoenix Healthcare Products) acquired in January 2002.
(2)
Of which one is a combined flexible packaging and plastic bottle facility.
(3) These figures include a flexible packaging plant in Cleveland, Ohio, which was closed in 2002 due to competitive reasons and its operations were consolidated into other existing facilities.
(4) Unconsolidated.
(5)
UK operations were consolidated into one site in 2002 and the second facility was closed.
(6)
Includes Avenir Print Serve, acquired in November, 2002.
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The Plastic Packaging division also benefits from a research and development center in Neenah, Wisconsin. A second research facility in Voreppe, France, was closed in 2002 and its activities were distributed among the Group’s European flexible packaging manufacturing facilities. The division also operates graphics centers in Dijon, France, and Barcelona, Spain. In 2002, a graphics center located in Neenah, Wisconsin, was closed and its activities outsourced to a company that specializes in graphics operations.

Recent strategic acquisitions

Reflecting its strategy to expand business in activities with potential for profitable growth, the Plastic Packaging division benefited from major financial investments:

  • In August 2001, the Group acquired Soplaril, a European manufacturer of film, laminated products and pouches for food, medical and consumer products. Soplaril’s experience and expertise in multi-layer blown films and stand-up pouches, as well as its capacity for innovation, will strengthen the Group’s flexible packaging business in Europe, which has become the fifth largest flexible packaging activity in Europe;
  • In October 2001, the acquisition of industrial assets from Harken Products, an American manufacturer of flexible packaging for the healthcare and dental hygiene market, allowed Pechiney to strengthen its presence in this segment;
  • In November 2001, the Group acquired Envaril Plastic Packaging Srl (Envaril), an Argentine manufacturer of films, processed meat casings and barrier bags for meat and cheese products. In 2001, Envaril reported sales of U.S.$18 million.

In 2002, the division pursued its strategy of internal and external profitable growth:

  • In February 2002, Pechiney Plastic Packaging acquired Phœnix Health Care Products, LLC, a manufacturer of flexible packaging products for the medical market with sales of U.S.$16 million. This acquisition broadens the Group’s line of medical packaging products;
  • In July 2002, the group completed its acquisition of Danaflex Packaging Corporation, in which it had acquired a majority interest in 1998. At its Wellington, New Zealand, facility, Danaflex Packaging manufactures plastic packaging materials and packaging systems for the meat, dairy and food industries. Of particular note is the global technology for a proprietary system, the Danaflex Multi-bagger system that increases the efficiency and traceability of meat vacuum packaging for our clients;
  • In August 2002, the Bottles business opened its first plastic bottles manufacturing facility in continental Europe. Located at Uchaux in southern France, it will serve the French private-label condiment market;
  • In December 2002, Pechiney acquired Avenir Print Service, a French company specializing in small runs of plastic films for health and beauty packaging. The company operates a new manufacturing facility located in Montreuil-Bellay, France;
  Investments

Industrial investments made it possible to improve the efficiency of existing lines and promote modernization while increasing production capacity.

In September 2002, Pechiney Plastic Packaging announced its plans to modernize operations at its flexible packaging facility in Menasha, Wisconsin. This U.S.$17 million expansion will increase the plant’s capacity and includes the creation of a printing cell and an upgrade to extrusion lamination equipment to support new technologies.

The business also announced plans to expand blown film production capacity at its flexible packaging plant in Neenah, Wisconsin. Startup is scheduled for the first quarter of 2003.

In September 2002, Envaril Plastic Packaging launched a shrink bag capacity expansion to improve service to the Argentine market and boost exports within South America.

Pechiney Soplaril Flexible Europe also made major investments in 2002 with the acquisition of a new press in Darmstadt, Germany, and of a triplex laminator in Garbagnate, Italy. It also acquired Doypack® cap-fitting and bag-making machines for the facility in Moreuil, France.

North American activities
In 1999, the Plastic Packaging division launched an ambitious Continuous Improvement program that produced results as of 2001 in terms of cost reductions and improved competitiveness.

Continuous Improvement initiatives and their systematic deployment remain a major focus of the division’s manufacturing strategy. The priority is to select and transfer best practices in order to anchor an environment for change and continuous improvement in performance. Experts in key areas such as Policy Deployment, Safety, Workplace Organization and Standard Work routinely come together to refine best practices, tools and procedures.

In 2001, Continuous Improvement initiatives also moved into the support groups, such as Sales and Marketing, Research and Development, Human Resources and Information Services. In 2002, Continuous Improvement initiatives grew in scope and effectiveness. During the year, Pechiney Plastic Packaging created a cultural diagnostic designed to ensure that Continuous Improvement remains an ongoing part of the business’s foundation. This diagnostic tool allows the business to identify areas of opportunity and develop action plans for embracing and sustaining Continuous Improvement. The business is also refining its business processes through the use of cross-functional teams. A cross-functional commercialization team has refined the process for bringing new products to market, introducing more accountability and discipline while giving greater attention to customer requirements, design, and process capability. In addition, pilot projects are nearing completion for developing best practices in specific manufacturing processes and the development of Statistical Problem Solving tools.

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Information on the Company

Item 4

European activities

In Europe, Pechiney Soplaril Flexible Europe implements the Pechiney Continuous Improvement System by promoting the sharing of best

 

practices. The division exploited major synergies between safety initiatives developed by Pechiney and Soplaril’s expertise in the realm of hygiene.

Markets and Distribution

   

In North America, the Plastic Packaging division’s customers include Abbott Laboratories, Bar S Foods, Cargill (Excel), ConAgra, Inc., H. J. Heinz Company, Hormel Foods Corporation, Keebler Co., Kraft Foods (a division of Philip Morris Companies, Inc.), Land O’ Lakes, Inc., Minute Maid (The Coca-Cola Company), Mott’s Company (Cadbury-Schweppes), Plastipak, Pepsi Cola, SSE, Schreiber and Welch Foods, The Procter & Gamble Co., The Smithfield Companies and Unilever N.V. The American division’s five largest customers accounted for approximately 41% of its sales in 2001. Over the last few years, customers in the United States food industry have tended to reduce the total number of their suppliers in favor of developing more stable, long-term relationships. This trend offers advantages for the large supplier with a wide product portfolio and global operations. However, it has also placed significant pressure on prices in the corresponding markets, making the acceleration of Continuous Improvement projects an even greater priority.

In South America, the integration of Envaril into the group continues. Exchange of technology has strengthened the company’s position in the global fresh meat packaging market.

 

In Europe, Pechiney Soplaril Flexible Europe was organized regionally into four business units - France, Spain/Portugal, Italy and Germany/central Europe - that focus on their own customers and markets, and operate their own sales, manufacturing and research and development resources. The main customers of Pechiney Soplaril Flexible Europe include (i) in the food industry, Bel, Cadbury Schweppes plc, The Danone Group, H.J. Heinz Company, Kraft International, Lactalis, Nestlé S.A. and Senoble, and (ii) in home and personal care, Aventis, Unilever N.V., Novartis AG, The Procter & Gamble Co. and The Roche Group.

With respect to the Plastic Bottles business, recently developed polyolefins and PET barrier bottles for food products and fruit juices have experienced significant growth. The Group believes that this market should continue to grow and benefit from the use of plastic as a substitute for glass, especially in venues where replacing glass by plastic can heighten product differentiation, convenience and safety.

The Plastic Packaging division distributes the majority of its products through its own sales network directly to its customers.

Competition

   

The Group estimates that there are more than 300 participants in the North American flexible packaging market. Principal competitors in the flexible packaging market include Bemis, Cryovac (a division of Sealed Air Corporation), Printpack Inc. and Rexam. In the bottle market, the main competitors are Owens Illinois and Graham Packaging.

In Europe, the flexible packaging market is equally fragmented, with

  approximately 400 companies operating in the sector. However, the consolidation trend which was initiated in 2001, continued in 2002. In April, Amcor (which had merged with Danisco & Akerland in 2001) acquired the Tobepal (Spain) and Rexam (United Kingdom) plants; Bemis took over Walki in October; and Alcan Packaging reached a non-binding agreement in principle with Norsk Hydro to purchase VAW Packaging in November 2002. Wipak also acquired Covex (formerly Wolf-Bayer).
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Cebal Tubes Europe

Cebal Tubes Europe is one of the four divisions created by the reorganization of Cebal. With Cebal Tubes Americas, it is, in the Group’s

 

opinion, the world leader in the market for collapsible plastic, laminated and aluminum tubes.

The following table sets forth selected Cebal Tubes Europe data.

Selected Cebal Tubes Europe Data 2002   2001   2000  






 
Net Sales (millions of euros) 240   271   282  






 
Sales, gross, by market (% of Total Division Sales)(1)            
Beauty 63   62   59  
Personal care - dental hygiene 2   9   14  
Healthcare 13   10   12  
Other (food, household and industrial) 22   19   15  






 
Sales, gross, by geographic region (% of Total Division Sales)(1)            
France 45   49   41  
Germany 25   23   17  
Italy 11   11   9  
Eastern Europe 9   5   5  
Rest of Europe -   2   23  
Other 10   10   5  






 
Sales, gross, by product (% of Total Division Sales)(1)            
Plastic tubes 70   67   63  
Laminated tubes 6   9   13  
Aluminum tubes 24   24   24  






 
(1) Including intragroup sales.

Products

Cebal’s collapsible laminated, plastic and aluminum tubes mainly target the cosmetics, personal care and healthcare markets. Its packaging products are some of the most commonly used by mass-market and selective distribution brands in light of the good value they represent for the price and the sophistication of the printing and finished techniques employed by Cebal Tubes Europe.

Tubes are popular in western countries and the Group believes that they have high growth potential in emerging countries, especially in Eastern Europe, where per capita consumption is increasing rapidly. Cebal Tubes Europe is also present in Poland and the Czech Republic.

 

Cebal Tubes Europe places great emphasis on product innovation, since it is an increasingly important differentiation factor. In 2001, the division won two prizes awarded by the European Association of Tube Manufacturers. It also presented three new products at the Luxe Pack deluxe packaging fair in Monaco. These products effectively address current cosmetics issues and were acclaimed by the professional press and customers alike. The division presented an airbackless tube, which is particularly content-protective, an elliptical tube with a very attractive serving cap, and a dual tube for the mixture of two components just before use. In 2002, as Cebal continued to innovate (two-colored service cap, very transparent tubes, 3D tubes, tubes with pointillist hotstamping, embossed tubes), the division began to commercialize the innovations presented in 2001 - Tandem for a cosmetics manufacturer and airbackless tubes for a pharmaceutical and skin cosmetics laboratory (Zeta-Pharm).

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Item 4

Production Facilities            
             
   The following table sets forth Cebal Tubes Europe’s 16 production facilities.            
             
   Cebal Tubes Europe Aluminum   Plastic   Laminated  






 
   France(1) 1   4   (2)1  
   Germany     1      
   Italy 1   1      
   Poland     1      
   Czech Republic(3) 1       1  
   Morocco(4) 1          
   China     1   1  


 


 
(1)
  
Cebal Tubes Europe has four additional facilities in France that are not mentioned in this table: Cotuplas (mechanical construction), Sefimo (molds for plastic materials), DM Photogravure (photography) and Carrillon (adhesive labels).
(2)
Combined plastic tube and laminated tube facility.
(3)
Combined aluminum tube and laminated tube facility.
(4)
Tubes, flexible packaging and household articles.

Cebal Tubes Europe continued to restructure its industrial base in 2002:

  • After the closing of three facilities in 2000 and the refocusing of the lamination unit at the Ste-Menehould facility in France on complex tubes for the cosmetics market in 2001, the division sold its aluminum tubes business in Finland;
 
  • Industrial investment continued with a very targeted focus: development of production capacities in Eastern Europe, investments in productivity, development of production capacity for Cebalcap service caps;
  • Implementation of the Pechiney Continuous Improvement System was pursued, particularly through the introduction of European networks to share best practices.

 


Markets and Distribution

After a year in 2001 marked by a focus on "Quality and Service" through the introduction of customer service representatives and the creation of a quality department, the division addressed the following issues in 2002:

  • It developed its resources in line with the achievements of the previous year by bolstering quality control, introducing preventive measures (process reliability and zero error systems) and focusing on logistic improvements;
 
  • It reaped the first benefits in terms of quality (15% decrease in customer returns for plastic tubes and 40% decrease for aluminum tubes compared with 2001);
  • It reaped the first benefits in terms of service (late deliveries were cut by an average factor of 2.5).
Cebal Tubes Europe was also innovative in its marketing tools with the launch of an electronic catalog that allows clients to have permanent and current access to its tubes’ product offerings.

Competition

In plastic and aluminum tubes, Cebal Tubes Europe’s principal competitors tend to be local producers whose output is sold principally in

 

a single region or country. In specialty laminated tubes, a key target of Cebal Tubes Europe, there is no real leading manufacturer.

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Cebal Tubes Americas

Cebal Tubes Americas is one of the four divisions created by the reorganization of Cebal in June 2000. With Cebal Tubes Europe, it is, in the

 

Group’s opinion, the world leader in the market for collapsible plastic, laminated and aluminum tubes.

The following table sets forth selected Cebal Tubes Americas data.

Selected Cebal Tubes Americas Data 2002   2001   2000  






 
Net Sales (millions of euros) 242   251   205  






 
Sales, gross, by market (% of Total Division Sales)(1)            
Beauty 26   22   24  
Personal care - dental hygiene 52   53   48  
Healthcare 18   20   23  
Other (food, household and industrial) 4   5   5  






 
Sales, gross, by geographic region
(% of Total Division Sales)
(1)
           
North America (USA, Canada, Mexico) 94   92   99  
South America (Brazil) 6   8   1  






 
Sales, gross, by product (% of Total Division Sales)            
Plastic tubes 36   34   33  
Laminated tubes 64   66   65  






 
(1)
Including intragroup sales.

Products

Cebal Tubes Americas manufactures collapsible plastic and laminated tubes, as well as aluminum tubes in Brazil, for the cosmetics, personal care and healthcare markets. Its packaging products are some of the most commonly used by mass-market and selective distribution brands. Tubes are very popular in western countries, and the Group believes that they have significant growth potential, especially in Latin America.

Recognized for the excellence of its laminated tubes which are widely used to pack toothpaste and also in the pharmaceutical market, the Cebal Tubes Americas division launched a program for the sophistication of plastic tubes and provided the North America market with high value added products (tubes with designed service caps, complex printing and finishing).

 

Equipped with a new-generation rolling mill installed at its new plant in Brampton (near Toronto), Canada, the Cebal Tubes Americas division focuses its laminated tubes activities on products with higher added value, for example, for the personal care and pharmaceuticals markets.

The division is committed to enhancing customer service and improving its competitiveness in its different markets. It therefore works to make its facilities more specialized through implementation of the Pechiney Continuous Improvement System.

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Item 4

   Production Facilities            
             
   The following table sets forth Cebal Tubes Americas’ 7 production facilities.            
             
   Cebal Tubes Americas Aluminum  
Plastic
  Laminated  






 
   United States    
4
  (1)3  
   Canada         1  
   Mexico         1  
   Brazil(2)
1
      1  






 
(1)
Combined plastic tube and laminated tube facility.
(2)
Combined aluminum tube and laminated tube facility.

The new Brampton facility, which started operations in November 2001, progressively increased the production capacity of its new extrusion-lamination machine in 2002 to meet the need for the web to be used in the manufacture of the division’s laminated tubes. In Brazil, the division, which has efficient machinery for the manufacture of laminated tubes, pursued the reorganization of its aluminum tubes business and launched the

 

production of plastic tubes to respond to strong growth in the cosmetics market.

In 2002, the division’s investment strategy focused on improving capacities and processes, particularly in plastic tubes activities.

Markets and Distribution

In North America, sales of plastic tubes increased compared with 2001. In order to broaden the product mix, the division’s marketing and sales strategy focused on more sophisticated, high value added tubes for which Cebal’s know-how and synergies between American and European activities provide a significant advantage.

 

In the laminated tubes segment, in both the United States and Canada, sales rose slightly in comparison with the previous year. However, certain significant laminated tubes sales contracts will come to an end in the first quarter of 2003, which will impact turnover negatively in 2003.

Competition

In plastic and aluminum tubes, Cebal’s principal competitors tend to be local producers whose output is sold principally in a single region or

 

country. In laminated tubes, the two most important competitors are Essel-Propack and Betts.

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Cebal Aerosols

The Group believes Cebal Aerosols is the world leader in the market for aluminum bottles and seamless aluminum aerosol cans (on the basis of

 

2002 Worldwide production) and the second largest manufacturer in Europe after Boxal (Alcan Group).

The following table sets forth selected Cebal Aerosols data.

Selected Cebal Aerosols Data 2002   2001   2000  






 
Net Sales (millions of euros) 89   108   93  
Sales, gross, by market (% of Total Division Sales)(1)            
Personal care 69   76   -  
Pharmaceuticals 11   9   -  
Other (perfume, hygiene, beverages, etc.) 20   15   -  






 
Sales, gross, by geographic region (% of Total Division Sales)(1)            
France 19   23   25  
Germany 15   16   9  
United Kingdom 24   21   12  
Italy 8   6   11  
Spain 5   5   14  
Eastern Europe 7   6   -  
North America 10   9   -  
Other 12   10   29  






 
(1)
Including intragroup sales.

Products

Seamless aluminum aerosol cans and bottles meet the needs of various markets. The principal market is personal care (deodorant, hair care and hygiene), which is complemented by a wide range of specialty niches, such as perfume, pharmaceuticals, decoration products and promotional samples).

Despite generally weaker demand in 2002, aluminum aerosol cans are appreciated for their technical and aesthetic qualities and are often used in product launches. The division created a technically complex aerosol with grips for the brand Axe / Lynx (Lever-Fabergé). This product was given an

 

award by Aerobal (Association Européenne de Fabricants d’Aérosols en Aluminium - European Association of Aluminum Aerosol Manufacturers). The division’s creativity and the quality of its innovations were also demonstrated in the market for specialty products. Its aluminum bottles have had a particular impact, and the division shared a Packaging Oscar with Heineken for a very innovative beer bottle.

The year was also marked by the startup of a new facility in Velim, Czech Republic, with a very favorable cost base to serve markets in Northern Europe, Germany and Eastern Europe.

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Item 4

Production Facilities

The following table sets forth Cebal Aerosols’ five production facilities in Europe (plus a unit operated by a subcontractor in Finland). The facility in Velim, Czech Republic, is a "green field" which started operations in April 2002.

Aerosols Europe
 


 
France(1)
1
 
Spain
1
 
Finland (unit operated by a subcontractor)
unit
 
Italy
1
 
United Kingdom
1
 
Czech Republic
1
 


 
(1) Aerosols Europe also owns the company Copal (aluminum slugs).

The division has made a major effort to rationalize and modernize its production facilities since 2000. Highlights include:

  • the closing of the Nürnberg aerosol unit at the end of 2000;
  • the sale, through an MBO at the end of February 2002, of the majority of the equipment of the Hanko plant in Finland;
  • the construction at the end of 2001 of the Velim plant in the Czech Republic, which started operations in April 2002;
  • the introduction of cost and capacity adjustment measures at the facilities in Cividate, Italy, and Badalona, Spain.

Specialization was reinforced at the division’s facilities to satisfy very different needs, including, on the one hand, specialty products for high

 

value added niches (perfume, pharmaceuticals, decoration, etc.) and, on the other, personal care and hygiene products (deodorants, hair care, etc.), which reflect mass-market trends.

The satisfactory startup of production at the Velim plant was one of the year’s major highlights. The facility is expected to have a workforce of 150 and in three years to operate six production lines with a capacity of 180 million aerosol cans per year. The plant was designed to integrate international standards in terms of safety, environmental protection and quality. It already participates in the Pechiney Continuous Improvement System. It was awarded ISO 9001 and ISO 14000 certification in December 2002.

Markets and Distribution

After a good year in 2001, western European manufacturers experienced a significant contraction in shipments in Western Europe. This unfavorable trend reflected customers’ inventory depletion, especially in Germany, as well as transfers of procurement and restocking volume to Eastern Europe.

While reorganizing its manufacturing base, the division adopted a marketing organization to serve customers efficiently and to introduce innovations which could be industrialized rapidly. It optimized its customer/

 

product portfolio on a European basis, adjusted prices to reflect the services offered, signed multi-year contracts, invested in the development of specialty products and bolstered research and development.

In the last two years, the division has striven to increase its penetration of large multinational accounts. It supplies most of the market leaders and works with both the restocking branches of large groups and smaller inventory specialists.

Competition

Cebal Aerosols competes with major groups such as US Can, Crown Cork, Impress and Alcan in the market for aluminum and steel aerosol cans. In

 

aluminum, it is also in competition with small and medium-sized companies in western and Eastern Europe.

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Techpack International

The Techpack International group (Techpack) is one of the world’s leading producers of high value added plastic packaging for perfume and

 

cosmetics. Techpack also has an international network of sales and marketing companies.

The following table sets forth selected Techpack data.

Selected Techpack Data 2002   2001   2000  






 
Net Sales (millions of euros) 388   460   405  






 
Sales by product line (% of Total Division Sales)            
Cosmetics 55   54   50  
Perfumes 21   20   23  
Skin care 18   18   17  
Hair care, personal care and other 6   8   10  






 
Sales by geographic area (% of Total Division Sales)            
France 36   36   42  
Rest of Europe 23   19   22  
United States 38   40   33  
Rest of the world 3   5   3  






 

Products

Techpack’s product development strategy targets high value added markets - makeup, perfume, personal care and hair care. It offers customers a wide range of packaging products, including lipstick tubes, mascara cases, boxes, caps, bottles, promotional items, jars and dispensers, etc.

In order to support its active focus on innovation, the division launched an Innovation Center in Paris in 2002. The center has state-of-the-art equipment that will enable Techpack to broaden its line of stock products that can be personalized and to form active strategic partnerships with its major customers and suppliers.

 

In 2002, Techpack again demonstrated its creativeness and technological expertise and participated in the launch of many major products, including:

  • in perfume, Gucci’s "Solo", LVMH’s "Dior Addict";
  • in personal care, the "Montblanc" bath line for women, Issey Miyake’s body lotion;
  • in makeup, Guerlain’s "Terracotta" line, two mascaras: Lancôme’s "Flextencils" and Dior’s "Maximeyes", and Clarins "Rouge" line;
  • in blow-molding, Yves Saint Laurent’s "Nu" bath line, Victoria’s Secret "Pink" line;
  • in mass-market promotional samples, Azzaro’s toilet kit, Yves Rocher’s makeup palette and Estée Lauder’s "blockbuster".

 

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Item 4

Production and Sales Facilities

In order to respond to the increasing internationalization of its customers and be present in emerging markets, Techpack has set up a worldwide

 

industrial and commercial network made up of 22 industrial facilities and 12 marketing units.


           
   Industrial facilities(1) Perfume Makeup Blow-molding
Number of facilities






   Europe          
   France X X X 9  
   Italy   X   4  
   Spain   X   1  
   Americas          






   North America X X   5  
   Latin America X X X 2  






   Asia/Pacific X X   1  






   Total       22  






(1) Certain production facilities are joint ventures with other manufacturers.

In the framework of Pechiney’s general strategy to develop business in markets with strong growth potential and to complete its geographic coverage, Techpack International chose to install an industrial base in Asia by acquiring the cosmetics business of the Indonesian group Tiger. Located in a region with favorable labor costs, this acquisition will allow the division to accompany its major customers in their effort to develop in Asia.

In North America, two facilities were closed (Watertown and Yaphank) and production of mascara cases and compacts for the selective makeup market was regrouped at the Melville plant. Mass-market mascara and perfume packaging were concentrated at the Mexican units of Matamoros (TACP) and TPI Mexicana to benefit from a more advantageous cost base, confirming the

 

successful integration of Anchor Cosmetics (now Techpack America Cosmetic Packaging - TACP), just one example over the last two years. In Europe, Käsmacher, the German subcontractor subsidiary, was sold.

The deployment of the Pechiney Continuous Improvement System continued at a steady pace. Implementation was facilitated by a new comprehensive training program for supervisors, named Pechiney’s "best HR initiative" in 2002. Significant savings were obtained in terms of procurement and production. In safety, Techpack International made remarkable progress - the Lost Time Rate per million hours worked was down almost two-thirds in 2002 (6.2 versus 17 in 2001) (based on the French reporting system).

Markets

Techpack International works in partnership with the main French groups (L’Oréal, LVMH, Sanofi, Clarins, Chanel, etc.) and international groups (Estée Lauder, Unilever, Procter & Gamble, Revlon, Shisheido, etc.). Techpack’s ten largest customers in 2002 represented 60% of its sales.

 

The crisis which followed the events of September 11, 2001 weighed on the selective makeup and perfume market, particularly in the United States and in duty-free shops. For the Group’s customers, the decrease in sales volume was offset by an increase in value. The market contraction linked to significant destocking affected Techpack sales volume.

Competition

Techpack International is a world leader in the deluxe plastic packaging industry, together with Rexam, Qualipac and Crown Cork and Seal. In the

 

last few years, competition has grown from Asian companies such as Hsing Chun Plastics.

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Caps and Overcaps

Activities are focused on the manufacture of caps and overcaps for the global wine, alcohol and spirits market. There are three production facilities

 

in France, a unit in the United States (Pechiney Cork & Seal of California) (*) and since November 2000, a unit in Canada (Pechiney Capalux).


Selected Data 2002   2001   2000  






 
Net Sales (millions of euros)(1) 92   91   79  






 
(1) Excluding division activities which are not consolidated.

In 2002, the division reported growth in sales of caps, particularly as a result of the development of its subsidiary Pechiney Capalux. In overcapping, there were contrasting trends: sales of champagne caps and caps in complex increased, while sales of stamped caps, particularly those made of tin, declined, owing to a contraction in the American market, in addition to the replacement of these top-of-the-line caps by middle-range caps.

The year 2002 was marked by the ongoing consolidation of the Canadian

 

subsidiary Pechiney Capalux, which has developed as planned to attain a good level of profitability. The development of capping activities at this facility will be boosted by additional investment to bolster the plant’s already considerable industrial efficiency.

The division undertook a review of the organization of its facilities based on the Pechiney Continuous Improvement System, and created a customer service unit to reinforce its ties with its clients.

(*) Since January 1, 1998, Cork & Seal of California has not been consolided by the Group, since it does not meet consolidated criteria.

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Ferroalloys and Other Activities

The Ferroalloys and Other Activities sector regroups the activities of the Ferroalloys division and of the Voreppe Research Center.

Selected Ferroalloys and Other Activities Data 2002   2001   2000  






 
Net Sales (millions of euros) 308   358   377  
Earnings from Operations (millions of euros) 3   0   0  
Assets Excluding Cash and Cash Equivalents (millions of euros)(*) 380   388   345  
Number of Employees (as of December 31) 2,153   2,427   2,433  






 
             
(*) The definition of Assets is not equal to the item "Capital Employed" used by Pechiney in calculating Return on Capital Employed.      
             
Ferroalloys            
             
The following table sets forth selected Ferroalloys data.            
             
Selected Ferroalloys Data 2002   2001   2000  






 
Net Sales (millions of euros) 308   358   377  






 
Sales by market(1)            
Steel 17   23   22  
Foundry 14   12   11  
Chemicals 26   26   25  
Light alloys 27   25   29  
Abrasives and refractories 16   14   13  






 
             
(1) Including intragroup sales            
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Products

Specialized in electric kiln reduction and high-temperature fusion techniques, Pechiney Electrométallurgie manufactures silicon, ferroalloys, specialty metals and electrofused products specially designed to upgrade

Its principal products and markets are the following.

 

the performance of steel and cast iron, light alloys, silicones, abrasives and refractories.


Products Markets

Ferroalloys
(FeSi, CaSi, CaC2)

Steel
(automotive, aerospace, electric, packaging and construction)



(inoculants, nodularizers)

Foundry (automotive, water conveyance)


Silicon and metals
(Mg, Sr, Ca)
Chemicals (silicone, electronics)
Light alloys (automotive, aerospace and packaging)
Steel


Silica fumes Construction and public works


Fused alumina (white and brown) Abrasives
(grinding wheels, cloths and papers, surface treatment)
Refractories



In 2002, Ferroalloys pursued its strategic focus on high value added products by consolidating its long-term relationships with customers, including manufacturers of grain-oriented sheets, stainless steel, cast iron pipes, cast automotive parts, silicone and abrasives.

In the framework of its innovation policy in the profitable market for inoculants used in the cast foundry industry, Pechiney Electrométallurgie formed new technical development partnerships with major customer

 

 

foundries. These special ties led to the development of innovative solutions to ensure production quality for sensitive parts and reduce manufacturing scrap significantly.

With the support of the Chedde Research Center, Invensil developed very high purity metallurgical silicon qualities for use in new markets such as the photovoltaic silicon segment.

Production Facilities

In each of its three principal businesses, Ferroalloys uses production processes that have high electricity requirements. The price of hydroelectric energy, pursuant to Article 8 of the Nationalization Law of 1946 from which Pechiney Electrométallurgie benefits, is a key element in maintaining a competitive position in all of the division’s markets (see "Dependence on the Economic Environment - Raw Materials and Energy").

In 2002, Ferroalloys refocused on its strategic activities (silicon and alloys for cast foundry), in which it benefits from competitive advantages, and discontinued the production of magnesium, calcium and calcium carbide.

In magnesium, Pechiney Electrométallurgie began talks with labor representatives in 2001 about the future of the business at the Marignac, France, facility, and in the absence of any economically viable solution, it

 

decided to close the plant. An activity to recycle magnesium alloy waste and product production scrap was started at Marignac in cooperation with an external partner.

In the steel industry, efforts to create alliances met with success in January 2002 when Pechiney Electrométallurgie (PEM) and SKW Metallurgie combined their calcium carbide, calcium and calcium alloys activities, as well as their equity interests in Affival, the world leader in covered wire for the steel industry, in a joint subsidiary called SKW Stahl Holding (SSH). PEM has a 25% interest and SKW Metallurgie a 75% stake in the company.

In 2002, plant performance significantly improved and the bases of the Pechiney Continuous Improvement System have been laid. Continuous Improvement initiatives focused on increasing productivity and

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implementing the new standard in process management. A special effort was also made to reduce quality defaults. A site piloting system using key performance indicators was also introduced.

Considering that listening to customers and meeting their needs are key priorities, PEM and Invensil upgraded their quality programs at the end of

 

2001, and were awarded in 2002 ISO 9001v2000 quality certification for their silicon, steel and foundry activities. The new version implies a regrouping under the same certification of most customer-related services in order to improve efficiency and reduce costs. In 2000, activities linked to the automotive sector had already been awarded the ISO/TS 16949 certification requested by manufacturers.

Markets and Distribution

Pechiney Electrométallurgie sells most of its products in the European market. Since Pechiney Electrométallurgie is a supplier to large heavy industries, its activity levels reflect trends in its markets.

The year 2002 was marked by a sharp downturn in the world economy, which particularly affected the division’s silicon and abrasives-refractories activities. The decline in the demand for silicon in the chemicals market and in the American metallurgical market resulted in a significant drop in Invensil’s sales volume. The results of the South African silicon plant at

 

Polokwane increased significantly, bolstered by the very favorable trend in the parity of the U.S. dollar and the rand, but did not manage to offset the decline in profitability in France. The abrasives-refractories business also reported a significant decrease in orders of white fused alumina, offset by a notable rise in the sale of refractories. In such an environment, only foundry activities reported satisfactory results. Inoculants consolidated their position with increased orders from French automobile manufacturers.

Competition

The principal competitors of Pechiney Electrométallurgie in the ferroalloy and silicon markets are Elkem and Fesil in Norway and Globe in the United States. Norsk Hydro (Norway and Canada) remains the major manufacturer of magnesium since Dow Chemical (United States) decided to stop

 

production. Treibacher (Austria), which was acquired by the Imerys Group in 2000, is the principal European manufacturer of fused alumina.

In several markets, the division also has to face competition from a certain number of producers, especially in Russia and China.

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International Trade

International Trade consists of three principal businesses: a global sales agency network through which the Group’s products and certain complementary products are sold, trading activities and since 1999, the

 

distribution of semi-finished aluminum (and some stainless steel) products in France, Germany, Switzerland, Austria and Belgium.


Selected International Trade Data
2002
2001
2000
     
(Restated)(3)
 
(Restated)(3))






Net Sales (millions of euros)
5,036
4,209
3,773
Earnings from operations (millions of euros)
73
58
65
Assets Excluding Cash and Cash Equivalents (millions of euros)(1)
665
829
723






Number of employees (as of December 31)
770
808
848






Agency sales by geographic region (% of Total Division Sales)(2)
Europe
58
55
55
Asia
26
32
29
North America
8
7
8
Latin America
2
4
5
Rest of World
6
2
3






(1) The definition of Assets is not equal to the item "Capital Employed" used by Pechiney in calculating Return on Capital Employed .
(2) Including intragroup sales.
(3) For additional information, see notes 1 and 25 to our Consolidated Financial Statements.


Shipments by product source






Group products
55
68
77
Non-Group products
45
32
23






Sales Agency Network

International Trade’s sales agency network maintains an extensive international presence through its 40 agencies operating in more than 60 countries around the world. The sales agency network offers its principals a wide range of services, and is structured to keep pace with the evolution of their manufacturing strategies. Through this network, International Trade distributes a variety of industrial products for the Group’s other activities and also for third parties.

 

After the events of September 11, 2001, the sluggishness of the American economy affected the world economy. Throughout 2002, this unfavorable situation weighed on the activities of the sales network, which nevertheless remained generally satisfactory. In fact, the diversity of the services the network provides and the good resistance demonstrated in southern Europe made it possible to minimize the lesser performances of certain agencies (Japan, Germany).

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Trading

International Trade’s trading activities are carried out through five companies: Pechiney World Trade USA in the United States; in Europe, Pechiney Trading Company (Switzerland), Pechiney Trading France (France) and Pechiney Trading Ltd. (London, formerly Brandeis Ltd.); and in Asia, Pechiney Far East Limited (Hong Kong).

International Trade specializes in the trading of bauxite, primary aluminum and metallurgical grade alumina. It maintains a global presence and is active both in intermediary markets and end-user markets. The Group believes that International Trade ranks as one of the largest traders worldwide, present at each stage of aluminum production, from bauxite mining to metal conversion.

International Trade is also active in refined copper trading, a business which benefits from synergies among the sales network and trading

 

activities. Finally, operating from the United States, the ores and concentrates activity remains one of the world’s major participants for copper, zinc and lead concentrates.

In 2002, the acquisition of Euromin’s trading activities strengthened International Trade’s presence in the former Commonwealth of Independent States (particularly Russia, Ouzbekistan and Kazakhstan). This acquisition also boosted the zinc metal business with trading volume of almost 200,000 metric tons per year.

Results in 2002 were up significantly from 2001 and were not affected by the generally depressed environment in the market for raw materials. Trading of aluminum, copper and concentrates made substantial contributions to the traditional good performance of alumina trading.

Distribution

The Almet distribution network operates in Austria, Belgium, France, Germany and Switzerland.

Specialized in semi-finished aluminum products, the network also distributes stainless steel items, primarily in France, to round off its product line. Together with the Aerospace, Transport, Industry division, Almet is particularly active in the aerospace, mechanical engineering and transport markets, as well as in boilermaking and construction. Operations are conducted through a network of sales outlets, which is being reorganized and modernized, and five service centers that ensure finishing (splitting, cutting and machining). Almet companies’ supply requirements are purchased from the Pechiney Group at prevailing market prices and on standard market terms.

 

Business in 2002 followed the trend observed at the end of 2001. The economic environment, characterized by a sharp decline in demand, led to a significant decrease in sales volume, selling prices and margins. This was true in all markets throughout the distribution network, and was particularly felt in the aerospace sector.

The restructuring and cost reduction program implemented in France at the end of 2001 made it possible to limit the impact. In light of the economic situation, these measures will be intensified.

Trading Risks Assumed by the Group

Trading activities conducted by International Trade involve managing a certain number of risks inherent in this type of operation. In connection with these activities, International Trade purchases and sells forwards and futures, as well as options (physical and paper) both on (LME) and off exchanges.

Price risks (price fluctuations) are systematically hedged, to stay within exposure limits authorized by the Group. Structure risks (gap between the spot price and the forward price) and premium risks (fluctuations in geographic premiums) are also subject to strict limits set by the Group’s executive management.

 

These limits are set by product and type of exposure. Daily monitoring of these limits involves immediate notification of the division’s management in the event of non-compliance.

Counterparty credit risks (default of counterparties or suppliers) are limited to lines of credit granted on a case by case basis, with credit insurance policies subscribed in certain countries. These lines are reviewed periodically.

There is no material seasonal variation in aluminum production and sales.

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Dependence on the Economic Environment

Supply of Raw Materials

Bauxite

In 2002, the Group consumed approximately 4.6 million metric tons of bauxite, the basic raw material for the production of alumina and, in turn, aluminum. Depending on the quality of the bauxite ore (i.e. the level of alumina oxide content), the amount of bauxite required to produce one metric ton of alumina varies from two to four metric tons. All raw materials are purchased at prevailing market prices and on standard market terms.

 

In 2002, approximately 53% of the Group’s bauxite requirements were extracted from mines in which the Group has an interest, with the balance supplied pursuant to long-term contracts (see "- Business of the Pechiney Group - Aluminum Sector - Primary Aluminum - Production Facilities -Bauxite Production").

Alumina

The Group’s share of alumina capacity from alumina refineries it owns or in which it has an interest amounts to approximately 2.2 million metric tons per year (see "- Business of the Pechiney Group - Aluminum Sector -Primary Aluminum - Production Facilities - Alumina Production"). A part of this

 

share of alumina is sold to third parties as non-metallurgical alumina, creating a need for external purchases in order to meet the Group’s alumina requirements. These external purchases generally amount to approximately 20% of the Group’s internal consumption.

Aluminum

The aluminum tonnage used by the Group’s European aluminum conversion activities increased compared with 2001 to approximately 620,000 metric tons of aluminum (excluding scrap metal). The rise was mainly linked to the 2001 acquisition of Eurofoil’s two facilities in Belgium

 

and Luxembourg. Most of this aluminum was procured directly from Aluminum Metal, pursuant to long-term supply contracts entered into at prevailing market prices and on standard market terms.

Plastics

Plastic packaging activities in the United States and Europe consumed approximately 295,000 metric tons of films and resins in 2002, as compared

 

with 305,000 metric tons in 2001. These films and resins are purchased from major European and American producers.

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Energy

The Group’s aluminum electrolysis and ferroalloys activities consume large quantities of electrical energy. The cost of energy is one of the most significant components in the overall production cost of primary aluminum and thus proves to be a determining factor in deciding the location of new smelters.

The ferroalloys and aluminum electrolysis plants located in France are supplied with electrical energy by Electricité de France (EDF). Approximately 25% of the Group’s electricity requirements in France, and essentially relating to the needs of Ferroalloys (see "- Business of the Pechiney Group - Ferroalloys and Other Activities - Ferroalloys"), are supplied under Article 8 of the French Nationalization Law of 1946, under which the Group has been given the right to obtain electricity from EDF at prices and quantities equivalent to those which it would have obtained from such hydroelectric facilities prior to their nationalization. The agreements implementing Article 8 expired at the end of 1996 and were renewed on similar terms effective as of January 1, 1997.

EDF supplies Aluminium Dunkerque’s energy requirements pursuant to a 25-year contract. In addition, EDF contributes to the financing of the

 

working capital requirements of Aluminium Dunkerque and is entitled to a share of Aluminium Dunkerque’s results. The balance of the electricity consumed by the facilities located in France in which the Group has an interest is supplied pursuant to separate contractual arrangements with EDF.

Since the end of its contract on March 31, 2001, Pechiney Nederland NV has supplied its aluminum production facility in Vlissingen, Netherlands, with electricity bought on the open Dutch market. Pechiney Nederland NV is currently investigating various electricity supply alternatives, which may prove to be more competitive.

Bécancour (Canada), Tomago (Australia), Aluminium de Grèce (Greece) and Alucam (Cameroon) obtain energy pursuant to long-term contracts, expiring between 2006 and 2017, with Hydro Québec, Macquarie Generation, DEH and AES-Sonel, respectively. The arbitration rendered in 2002 on Aluminium de Grèce’s energy contract (see "- Legal Proceedings") has made it possible to secure this contract until it expires, with the provision of certain additional payments. Each energy contract includes pricing formulas indexing electricity prices to LME aluminum quotations.

Fluctuations in Prices of Raw Materials

Primary Aluminum

In addition to energy (see "- Energy"), the principal raw materials of this division are bauxite, alumina, coke and soda ash. A substantial portion of the division’s bauxite and alumina raw material requirements is supplied by

 

the Group, with the balance of bauxite and alumina as well as the coke and soda ash being supplied pursuant to long-term supply contracts entered into with third parties.

Aluminum Conversion

The principal raw materials consumed are aluminum and, to a lesser extent, additive metals used in aluminum alloys.

 

To protect against fluctuations in the price of aluminum, the policy of the Aluminum Conversion divisions is to hedge aluminum prices as orders for semi-finished products are recorded, as well as all of the firm commercial commitments taken by these divisions.

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Cebal

The principal raw material consumed by Cebal in the production of aerosols and aluminum tubes is, by definition, aluminum.

Cebal generally limits its exposure to fluctuations in the price of aluminum by matching, to the degree possible, its contracts to supply cans to its customers with forward purchase contracts for aluminum supply on the same terms.

 

In 2002, almost all of Cebal’s aluminum requirements were supplied by Pechiney Trading France and Aluminium Pechiney. To the extent Cebal has not procured a sufficient supply of aluminum to meet its obligations under its sales contracts, it hedges its exposure to fluctuations in the price of aluminum by entering into a variety of hedging commodity contracts in the same manner as described above with respect to Aluminum Conversion.

Plastic Packaging, Cebal and Techpack International

With respect to the production of flexible packaging, plastic bottles, plastic tubes and deluxe plastic packaging, the primary raw materials consumed by these three activities are resins for plastics and, to a lesser extent, thin aluminum foil, plastic films and paper. These activities enter into purchase contracts for these raw materials on prevailing market terms.

In some cases, these activities protect themselves from fluctuations in raw

 

materials prices by including escalator clauses in their sales contracts. Such provisions allow them to pass on increases or decreases in resin prices to their customers, although there can be a time lag between a change in prices under their purchase contracts and the corresponding change under their sales contracts. During such lag, they bear the temporary additional cost or benefit resulting from the change in prices under their purchase contracts.

Energy

Aluminum smelters generally require an uninterrupted supply of intense electrical energy, and any interruption of more than four hours, whatever the cause, may have a major technical, commercial and financial impact on the activities of the facility concerned. Smelters that depend on hydroelectric power may also, in certain cases, be affected by a persistent decrease in the rain gage level when such an occurrence results in a drop in the electrical intensity supplied at certain periods of the year (this

 

explains the seasonal nature of primary aluminum production capacity sometimes observed at certain facilities). Nevertheless, in light of the technical, commercial and financial implications an interrupted supply of intense electrical energy has for the Group’s smelters, the contracts signed by the Group for these facilities generally contain provisions to ensure priority access to the electric power produced by the suppliers of electricity.

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Industrial and Environmental Risks

Pechiney’s Environment and Industrial Risk Management Department is responsible for defining Group policy in these areas. The Group’s industrial divisions are responsible for its implementation.

 

 

Environmental Regulation and Policy

The Group is subject to a broad range of environmental laws and regulations in each of the jurisdictions in which it operates. These laws and regulations impose increasingly stringent environmental protection standards on the Group regarding, among other things, air emissions, wastewater discharges, the use and handling of hazardous materials, waste disposal practices, and the remediation of environmental contamination.

Each year, the Group commits significant capital resources and expenditures towards its environmental regulation compliance requirements. The Group believes its facilities and activities are generally in accordance with applicable environmental laws and regulations.

Pechiney applies the international standard ISO 14001 as the benchmark for its environmental protection management. This system, which is based on the standards of prevention, compliance with regulations and the Pechiney Continuous Improvement System, is complemented by a comprehensive training program. The objective is to certify the Group’s main facilities by 2004. In 2002, the plants at Saint-Jean-de-Maurienne (smelting), Sogerem

 

(fluorspar mines), Compiègne (aluminum recycling), Dudelange (Eurofoil), Arenzano, Badalona and Velim (packaging) were certified, bringing to 25 the number of ISO 14001 facilities. Several other units have undertaken similar initiatives. In addition, the Group’s American facilities comply with the MACT standard (Maximum Achievable Control Technology).

In 2002, the major improvements concerned the reduction of atmospheric emissions of fluorine (smelters), COV (aluminum conversion and packaging plants) and dioxides (Affimet), as well as recycling programs for bauxite scrap (Gardanne and ADG) and carbonaceous electrolysis cell linings.

For its customers, the Group develops solutions that contribute to sustainable development. AP18 and AP30 electrolysis cells are the most economical in the world in terms of the consumption of electrical energy, and emissions of greenhouse gases are two times lower than the world smelting average. The new generation of AP50 cells will make it possible to reduce PFC emissions even further.


(millions of euros) 2002   2001   2000  







Environmental provisions 77.0   76.0   85.8  







The aggregate amount of provisions made to ensure environmental compliance as well as the risk of environmentally related legal proceedings totaled approximately € 77 million as of December 31, 2002.

Environmental protection obligations included in the provisions are those which the Group may be obliged to meet with respect to certain current and past activities as well as for disposal sites it owns or that belong to third parties, notably when it agreed to continue to bear all or part of the environmental responsibility involved upon the sale of these activities or disposal sites. In the United States, the Group’s activities are subject to both federal and state laws. Certain laws allow for the financial liability of certain categories of specifically named individuals for the remediation of polluted sites with no obligation to prove that they may have committed any particular offense or failed to comply with environmental standards

 

applicable to the activity alleged to have caused the pollution.
It is the Group’s policy to identify and, to the extent possible, quantitatively budget for the costs associated with the potential remediation of sites where the Group could incur liability. The Group makes provisions no later than when the occurrence of an event makes costs probable and reasonably estimable, such as the issuance by competent authorities of an order to perform remedial work. In keeping with this policy, the Group believes it has covered all the expenses relating to environmental remediation activities that it has determined were probable and reasonably estimable as of December 31, 2002.

There can be no assurance that the amounts the Group has budgeted and provisioned will enable it to satisfy its environmental obligations, especially in light of the following factors:

  • The rapid development of increasingly stringent environmental laws and
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    • regulations and of their interpretation by the courts, especially if minority shareholders of companies being liquidated were to be made liable;
    • Governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress; and potential liability of the Group to remediate sites for which provisions have not been established;
    • In addition, future developments, such as changes in law or new information regarding environmental conditions, could result in increased environmental costs and liabilities that could have a material adverse effect on the Group’s future financial condition and results of operations or its consolidated financial position.

    Between 1990 and 2000, Pechiney reduced emissions of greenhouse gases at its aluminum facilities in France by 41% in line with its commitment, while increasing production by 30%.

     

    In 2000, the Group broadened this voluntary commitment to reduce greenhouse gas emissions in all its activities throughout the world. The objective is a 15% reduction (direct emissions only) by 2012 compared with the 1990 level with ambitious growth in business. The reduction achieved in 2001-2002 totaled approximately 11% (subject to verification by an independent audit), with a mediocre year in 2002 owing to serious operating problems at three facilities. New initiatives will be taken to improve the situation, in particular in the framework of the agreement on voluntary reduction that Pechiney is going to propose to French authorities for the period 2003-2007 together with other committed companies in the AERES organization, which was created for this purpose.

    The impact of products on the environment

    Pechiney must meet the most stringent environmental protection standards. For this reason, the Group closely follows the introduction of environmental regulations in which it actively participates along with European manufacturers.

    Recycling products after use and reducing waste are priorities for the European Commission and the European Parliament.

    The Group expanded its recycling capacity. In line with its efforts to promote the recycling of its can customers’ aluminum scrap, the Neuf Brisach facility is now able to reuse a major portion of its automotive customers’ production scrap (PSA Citroën, Renault and Daimler Chrysler

     

    Mercedes). In aerospace, the Issoire plant introduced a system in 2002 that makes it possible to recast machining scrap from Airbus. Almost € 4 million were invested in this project to recycle 11,000 metric tons of aluminum alloy per year. Pechiney also develops solutions to limit raw materials consumption and facilitate the recycling of post-consumer packaging.

    The use of aluminum in automobiles makes a direct contribution to the attainment of this objective. Pechiney is closely associated with automobile manufacturers and involved in the recovery of cars that are no longer operable to find solutions that will optimize the recovery and recycling of their aluminum content.

    Industrial property risks

    Pechiney advocates an advanced policy for the prevention of industrial property risks.

    Insurance companies evaluate the quality of risk control at industrial facilities to determine appropriate insurance premiums and coverage.

    As of January 1, 2003, 55% of physical assets in production units insured by the Group (assets plus annual gross margin) were designated Highly Protected Risks, compared with 68% as of January 1, 2002. Six major facilities lost their rating in 2002, subsequent to prevention audits by prevention engineers commissioned by the Group’s insurance companies.

    In 2003, action plans will be implemented at these facilities to enable them to regain their HPR rating. In addition, different improvement points have

     

    been identified and, in particular fire protection upgrades, which should make it possible to have at least 70% of the Group’s facilities designated Highly Protected Risks by the end of 2003. These efforts will reduce the probability and seriousness of financial loss in the event of an accident, as well as the cost of insurance.

    In this way, the Pechiney group demonstrates its capacity to meet or even exceed the prevention criteria established by the National Fire Protection Association in the United States, which maintains some of the strictest property protection standards in the world.

    After a methodological study of industrial hazards, the six Group facilities recently classified Seveso 2 met regulatory requirements which reinforce the industrial property risks prevention system.

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    Safety

    A top priority for Pechiney, safety is one of the important criteria according to which the quality of management is measured at all levels of the Group. Pechiney implements a very active risk prevention policy at work that is based on a visible commitment of the management and committed employee mobilization to clear principles of organization.

    Annual and multi-annual action plans are designed, monitored and implemented by safety committees in each operational division and for each facility.

     

    Two mechanisms contribute decisively to the improvement of safety conditions:

    • standards that determine the minimum requirements for a task or a specific risk;
    • internal reviews that cover safety systems, standards and practices in the work environment.
    Groups of security coordinators assigned to the aluminum and packaging sectors assist the facilities in implementing these mechanisms and encouraging the exchange of information as to good practices and   significant incidents. Positive results are incentivized through compensation.

    Lost Time Rate per million hours worked - LTR
    2002   2001   2000   1999
    1998
     










    6.8   9.7   10.1   11.0   12.9  










                       

    Total Incidence Rate per million hours worked - TIR

    2002   2001   2000   1999   1998  










    18.1   23.9   24.6   28.5   31.8  










    Health

    An independent medical and toxicological council, chaired by Dr. Maurice Tubiana, advises executive management on work-related and public health issues related to the Group’s manufacturing activities and products. In particular, it is monitoring studies on the possible toxicity of aluminum. The protocol agreement signed in 2001 with the French National Institute of Health and Medical Research (INSERM) took concrete form in 2002 through the organization of scientific monitoring of solvents such as glycol ethers. In addition, impact studies at the main risk category facilities in France made it possible to verify the absence of health risks in their environment

    To the best of their knowledge, neither Pechiney nor any of its subsidiaries has, in the past, extracted asbestos or utilized asbestos as a raw material in the manufacture of its products, or marketed products containing asbestos, with the one known exception of Cefilac Saint-Etienne (part of Carbone Lorraine), whose production included some joints made of asbestos.

     

    The only exposure of Pechiney employees to asbestos has been principally due to asbestos contained in consumer goods, such as gloves, joints, weaves and consumable asbestos slabs or resulting from maintenance work on asbestos-containing products contained in buildings or in the ovens (insulation).

    The number of employees exposed to asbestos is therefore very limited compared to that of manufacturers of asbestos-containing products.

    In July 2002, common asbestos standards were adopted by the sectors of the Group. They reiterate that the use of consumable asbestos has been forbidden in the Pechiney Group since 1993, and set up a strict management system to identify any residual asbestos materials, such as fibrocement, through permanent inventory, labeling, regular measurement of asbestos particles in the atmosphere and the adoption of remediation procedures.

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    Insurance

    The Pechiney Group’s companies are insured through centralized global packages. In 2003, the cost of these insurance policies totalled €36 million, excluding the costs of life and medical insurance for Group employees, since these types of insurance are purchased on a country-by-country basis in light of local practices.The coverage provided by these packages and the amounts of their guarantees are comparable to those of industrial groups of the same size and in the same sector throughout the world. These policies cover risks involving property and resulting operating losses, transport and liability related to operations or products. The risk of accidental pollution is also covered.

    Insurance for damage at the Group's industrial facilities and resulting economic losses is in the form of "all risks excluding" coverage. The coverage is subject to certain exclusions and standard limitations, in particular, damages resulting from natural hazards or terrorism. For general and products liability coverage (including aircraft products) the coverage limit is at least €200 million.

    The Group's insurance coverage is also subject to additional exclusions and sub-limitations, standard among comparable companies, such as damage due to gradual pollution or performance defects. These sub-limitations may vary according to geographic location.

     

    In order to preserve basic guarantees and adequate coverage, and at the same time to optimize the Group’s premium budget in one of the least flexible insurance markets in decades, Pechiney opted for a higher deductible for property damage and business interruptions. This deductible has been raised to € 15 million per claim as of January 1, 2003.

    Moreover, the tightening of conditions in the insurance market has caused the Group to take certain restrictions on coverage as of 2003.

    In November 2002, the bad weather that ravaged northern Europe caused major damage at the Group’s Dutch plant. Deposits of sea salt seriously damaged the substation’s electrical installations, affecting the electrolysis cells. The damage caused will result in several months of operating losses estimated at more than € 25 million.

    Intellectual Property

    Intellectual property (patents, models, know-how, trademarks, etc.) constitutes an important asset for the Group.

    As of December 31, 2002, the Group had a portfolio of 815 basic patents in several countries (a total of approximately 3,400 patents). The Group filed 80 new patent applications in 2002.

    The patents granted to the Group in 2002 in Europe and the United States include the following noteworthy processes and products:

    • several processes linked to the construction of new-generation smelters;
     
    • a process to distribute alumina on electrolysis cells;
    • polycrystalline fused alumina and realization process;
    • an alloy for brazed heat exchangers;
    • an alloy for aircraft fuselages;
    • an aerosol with a threaded neck;
    • several new processes for food and cosmetics packaging products.

    No Group activity is threatened by the expiration of a patent within the next few years.

    Legal Proceedings

    • In 1990, the U.S. environmental protection authorities commenced proceedings against the Group regarding environmental liabilities relating to several mines and manufacturing facilities in the United States operated by a former Group subsidiary between 1940 and 1962. In connection with the sale of the mines in 1960, the Group agreed to indemnify the purchaser against certain environmental liabilities.
    • In 1991, the Group commenced proceedings in the New Jersey state courts seeking to recover its costs and legal expenses from its insurers under former insurance policies.
    After accounting for remediation work already carried out, the Group believes that its provision amounting to U.S.$20.4 million as of December 31, 2002, is adequate. The Group cannot evaluate its risks more accurately until the extent of the necessary remediation work has been fully determined.
     
    • In March 1997, Howmet Turbine Corp., a former Group subsidiary sold in 1995, notified Pechiney of the existence of polychlorbiphenyls (PCBs) at its facility in Dover, New Jersey. In accordance with an agreement entered into in April 1997 with the New Jersey authorities, Howmet undertook investigations to determine an acceptable means of remediation. The solution has not yet been determined by the authorities.

    In June 1998, Howmet notified Pechiney that remediation work may also be necessary at its facility in Combe Fill South, New Jersey. Similar remediation work relating to operations prior to 1995 may also be necessary for other facilities.

    • In connection with the sale of its Turbine Components in 1995, the Group agreed to indemnify the purchaser against certain environmental liabilities. The Group may be liable to bear a substantial portion of remediation expenses under this indemnity. This guarantee is effective, after allocation
      70

     

     

    »Information on the Company

    Item 4

    of insurance indemnities, from the first dollar exceeding the provision determined contractually with the buyer at the cumulated amount of U.S.$6 million. The December 31, 2002, estimate of the risks of loss or damage for all the facilities covered by this guarantee totals U.S.$11 million (including attorneys’ fees). In light of the deductible sum stipulated in the contract in the amount of U.S.$6 million which is the responsibility of the buyer, the provision made by the Group as of December 31, 2002, totaled U.S.$5 million. The Group believes this provision is sufficient and it is not possible to make an accurate assessment of the definitive risks related to these proceedings until the extent of the necessary remediation work at the two locations (Dover and Combe Fill South) has been fully determined.

    • At the end of December 1999, DEH, which supplies electric power to Aluminium de Grèce’s Saint Nicolas aluminum production facility in Boetia, delivered to the Group a request for arbitration. The request for arbitration seeks approval of the following changes in its electricity supply contract:
      • an increase in the thermal tranche price of electricity supplied as of January 1, 1999, and
      • a re-examination of the contract to ensure compliance with Greek legislation transposing the European directive No. 96/92 relating to the deregulation of the electricity market in the European Union
     

    Since January 1, 1999, the price of electricity for the thermal tranche continues to be billed temporarily by DEH on the basis of the formula in the initial contract, with the difference between this price and the price asked for in the arbitration procedure representing, for the years 1999 and 2000, a total of approximately U.S.$12 million on the basis of actual consumption.

    The Group rejected these two requests, and was opposed to any increase in the various price components before the expiration of the contract which is scheduled for the end of 2006. The arbitration panel met at the end of June 2000. The arbitration rendered in June 2002 rejected DEH’s second request, which was for a re-examination of the contract to ensure compliance with Greek legislation transposing the European directive relating to the deregulation of the electricity market. On the other hand, in their capacity as arbitrators, the members of the panel partially acquiesced to DEH’s first request, for an increase in the thermal tranche price of electricity. The outcome of these proceedings represented an additional payment to DEH (capital plus interest) of € 12.8 million, determined on the basis of the new price formula set by the arbitrators and covering the whole period in dispute.

    • Other than the foregoing, the Group has no knowledge of any claims or legal proceedings which may, beyond existing provisions, substantially affect its consolidated results of operations, financial condition or liquidity
    Recent developments    
    • On January 17, 2003, Cebal Americas, a division of Pechiney’s Packaging sector, announced plans to build a plant in Mexico to manufacture plastic tubes for the cosmetics segment in North America. Construction of the new plant is expected to represent an investment of U.S.$10 million.
    • On March 13, 2003, Corus Group plc announced that it was unable to proceed with the proposed sale of its aluminum conversion business to Pechiney.
    • On March 19, 2003, Pechiney announced that management of its Auzat aluminum plant in Ariège, France had decided for safety reasons to suspend operations at the plant’s smelting workshop. The Auzat plant was subsequently shut down permanently.
    • On April 9, 2003, Pechiney and SUAL announced that they had reached an agreement to enter into substantive negotiations for the joint development of a bauxite, alumina and aluminum complex in the Komi Republic, Russian Federation. It is contemplated that Pechiney will acquire an interest of up to 35-40% in the joint venture.
    • In April 2003, Pechiney announced the acquisition of the cosmetics packaging assets of the Tiger Group of Indonesia. The acquisition was made through Techpack Asia, a newly-created subsidiary held as to 95% by Pechiney’s subsidiary Techpack International. Pechiney announced that Techpack Asia’s business would also include CT-Pack, which was previously held jointly by Techpack International and the Tiger Group. Initially, Teckpack Asia's revenues are expected to amount to U.S. $ 20 million per year.
     
    • On May 27, 2003, a special meeting of the holders of Preferred Shares "B" of Pechiney approved the vote of the general shareholders’ meeting of April 3, 2003 to convert the Preferred Shares "B" into Common Shares "A". For further information, see "Item 10. Additional Information – Description of Share Capital – Capital Structure of the Company."
    • On June 12, 2003, Pechiney announced the acquisition of Enocap, a Chilean capsule manufacturer, by Pechiney Capsules. Enocap achieves annual sales of almost U.S. $ 3 million.
    • On July 9, 2003, Pechiney announced that it had reached an agreement with its financial partners to purchase, as of December 30, 2003, the 65% equity interest in Aluminium Dunkerque not already held by Pechiney. This agreement is the result of negotiations undertaken during the first half of 2003 with the financial partners with a view to anticipating the exercise of put options that were granted to them in June 1990. In this transaction, all of the shares transferred to Pechiney, together with all subordinated debt (titres subordonnés participants), for consideration of approximately €250 million. The consolidation of Aluminium Dunkerque will also lead to Pechiney consolidating additional debt that is estimated to amount to approximately €135 million at year end 2003. For further information, see "Item 5. Operating and Financial Review and Prospects –Liquidity and Capital Resources – Contingencies – Option on an Affiliate."
    • On August 22, 2003, Pechiney Plastic Packaging Inc. acquired Novacel, a Mexican custom flexible packaging company, from Grupo Arteva, S. de R.L. de C.V. and Grupo Bimbo, S.A. de C.V. for U.S.$90 million. Novacel manufactures a variety of flexible packaging products, primarily for the food market.
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    » Information on the Company
    • On August 26, 2003, Pechiney announced that Baotou Aluminium Co. and Aluminium Pechiney had reached an agreement for the construction of a new production unit for high purity aluminum in Baotou, Inner Mongolia. Aluminium Pechiney and Baotou Aluminium Co. are expected to own 51% and 49% of the joint venture, respectively. Pechiney’s total investment in this project is estimated to amount to U.S.$13 million.
    • On July 7, 2003, Alcan announced an unsolicited bid for the Pechiney Securities. For further information, see "Item 4. Information on the Company – Overview of the Pechiney Group." Following successive increases in the value of Alcan’s bid, Pechiney announced on October 9, 2003 that its board of directors had formally recommended to the holders of Pechiney Securities that they accept the revised bid. Pechiney has made a provision in its September 30, 2003 Financial Statements (which have not, as yet, been reviewed by Pechiney's auditors) in the amount of €33 million for the estimated fees to be paid to its financial and legal advisors in respect of their services relating to the Alcan tender offer.
    • On October 2, 2003 Pechiney announced that it had entered the FTSE4GOOD Europe and Global indices, which were created by the FTSE group in July 2001 and specialize in sustainable development. The criteria for inclusion in these indices focus on working towards environmental sustainability, developing positive relations with stakeholders and upholding and supporting human rights.
    • The Coega Aluminum Smelter project for the construction of an aluminum smelter in South Africa using AP50 Technology has made significant progress. For further information on this project, see "Item 4. Information on the Company-Business of the Pechiney Group-Primary Aluminum-Aluminum Metal". Based on the decisions in principle taken by several partners to make equity investments in the project, subject to certain conditions, in addition to the 49% which is to be held by Pechiney, these commitments currently cover more than 90% of the project's equity financing. Moreover, on September 30, 2003, Pechiney gave notice of its decision to continue with the project, which resulted in the electricity supply agreement with the Eskom group becoming effective. This agreement may be terminated during the next 12 months, subject to a break up fee of U.S. $5 million per month. In addition, this notification triggers an obligation for Pechiney to pay, in October 2003, an installment of ZAR 100 million (equal, for information purposes, to approximately €12.29 million on the basis of the exchange rate at September 30, 2003) in respect of connection fees, and a requirement that it confirms its undertaking to reimburse, if applicable, up to ZAR 133 million (equal, for information purposes, to approximately €16.34 million on the basis of the exchange rate at September 30, 2003) which is the maximum amount payable to Eskom as compensation for infrastructure costs not recoverable if the project is terminated. Pechiney has thus been actively continuing the preparation of the Coega Aluminum Smelter project. If a different approach were to be adopted in the future, any decision not to continue the project, made between the date hereof and September 30, 2004, would require that the following be charged to income: the costs capitalized on Pechiney's balance sheet (equal to €45 million at September 30, 2003), as increased by additional assets and commitments to be incurred in the future (in particular the connection fee of up to ZAR 100 million, the break-up fee, the portion actually incurred of the compensation amount of up to ZAR 133 million discussed above, and the cost of winding down the project).
     
    • On October 22, 2003, the Queensland Government in Australia, without prior consultation, requested a Pechiney subsidiary in Australia to surrender mining rights, which site has not to date been exploited by Pechiney. The government has given Pechiney until October 24, 2003, to make such surrender. Pechiney is considering its position in respect of such request.
    • The performance of a business contract by a Pechiney subsidiary in the Aluminum Lithium activity could require industrial investments that currently may generate a loss, the aggregate total of which is estimated to amount, in such a scenerio, to approximately U.S.$10 million.
    • The non-renewal of a multi-year contract, in one of the units in the Packaging sector is expected to have a negative impact on 2004 revenues of approximately U.S.$30 million assuming that the loss of the contract, is not offset by new business. On the same assumption, it may also become necessary to carry out industrial restructuring measures.
    • With respect to the valuation of Pechiney’s assets, tax loss carry-forwards and goodwill, Pechiney’s multi-year business plans which form the basis for the annual depreciation analysis, (unless any new developments come to light during the course of the year) will be presented and analyzed in the last two months of 2003. However, the deteriorating financial outlook in certain businesses will lead Pechiney to incur write-downs of tangible assets in its September 30, 2003 financial statements in the amount of €6 million in the Primary Aluminum sector, €8 million in the Aluminum Conversion sector and €22 million in the Packaging sector. For the same reasons, an earlier than anticipated review of the outlook for certain of the activities of the Techpack business unit (Packaging sector) and Foil and Strip/Specialties business unit (Aluminum Conversion sector) is ongoing and might lead, if such deteriorating financial outlook was confirmed to exceptional write downs in the September 30, 2003 financial statements.
    • In January 2003, Pechiney began consultations with employee representatives regarding three new industrial restructuring plans, including the potential termination of approximately 600 employee positions at the following plants: the Aluminium Pechiney plants at Auzat and Sabart in Ariège, France; the Casting Alloys headquarters; the Pechiney Softal extrusions plant at Aubagne in Bouches-du-Rhône, France; and the Lir-France cosmetics packaging plants at Avallon in Yonne, France and at Provins in Seine-et-Marne, France. See "Item 5. Directors, Senior Management and Employees – Employees – Labor Policy." Following this consultation process, implementation of the restructuring plans has been underway from April through October 2003, and production has been terminated or transferred to other plants. The related employment terminations have been ongoing since April 2003 and are expected to be completed in early 2004, at the end of the relevant notice and outplacement periods. In addition, a further 70 employment terminations (expected to be carried out between July 2003 and June 2004) have been scheduled in the Pechiney Aviatube hard alloy extrusion plant in Carquefou, France, and approximately 50 proposed employment terminations in the Cebal aerosol can plant in Bellegarde, France have been submitted to employee representatives for consultation.

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    »Operating and Financial Review and Prospects

    Item 5

    The following discussion and analysis should be read in conjunction with the Group’s Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report.

    The Company has changed its presentation of goodwill amortization in its Consolidated Financial Statements for the 2002 fiscal year with respect to previous years, impacting several line items on the Company’s income statement. Income from operations published in the Group’s 2001 Annual

     

    Report on Form 20-F and in prior years reflected goodwill amortization. In 2002, Income from Operations no longer includes goodwill amortization, which is now presented as the last item on the income statement before net income. Accordingly, income statements of previous years have been reclassified in this year’s Annual Report to conform to the new accounting treatment. This change in presentation was made to facilitate comparisons with U.S. companies that no longer amortize goodwill, in conformity with recent changes to U.S. GAAP rules.

    Results of Operations

    Year Ended December 31, 2002,
    Compared with Year Ended December 31, 2001

    Net Sales (Restated)

    Contributions to the Group’s Net Sales by segment after elimination of intragroup sales for the years ended December 31, 2002 and 2001, and the percentage change between the periods were as follows.

     

     


               
    Year Ended December 31 (millions of euros) 2002   2001  
    Percentage
    Change
     







    Primary Aluminum 1,605   1,851   -13.3%  
    Aluminum Conversion 2,618   2,676   -2.2%  
    Packaging 2,342   2,418   -3.1%  
    Ferroalloys and other 308   358   -14.0%  
    Net Sales from Industrial Activities 6,873   7,303   -5.9%  
    International trade (Restated) 5,036   4,209   19.6%  







    Total Net sales (Restated) 11,909   11,512   3.4%  








    The Group’s consolidated Net Sales increased by 3.4% to € 11,909 million in 2002, compared with € 11,512 million in 2001.

     

     

      73
    »Operating and Financial Review and Prospects

    Aluminum

    Primary Aluminum

    In 2002, Primary Aluminum reported Net Sales of € 1,605 million, representing a decrease of 13.3% from 2001 (€ 1,851 million).

    This trend reflected two factors:

    • a decrease in selling prices, which were negatively impacted by the combined decline in the price of aluminum on the LME and in geographic and form premiums, as well as by the significant depreciation of the U.S. dollar vis-à-vis the euro;
     
    • a decrease in sales volume to third parties due, on the one hand, to production difficulties encountered at facilities belonging to Alucam (a hydroelectric energy supply problem resulting from the drought) and PNL (consequence of bad weather conditions in northern Europe in October) and, on the other hand to the greater percentage of internal sales to the aluminum conversion sector.
    These negative elements were only partially offset by a rise in the net sales of ECL, which benefited from the shipment of superstructures for the second potline at Mozal and the third potline at Hillside.

    Aluminum Conversion

    Net Sales from Aluminum Conversion activities totaled € 2,618 million in 2002, compared with € 2,676 million in 2001, down 2.2%. In 2002, this figure included the contribution of the companies consolidated during 2001 Workington and Eurofoil. On a comparable basis, the decrease was 6%.

     

    The contributions of the different divisions to Net Sales from Aluminum Conversion activities for the years ended December 31, 2002 and 2001, and the percentage change between the periods were as follows.


               
    Year Ended December 31 (millions of euros) 2002   2001  
    Percentage
    Change
     







    Aerospace, Transport, Industry 973   1,013   -3.9%  
    Cans, Automotive, Standard Rolled products 721   734   -1.8%  
    Foil and Strip / Specialties 415   354   17.2%  
    Extrusions, Casting Alloys, Automotive 509   575   -11.5%  
    Transformation 2,618   2,676   -2.2%  








    Net Sales of the Aerospace, Transport, Industry division decreased by 3.9% to € 973 million in 2002, compared with € 1,013 million in 2001.

    In Europe, the division was primarily affected by the crisis in the aerospace market, which resulted in a very significant drop in shipments of technical rolled products and hard alloy extrusions. In the division’s other markets, the environment remained sluggish, with a general decline in sales volume. Nevertheless, at the end of the year there was a slight recovery in shipments in aerospace markets, reflected by a marked increase in orders of technical rolled products in the fourth quarter of 2002.

    In the United States, a major rise in the production volume of standard rolled products, linked to an upswing in demand during the year and to more efficient use of equipment, offset the low aerospace volume caused by the crisis in this sector in the United States.

     

    Net Sales of the Cans, Automotive, Standard Rolled Products division decreased by 1.8% in 2002. This trend reflected a decline in selling prices as a result of the lower price of aluminum on the LME, which was offset to a large extent by increased sales volume in the automotive and heat exchanger markets.

    Net Sales of the Foil and Strip / Specialties division increased by 17.2%, due mainly to the full year contribution of Eurofoil, which was consolidated in 2001.

    Net Sales of the Extrusions, Casting Alloys, Automotive division totaled € 509 million in 2002, down € 66 million from 2001. The division was confronted by a significant drop in sales volume, in both extrusions and casting alloys, linked to a general decrease in demand in Germany and France. In addition, the division was affected by the erosion of its sales margins, due to increased pressure from competition.

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    »Operating and Financial Review and Prospects

    Item 5

    Packaging

    Net sales of Packaging totaled € 2,342 million in 2002, compared with € 2,418 million in 2001, representing a decrease of 3.1%. In 2002, Net Sales included the sales, on a full year basis, of Soplaril, acquired in 2001. On a comparable basis, the decrease was 9%.

     

    The respective contributions of activities for the years ended December 31, 2002 and 2001, and the percentage changes between periods were as follows.


               
    Year Ended December 31 (millions of euros) 2002   2001  
    Percentage
    Change
     







    Flexible Packaging Europe 372   260   43.1%  
    Flexible Packaging North America 734   786   -6.6%  
    Bottles 185   191   -3.1%  
    Cebal Tubes Europe(*) 240   271   -11.4%  
    Cebal Aerosols 89   108   -17.6%  
    Cebal Tubes Americas 242   251   -3.6%  
    Techpack International 388   460   -15.7%  
    Caps 92   91   1.1%  
    Packaging 2,342   2,418   -3.1%  







    (*) Net Sales of the Cebal China division are included in those of Cebal Tubes Europe.

    Net sales of Plastic Packaging (flexible packaging and bottles) rose to € 1,291 million in 2002 from € 1,237 million in 2001. This rise reflected the contribution, on a full year basis, of Soplaril, which was acquired in 2001. This offset the impact of the depreciation of the U.S. dollar vis-à-vis the euro from one year to the next. On a comparable basis, net sales in this division were down 7%.

    Cebal reported Net Sales of € 571 million in 2002, compared with € 630 million in 2001. The respective decline in net sales at Cebal Tubes Europe and Cebal Aerosols was mainly due to lower sales volume in these divisions. At Cebal Tubes Americas, increased sales volume offset the negative parity impact.

     

    Techpack International reported Net Sales of € 388 million in 2002, down € 72 million from 2001.

    The decline mainly reflected lower sales volume, mainly in the makeup and perfume markets, as the environment in these markets was particularly unfavorable. Net Sales in this sector were also affected, though to a lesser degree, by the depreciation of the U.S. dollar vis-à-vis the euro.

    Net sales from the Caps and Overcaps division totaled € 92 million in 2002, practically stable compared with 2001. This stability nevertheless masked a significant increase in sales volume in the final quarter, which compensated for a first quarter marked by lower demand, particularly in the champagne cap market.

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    »Operating and Financial Review and Prospects

    Ferroalloys and Other Activities

    Net sales from Ferroalloys and Other Activities totaled € 308 million in 2002, down € 50 million from 2001.

    The decrease mainly reflected the deconsolidation of the activities

     

    transferred to the SKW joint venture in 2001, as well as the shutdown of magnesium production at the Marignac plant. In addition, the division experienced a significant drop in the price of silicon.

    International Trade (Restated)

    In 2002, Net Sales from International Trade activities totaled € 5,036 million, compared with € 4,209 million in 2001, representing an increase of 20%. The increase was related principally to a major increase in sales volume linked to the development of copper activities in Europe and the integration of the Euromin contracts that Pechiney acquired in February 2002. These factors was partially diminished by a negative parity impact, mainly due to the depreciation of the U.S. dollar, and by a decline in selling prices, especially in alumina.

    In 2002, International Trade was engaged in three principal activities:

    • marketing the products of the Group and other producers on an agency basis;
    • nonferrous metal trading;
    • LME brokerage (see "Item 4. Information on the Company - Business of the Pechiney Group - International Trade"). The bulk of Net Sales from International Trade activities are contributed by its trading operations, which are conducted through Pechiney Trading Company, Brandeis (USA) and the Minemet group of companies. A far smaller portion of International Trade’s Net Sales comes from agency and distribution operations. Because the sales of International Trade reflect only a portion of its activities and because sales are not a good indicator of the International Trade’s contribution to Earnings from Operations, the Group
     
    • does not consider the reported sales of the International Trade to be a meaningful indicator of the development of International Trade’s business.

    International Trade’s marketing activities, when conducted on a pure agency basis, are not reflected in Net Sales but reported under Other operating revenues as described in Note 1 to our consolidated financial statements.

    Trading activities are reflected in Net Sales to the extent that such sales represent International Trade sales to third parties of products produced by third parties. Sales to the Group or sales to third parties of the Group’s products are not reflected in International Trade’s Net Sales. Consequently, reported Net Sales from International Trade activities are influenced primarily by the volume of third party sales versus Group sales made through trading operations. Reported sales are also affected by fluctuations in the price of metals.

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    »Operating and Financial Review and Prospects

    Item 5

    Earnings from Operations (Restated)

    Earnings from Operations take into account Net Sales, Other Operating Revenues, Cost of Goods Sold (excluding depreciation), Selling, General and Administrative Expense, Research and Development Expense and Depreciation and Amortization. Earnings from Operations do not take into account Goodwill Amortization, Long-lived Assets Writedown, Restructuring Expense and Other Income (Expense); such items are, under U.S. GAAP, considered to be operating income/expenses. The Earnings from Operations measure has been used by the Group for many years in its public reporting and is closely monitored by financial analysts

     

    in France. The Group believes that the exclusion of Goodwill Amortization, Long-lived Assets Writedown, Restructuring Expense and Other Income (Expense) results in a measure that reasonably reflects recurring operating results and facilitates comparison with the Group’s competitors.

    Contributions to the Group’s Earnings from Operations by segment after elimination of intragroup transactions, which are included as inventory under the Holdings line items, for the years ended December 31, 2002 and 2001, and the percentage change between the periods were as follows.


    Year Ended December 31 (millions of euros)
    2002   2001  
    Percentage
    Change
     
             







    Primary Aluminium
    276   423   -34.8%  
    Aluminium Conversion
    16   23   -30.4%  
    Packaging
    129   136   -5.1%  
    Ferroalloys and Other
    3   0   -  
    International Trade (Restated)
    73   58   25.9%  
    Holdings
    (90)   (88)   2.3%  







    Total (Restated)
    407   552   -26.3%  








    In 2002, the Group’s Earnings from Operations totaled € 407 million, compared with € 552 million in 2001, representing a decrease of € 145 million or 26.3%.

    In 2002, the Group was confronted by a difficult economic environment -mainly a decrease in the price of aluminum and the U.S. dollar, as well as, to a lesser degree, a significant decline in sales volumes in certain Aluminum Conversion (aerospace) and Packaging markets. These negative factors were partially offset by:

    • the positive impact of the scope of consolidation, mainly due to the acquisition in 2001 of Eurofoil, Soplaril and an additional 15.5% equity interest in Tomago;
    • a notable reduction in raw materials costs, primarily in packaging, as a result of the lower price of resins;
    • the good performance reported in terms of costs in the Aluminum Conversion and Packaging segments, linked to the rapid implementation of the Pechiney Continuous Improvement System.
     

    Pechiney does not report Other Operating Revenues, Cost of Goods Sold (excluding depreciation), Selling, General and Administrative Expense, Research and Development Expense or Depreciation and Amortization (excluding Goodwill Amortization) by segment. For the Group as a whole, Other Operating Revenues decreased by 7% to income of € 144 million in 2002, compared with € 155 million in 2001; Cost of Goods Sold (excluding depreciation) increased by 5.4% to an expense of € 10,611 million in 2002, compared with an expense of € 10,070 million in 2001; Selling, General and Administrative Expense decreased to € 610 million in 2002, compared with € 620 million in 2001; Research and Development Expense decreased by 7.2% to an expense of € 90 million in 2002, compared with an expense of € 97 million in 2001; and Depreciation and Amortization (excluding Goodwill Amortization) increased by 2.1% to an expense of € 335 million in 2002, compared with an expense of € 328 million in 2001 (see "the Consolidated Statement of Income").

      77
    » Operating and Financial Review and Prospects

    Aluminum

    Primary Aluminum

    Primary Aluminum Earnings from Operations decreased by € 147 million to € 276 million in 2002, compared with € 423 million in 2001.

    This decline reflected an unfavorable trend in external factors: the division’s operating results were affected by a decline in the price of aluminum, as well as, to a lesser degree, the depreciation of the U.S. dollar vis-à-vis the euro. The average price of aluminum on the LME realized by Pechiney in 2002 (U.S.$ 1,358 per metric ton) was down 8.4% from 2001).

    The negative impact from these external factors could only partially be compensated by the progress made otherwise by the sector:

     

    Production of primary aluminum was increased due, in particular, to the acquisition of its additional 15.5% equity interest in the Tomago facility in October 2001;

    Several successes were reported in the sale of technology (winning all the large smelter expansion contracts on the market in 2002) mainly Alba, Hillside, Alouette and Mozal 2. These successes reinforce Pechiney’s technological leadership.

    Production costs for the sector were kept under control despite several technical incidents in different factories of the Group and higher maintenance costs during 2002.

    Aluminum Conversion

    Aluminum Conversion Earnings from Operations totaled € 16 million in 2002, compared with € 23 million in 2001. This result at first obscures otherwise good performances in European activities, which at € 70 million succeeded in maintaining earnings from operations at the level of 2001. This demonstrates a certain resistance to the economic slump, a rapid adaptation of production capacity to weak demand and good performancesin terms of cost reductions. At the same time, the Ravenswood plant in West Virginia reported a loss of € 54 million in 2002, compared with € 47 million in 2001.

    European activities of the Aerospace, Transport, Industry division were principally affected by the aerospace crisis, with a significant decrease in shipments of heavy plate and hard alloy extrusions in this market. Nevertheless, the stability of sales margins and satisfactory performance in terms of costs made it possible to limit the impact of this situation. After a period of major inventory depletion, there seemed to be a slight upswing in shipments at the end of the year in the aerospace market, reflected in a significant increase in orders for technical rolled products in the fourth quarter of 2002.

    In the United States, despite the rise in sales volume for standard rolled products, the Ravenswood plant was confronted with a significant erosion of its product mix, linked to slow sales to the aerospace industry. The persistence of losses in this business led the Group to launch a dynamic recovery plan, including a 17% cut in the workforce and a complete overhaul of the facility’s marketing and sales policy, focusing sales on profitable customers and segments. Finally, the business was six months early in negotiating a two-year renewal of the labor agreement at the plant, on more favorable terms.

     

    The Cans, Automotive, Standard Rolled Products division reported strong growth in sales volume, good industrial and technical performances at the Neuf Brisach plant and a marked reduction in the division’s production and operating costs, which generated a major increase in operating results in 2002 compared with 2001. In addition, the environment remains favorable in most of the division’s markets: automotive, heat exchangers and can stock.

    In 2002, the Foil and Strip / Specialties division benefited from the full contribution of Eurofoil’s plants, acquired in 2001. In addition, the integration of these facilities into the division made it possible to generate major industrial and commercial synergies with the Rugles plant, which reported considerable improvement in operating performance in 2002, particularly in terms of production volume and costs.

    Lastly, in the Extrusions, Casting Alloys, Automotive division, Extrusions suffered in both Germany and France from the persistent unfavorable economic environment, with a marked decline in sales volume. As for Casting Alloys, in addition to the decrease in shipments, business was penalized in recycling by the sharp rise in aluminum waste.

    Aluminum Conversion’s Earnings from Operations as a percentage of Net Sales decreased to 0.6% in 2002, compared with 0.9% in 2001. The decrease was mainly due to lower shipments of heavy plate and hard alloy extrusions in the aerospace market.

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    »Operating and Financial Review and Prospects

    Item 5

    Packaging

    Earnings from Operations in Packaging decreased slightly from € 136 million in 2001 to € 129 million in 2002.

    The decline reflected good resistance to the low sales volume recorded in most of the markets in this sector. The impact of this difficult environment exerted on earnings from operations was largely offset by the decrease in raw materials costs and cost reductions secured through the Pechiney Continuous Improvement System.

    In flexible packaging, results continued to improve and benefited, in particular, from the successful integration of Soplaril. This activity more than offset the decrease in sales volume and selling prices by reducing production costs and raw materials costs, the latter decrease linked to lower resin prices and procurement synergies generated by the integration of Soplaril. In addition, earnings from operations in 2002 included the impact of the change in the scope of consolidation linked to the full year contribution of Soplaril, consolidated as of August 2001.

     

    Whether the result of inventory depletion or of the significant downturn in the luxury packaging market, the sharp decline in sales volume and selling prices in the beauty and cosmetics markets was not offset by the nevertheless marked improvement in production costs.

    The general decrease in sales volume, related to particularly unfavorable market conditions, did not allow the sector to increase its operating results. Nevertheless, the difficult economic environment was accompanied by good performances in terms of production costs linked to the implementation of the Pechiney Continuous Improvement System in the sector.

    Packaging’s Earnings from Operations as a percentage of Net Sales was stable at 5.5% in 2002, compared with 5.6% in 2001.

    Ferroalloys and Other Activities

    Earnings from Operations in Ferroalloys and Other Activities rose from € 0 million in 2001 to € 3 million in 2002.

    The increase in operating results in 2002 was mainly linked to the deconsolidation of the facilities transferred to the SKW joint venture and the shutdown of the Marignac plant in France, activities which reported a loss in

     

    2001, and to good performance in terms of costs. Nevertheless, the significant decrease in selling prices for silicon continued to weigh on the division’s results.

    Ferroalloys and Other Activities’ Earnings from Operations as a percentage of Net Sales increased to 1% in 2002, compared with 0% in 2001. This evolution reflects the increase in operating results.

    International Trade (Restated)

    International Trade reported strong growth in Earnings from Operations to € 73 million in 2002 from € 58 million in 2001.

    The increase reflected principally a significant rise in sales volume in trading of copper and aluminum, in particular in Europe, and of concentrate, linked to the integration of the contracts acquired from Euromin in February 2002.

     

    Earnings from Operations of brokerage and trading activities are impacted primarily by the volume of sales and purchases in the various metals brokered and traded by the Group, which is affected by several market conditions, and by the level of quotations of such metals on the LME. Broadly speaking, improved demand in the market tends to cause International Trade’s volume to increase, while spreads and commissions tend to increase as prices increase. The Earnings from Operations of agency business generally result from commissions calculated as a percentage of the principal’s sales. Consequently, such Earnings from Operations are also impacted primarily by the price and volume in the market generally.

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    »Operating and Financial Review and Prospects

    Other Statement of Income Items

    Income from Operations (Restated)

    Income from Operations takes into account Earnings from Operations,   Goodwill Amortization, Restructuring Expense and Long-lived Assets

     

    Writedown, and Other Income (Expense). The following table presents these items for the years ended December 31, 2002 and 2001.


             
       Year Ended December 31 (millions of euros) 2002   2001  
      (Restated)   (Restated)  





       Earnings from Operations 407   552  
       Restructuring Expense and Long-lived Assets Writedown (145)   (75)  
       Other Income (Expense) (103)   10  





       Income from Operations 159   487  






    The € 328 million decrease in Income from Operations was the result of the € 145 million decline in Earnings from Operations, and of the trend in other income items discussed below.

    Restructuring Expense and Long-lived Assets Writedown totaled € 145 million, compared with € 75 million in 2001. The € 70 million increase was mainly due to restructuring expense and long-lived asset writedown (calculated in accordance with the new US GAAP SFAS 144) for certain activities in the Packaging sector, in particular the activities of Techpack International in Europe and the United States and the activities of Cebal in Asia, and of certain activities in the Aluminum Conversion sector, especially in the United States, which were higher than the expenses recorded in 2001, and which mainly concerned the shutdown of primary magnesium production (Ferroalloys and Other Activities).

     

    Other Income (Expense) fell from net income of € 10 million in 2001 to a net expense of € 103 million in 2002. This negative change of € 113 million was mainly the result of the depreciation of securities and receivables of entities linked to the brokerage business sold in 2000, in large measure owing to the settlement of a legal dispute related to this activity, and due to the cost of the premium of an individual insurance policy relating to the environmental remediation costs linked to the past operation of a mine in the United States. This negative change was reduced by income from the positive settlement of a legal dispute concerning violation of a patent registered by the Group. The net income reported in 2001 came from the reversal of provisions following the definitive settlement of the Viskase litigation.

    Income before Income Taxes (Restated)

    Income before Income Taxes totaled € 110 million in 2002, compared with € 419 million in 2001. The decrease of € 309 million mainly reflected the € 328 million decline in Income from Operations.

     

    Net financial expense totaled € 49 million in 2002, compared with € 68 million in 2001. This trend was due to the reduction in the average cost of the Group’s financing (3.8% in 2002, compared with 5.7% in 2001), linked to the decline in interest rates on euro- and U.S. dollar-denominated debt between 2001 and 2002.

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    Item 5

    Income from Consolidated Companies (Restated)

    Income from Consolidated Companies totaled € 71 million in 2002, compared with € 289 million in 2001. This € 218 million decrease was due to the € 309 million decline in Income before Income Taxes, offset in the amount of € 91 million by the change in Income Tax, which went from a tax expense of € 130 million in 2001 to a tax expense of € 39 million in 2002.

     

    The change in Income Tax was primarily the result of the decrease in Income before Income Taxes in 2002.

    Net Income excluding Goodwill Amortization (Restated)

    In 2002, Net Income excluding Goodwill Amortization totaled € 74 million, compared with € 285 million in 2001. This € 211 million decrease was due to the € 218 million decline in Income from Consolidated Companies and to the € 21 million decline in the Net Earnings of Equity Affiliates, offset in the amount of € 28 million by the reduction of minority interests in consolidated net income.

     

    The Group’s share of the Net Earnings of Equity Affiliates decreased by € 21 million, from € 24 million in 2001 to € 3 million in 2002. This change was mainly due to the impact of the drop in the price of aluminum on the income of aluminum-producing companies.

    Minority interests in consolidated net income totaled € 0 million in 2002, compared with € 28 million in 2001; this trend was mainly due to the results of Cebal Asia.

    Net Income (Loss) (Restated)

    In 2002, the Group reported a Net Loss of € 55 million, compared with Net Income of € 234 million in 2001. The € 289 million decrease was due to the € 211 million decline in Net Income excluding Goodwill Amortization and to the € 78 million increase in goodwill amortization.

     

    Recurring goodwill amortization increased by € 2 million, from € 29 million in 2001 to € 31 million in 2002. Extraordinary goodwill amortization increased by € 76 million, from € 22 million in 2001 to € 98 million in 2002. This change was mainly due to the extraordinary amortization of a part of the goodwill of the activities of Techpack International (Packaging sector) and of all of the goodwill of the American activities of the Aluminum Conversion sector (calculated in accordance with the new US GAAP SFAS 142).

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    »Operating and Financial Review and Prospects

    Year Ended December 31, 2001, Compared with Year Ended December 31, 2000

    Net Sales

    Contributions to the Group’s Net Sales by segment after elimination of intragroup sales for the years ended December 31, 2001 and 2000, and the percentage change between the periods were as follows.

     

     


               
    Year Ended December 31 (millions of euros) 2001   2000  
    Percentage
    Change
     







    Primary Aluminum 1,851   2,039   -9.2%  
    Aluminum Conversion 2,676   2,600   2.9%  
    Packaging 2,418   2,085   16.0%  
    Ferroalloys and Other 358   377   -5.0%  







    Net Sales from Industrial Activities 7,303   7,101   2.8%  
    International Trade (Restated) 4,209   3,773   11.6%  







    Total Net Sales (Restated) 11,512   10,874   5.9%  








    The Group’s consolidated Net Sales increased by 5.9% to € 11,512 million in 2001, compared with € 10,874 million in 2000. This growth was mainly

     

    linked to the consolidation in 2001 of the companies acquired in 2000 and 2001.

    Aluminum

    Primary Aluminum

    In 2001, Primary Aluminum reported Net Sales of € 1,851 million, representing a decrease of 9.2% from 2000 (€ 2,039 million).

    This trend reflected three main factors:

    • a decrease in the price of aluminum on the LME and a decline in geographic and form premiums;
    • lower technology sales due to the termination of the Alma and Mozal contracts;
     
    • the transfer of the alumina trading activity from the Primary Aluminum sector to International Trade.
    These negative elements were only partly offset by a rise in the average parity of the U.S. dollar negotiated by Primary Aluminum from one period to the next (+7.4%) and by an increase in the volume of aluminum metal and alumina sold by the segment.
      82

     

     

    »Operating and Financial Review and Prospects

    Item 5

    Aluminum Conversion

    Net Sales from Aluminum Conversion activities totaled € 2,676 million in 2001, compared with € 2,600 million in 2000. In 2001, this figure included the contribution of the companies consolidated during the year, Workington and Eurofoil. Conversely, Société Métallurgique de Gerzat, which had been consolidated in 2000, was sold in May 2001.

     

    The contributions of the different divisions to Net Sales from Aluminum Conversion activities for the years ended December 31, 2001 and 2000, and the percentage change between the periods were as follows.


    Year Ended December 31 (millions of euros) 2001   2000  
    Percentage
    Change
     







    Aerospace, Transport, Industry 1,013   (*)1,186   -14.6%  
    Cans, Automotive, Standard Rolled products 734   685   7.2%  
    Foil and Strip / Specialties 354   (*)158   124.1%  
    Extrusions, Casting Alloys, Automotive 575   571   0.7%  
    Transformation 2,676   2,600   2.9%  







    (*) Figures not restated subsequent to the transfer, as of 2002, of the Mercus, Froges and Goncelin plants from the Aerospace, Transport, Industry division to the Foil and Strip / Specialties division.

    Net Sales of the Aerospace, Transport, Industry division decreased by 14.6% to € 1,013 million in 2001, compared with € 1,186 million in 2000. In Europe, a favorable environment in the aerospace market, the maintenance of a good level of selling margins and the consolidation of Workington’s sales generated significant growth in Net Sales, in spite of a sharp drop in sales volume (excluding aerospace). Conversely, in the United States, Net Sales were down owing to a substantial decline in sales of standard rolled products and to the impact on the aerospace market of the events of September 11, which occurred more rapidly than in Europe, where the first effects of the tragedy on the aerospace market were felt at the end of the year with a significant decrease in orders.

    Net Sales of the Cans, Automotive, Standard Rolled Products division rose 7.2% in 2001, reflecting:

    • an increase in selling prices as a result, in particular, of passing through to customers the rise in the price of aluminum expressed in euros (the appreciation of the parity of the U.S. dollar more than offset the fall in the price of aluminum);
     
    • improvements in the product mix due to the progressive discontinuing of standard rolled products activities to the benefit of cans, a market in which demand remains strong, and the automotive segment.

    Net Sales of the Foil and Strip / Specialties division increased by € 196 million mainly as a result of the acquisition of Eurofoil and improved manufacturing performances at certain facilities like Rugles and Annecy in France, which in 2000 had to deal with technical problems.

    Net Sales of the Extrusions, Casting Alloys, Automotive division totaled € 575 million in 2001, almost stable compared with 2000. The division was confronted by a drop in sales volume, particularly in Germany, in a difficult market environment. Only in the French construction market was sales volume relatively stable. In the casting alloys market, sales volume was down slightly from one year to the next. The decline in sales volume was offset by higher selling prices due, in part, to success in passing through to customers the rise in the price of aluminum expressed in euros.

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    » Operating and Financial Review and Prospects

    Packaging

    Net sales of Packaging totaled € 2,418 million in 2001, compared with € 2,085 million in 2000, representing an increase of 16.0%.

    In 2001, Net Sales included the sales, on a full year basis, of the companies acquired in 2000 (JPS Packaging, Anchor Cosmetics and Metalpack), as well as the partial contributions of the companies consolidated in 2001 (Soplaril, Molplastic, Capalux, etc.).

     

    The respective contributions of the activities of Food, Healthcare and Beauty for the years ended December 31, 2001 and 2000, and the percentage changes between periods were as follows.


    Year Ended December 31 (millions of euros) 2001   2000  
    Percentage
    Change
     







    Flexible Packaging Europe 260   173   50.3%  
    Flexible Packaging North America 786   668   17.7%  
    Bottles 191   180   6.1%  
    Cebal Tubes Europe(*) 271   282   -3.9%  
    Cebal Aerosols 108   93   16.1%  
    Cebal Tubes Americas 251   205   22.4%  
    Techpack International 460   405   13.6%  
    Caps 91   79   15.2%  
    Packaging 2,418   2,085   16.0%  







    (*) Net Sales of the Cebal China division are included in those of Cebal Tubes Europe.

    Net sales of Plastic Packaging rose to € 1,237 million in 2001 from € 1,021 million in 2000. This rise mainly reflected the contribution of the activities acquired at the end of 2000 and in 2001 (primarily JPS Packaging and Soplaril). The increase in Net Sales was also linked, to a lesser degree, to the appreciation of the parity of the U.S. dollar from one year to the next.

    Cebal reported an increase of 8.6% in Net Sales (€ 630 million in 2001, compared with € 580 million in 2000). Net Sales in 2001 included the contribution of the activities acquired at the end of 2000 and in 2001 (primarily Metalpack).

    Excluding this impact, the rise in sales was due to higher sales volume, reflecting very contrasting trends. Cebal Americas and Cebal Aerosols Europe reported strong growth during the year, while Cebal Tubes Europe was affected by a decline in sales volume linked to the end of a laminated tube contract with a major customer and by sluggish demand. Cebal also benefited, to a lesser degree, from higher selling prices in Europe, subsequent to the introduction a new marketing strategy at the end of 2000 as well as from the impact of a favorable U.S. dollar exchange rate.

     

    Techpack International reported Net Sales of € 460 million in 2001, compared with € 405 million in 2000.

    The rise mainly reflected the consolidation in 2001 of the sales of companies recently acquired (in particular, Anchor Cosmetics and Molplastic). The business also benefited from higher sales, especially in the markets for accessories and promotional samples, perfume and makeup.

    Net sales from Caps & Overcaps Activities totaled € 91 million in 2001, compared with € 79 million in 2000. The increase was the result, on the one hand, of the acquisition of Capalux, and on the other, of increased sales volume reflecting growth in the capping and overcapping segments, particularly in export markets. The consolidation of Capalux thus allowed the division to enter the North American market and expand its customer portfolio.

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    »Operating and Financial Review and Prospects

    Item 5

    Ferroalloys and Other Activities

    Net sales from Ferroalloys and Other Activities totaled € 358 million in 2001, compared with € 377 million in 2000.

    The decrease mainly reflected lower sales volume in several markets, particularly in steel, silicon and especially magnesium, which was the result of the shutdown of the Marignac plant in May 2001.

     

    Conversely, selling prices remained stable, as opposed to the trend reported in 2000, in particular in the metallurgical silicon and calcium carbide markets.

    International Trade (Restated)

    In 2001, Net Sales from International Trade activities totaled € 4,209 million, compared with € 3,773 million in 2000, representing an increase of 11.6%. The increase was related to the appreciation of the U.S. dollar and to

     

    increased operating volume, particularly in alumina and aluminum trading activities, where an increase in volume more than offset a decline in prices.

    Earnings from Operations (Restated)

    Earnings from Operations take into account Net Sales, Other Operating Revenues, Cost of Goods Sold (excluding depreciation), Selling, General and Administrative Expense, Research and Development Expense and Depreciation and Amortization. Earnings from Operations do not take into account Goodwill Amortization, Long-lived Assets Writedown, Restructuring Expense and Other Income (Expense); such items are, under U.S. GAAP, considered to be operating income/expenses. The Earnings from Operations measure has been used by the Group for many years in its public reporting and is closely monitored by financial analysts

     

    in France. The Group believes that the exclusion of Goodwill Amortization, Long-lived Assets Writedown, Restructuring Expense and Other Income (Expense) results in a measure that reasonably reflects recurring operating results and facilitates comparison with the Group’s competitors.

    Contributions to the Group’s Earnings from Operations by segment after elimination of intragroup transactions for the years ended December 31, 2001 and 2000, and the percentage change between the periods were as follows.


               
    Year Ended December 31 (millions of euros)
    2001   2000  
    Percentage
    Change
     







    Primary Aluminum
    423   509   -16.9%  
    Aluminum Conversion
    23   78   -70.5%  
    Packaging
    136   100   36.0%  
    Ferroalloys and Other
    0   0   -  
    International Trade (Restated)
    58   65   -10.8%  
    Holdings
    (88)   (93)   -5.4%  







    Total (Restated)
    552   659   -16.2%  







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    » Operating and Financial Review and Prospects

    In 2001, the Group’s Earnings from Operations totaled € 552 million, compared with € 659 million in 2000, representing a decrease of € 107 million. A decrease in sales volume, which mainly affected primary aluminum and aluminum conversion activities, higher raw materials and energy costs and a rise in the average price of aluminum and the level of geographic and form premiums had a negative effect on the Group’s results.

    Nevertheless, good industrial performances in the packaging sector, with increased sales volume, a positive foreign exchange impact linked to the appreciation of the U.S. dollar from one period to the next, and the contribution of the acquisitions made at the end of 2000 and in 2001 helped limit the consequences of what proved to be a particularly difficult economic environment in 2001.

    Pechiney does not report Other Operating Revenues, Cost of Goods Sold (excluding depreciation), Selling, General and Administrative Expense,

     

    Research and Development Expense or Depreciation and Amortization (excluding Goodwill Amortization) by segment. For the Group as a whole, Other Operating Revenues increased by 1.3% to income of € 155 million in 2001, compared with € 153 million in 2000; Cost of Goods Sold (excluding depreciation) increased by 7% to an expense of € 10,070 million in 2001, compared with an expense of € 9,411 million in 2000; Selling, General and Administrative Expense increased to € 620 million in 2001, compared with € 564 million in 2000; Research and Development Expense increased by 7.8% to an expense of € 97 million in 2001, compared with an expense of € 90 million in 2000; and Depreciation and Amortization (excluding Goodwill Amortization) increased by 8.3% to an expense of € 328 million in 2001, compared with an expense of € 303 million in 2000 (see "the Consolidated Statement of Income").

    Aluminum

    Primary Aluminum

    Primary Aluminum Earnings from Operations decreased by € 86 million to € 423 million in 2001, compared with € 509 million in 2000.

    This decline reflected:

    • a drop in sales volume linked to production difficulties in the first half of the year at certain smelters and to a decrease in technology sales due to the termination of the Alma and Mozal contracts;
    • a rise in the price of raw materials and energy, which mainly affected alumina production activities (bauxite, gas, heating oil and soda ash);
    • a temporary rise in costs (linked to the launch of certain projects, in particular AP50);
     
    • a decrease in the price of aluminum and in geographic and form premiums.

    These elements were partly offset by:

    • a rise in the average parity of the U.S. dollar from one period to the next;
    • the consolidation of the additional 15.5% equity interest in Tomago acquired in October 2001.

    Aluminum Conversion

    Aluminum Conversion’s Earnings from Operations decreased by € 55  million to € 23 million, from € 78 million in 2000.

    European activities of the Aerospace, Transport, Industry division benefited from a favorable environment in Europe during most of the year, particularly in the aerospace segment, a market in which sales volume and margins were maintained at a good level. Nevertheless, there was a decrease in orders at the end of the year in this market, the first effect of a downturn in the aerospace cycle accelerated by the events of September 11. In the United States, on the other hand, business was characterized, in spite of favorable conditions in the aerospace segment, by a very difficult market environment in standard rolled products and by production problems at Ravenswood linked to the industrial restructuring of this plant in the first nine months of the year. In addition, exceptional cost overruns partly related to the economic environment (provisions for non-performing loans, etc.) weighed on the results of the division’s American activities.

     

    In the Foil and Strip / Specialties division, sales volume declined owing to a drop in demand in the market for refined products (high-purity aluminum) and to lower sales of technology (Jumbo 3CM continuous casting) than in 2000, which benefited from the Norandal contract.

    Conversely, the Cans, Automotive, Standard Rolled Products division succeeded, under difficult market conditions, in maintaining the level of sales, in particular owing to the fact that it withdrew from the standard rolled products market and concentrated on automotive applications and can stock. This improved product mix also enabled the division to increase its margins compared with 2000. Nevertheless, non-recurring charges in 2001 did not allow the division to maintain the good level of results reported in 2000.

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    »Operating and Financial Review and Prospects

    Item 5

    Lastly, the Extrusions, Casting Alloys, Automotive division suffered in both Germany and France from the economic downturn which occurred in the second half of the year, in the market for extrusions (construction and industry) and cast products. In addition, sales volume and costs were affected in France by technical problems at two manufacturing facilities. These negative elements were partly offset by maintaining margins at a good level, in particular for cast products.

     

    Aluminum Conversion’s Earnings from Operations as a percentage of Net Sales decreased to 0.9% in 2001, compared with 3% in 2000. The decrease was due to difficult market conditions related to the deterioration of the economic environment and by production problems at Ravenswood linked to the industrial restructuring of this plant in the first nine months of the year.

    Packaging

    Earnings from Operations in Packaging increased by € 36 million to € 136 million in 2001 from € 100 million in 2000.

    The sector benefited from increased sales volume, particularly in the following markets:

    • flexible packaging for food products in the United States, where demand remained strong throughout the year;
    • the healthcare and beauty sector in North America (Tubes Americas division) with a significant improvement in the product mix and gains in market share (a result of marketing strategy and the launch of new products);
    • aerosol cans in Europe, with sustained strong demand in a market characterized by under-capacity and the development of specialty products by the division;
    • packaging for the perfume and makeup markets, which benefited in 2001 from a considerable increase in demand.

    The rise in Earnings from Operations in this sector was also linked to the good manufacturing performance of Plastic Packaging and certain of Cebal’s activities. Continuous Improvement workshops led to a notable improvement in industrial efficiency throughout the year in the United

     

    States and are beginning to have an impact in Europe. Conversely, Techpack International had to deal with technical and productivity problems linked to the overloading of certain lines and to the launch of many new products.

    Higher raw materials costs (resins and film) observed at the start of the year, partly offset by an increase in prices negotiated at the end of the first half of the year, nevertheless weighed on the sector’s results. In certain activities, strong competitive pressure obliged the divisions to make concessions to major customers. The trend in raw materials costs was, however, favorable in the second half of the year. Finally, there was also a rise in structure costs, particularly in North America, linked to the launch of e-business projects.

    Packaging’s Earnings from Operations as a percentage of Net Sales increased to 5.6% in 2001, compared with 4.8% in 2000. The increase was mainly due to the good manufacturing performance of Plastic Packaging and certain of Cebal’s activities.

    Ferroalloys and Other Activities

    Earnings from Operations in Ferroalloys and Other Activities were stable in comparison with 2000.

    This business was affected by a very sharp drop in sales volume, particularly in steel and magnesium (linked to the shutdown of the

     

    Marignac plant), and a significant increase in the price of raw materials and energy. Conversely, it benefited from a significant improvement in production costs and the positive impact of the appreciation of the U.S. dollar and the South African rand.

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    » Operating and Financial Review and Prospects

    International Trade (Restated)

    International Trade reported a decrease in Earnings from Operations to € 58 million in 2001 from € 65 million in 2000.

    The division’s volume of business, which reflects fluctuations in the economic environment, mainly recorded a significant drop in sales volume,

     

    particularly in trading and distribution. These activities were penalized throughout the year by the weak demand reported in the United States and by the slowdown observed in Europe in the second half of the year. This decrease in the volume of business was, however, partially offset by a major reduction in structure costs and good performance in alumina trading.

    Holdings

    The change in Earnings from Operations of the holdings mainly reflected drastic cost reductions introduced as of the summer of 2001 to respond to the erosion of the European economic environment, particularly in the

     

    aluminum market, as well as the first results of Continuous Improvement initiatives at the holdings.

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    »Operating and Financial Review and Prospects

    Item 5

    Other Statement of Income Items   

     Income from Operations (Restated)

    Income from Operations takes into account Earnings from Operations,  Goodwill Amortization, Restructuring Expense and Long-lived Assets

     

    Writedown, and Other Income (Expense). The following table presents these items for the years ended December 31, 2001 and 2000.

       Year Ended December 31 (millions of euros) 2001   2000  
      (Restated)   (Restated)  





       Earnings from Operations 552   659  
       Restructuring Expense and Long- lived Assets Writedown (75)   (29)  
       Other Income (Expense) 10   (8)  
       Income from Operations 487   622  






    The € 135 million decrease in Income from Operations was the result of the decline in Earnings from Operations, in the amount of € 107 million, and of the trend in other income items commented below.

    Restructuring Expense and Long-lived Assets Writedown increased by € 46 million. This change was mainly due to the writedown of a part of the goodwill on the TPI Group and to restructuring expense and long-lived assets writedown linked to the shutdown of primary magnesium production at the Marignac plant in France (Ferroalloys and Other Activities) and the closing of the Cleveland, Ohio, facility (Packaging), the

     

    amounts of which were greater than the charges of the same nature recorded in 2000, which mainly concerned the restructuring of the brokerage activity of the subsidiary Brandeis Brokers Limited and a Cebal UK plant.

    Other Income (Expense) went from a net expense of € 8 million in 2000 to net income of € 10 million in 2001. This positive change of € 18 million was mainly the result of a reversal of provisions in the amount of € 48 million following the definitive settlement of the Viskase litigation.

    Income before Income Taxes (Restated)

    Income before Income Taxes totaled € 419 million in 2001, compared with € 554 million in 2000. The decrease of € 135 million reflected the € 135 million decline in Income from Operations.

     

    Net financial expense totaled € 68 million in both 2001 and 2000. The reduction in the average cost of the Group’s financing (5.7% in 2001, compared with 6.5% in 2000) linked to the decline in interest rates on euro and U.S. dollar-denominated debt offset the rise in the Group’s average indebtedness between 2000 and 2001.

    Income from Consolidated Companies (Restated)

    Income from Consolidated Companies totaled € 289 million in 2001, compared with € 382 million in 2000. This € 93 million decrease was due to the € 135 million decline in Income before Income Taxes, offset in the amount of € 42 million by the change in Income Tax, which went from a tax expense of € 172 million in 2000 to a tax expense of € 130 million in 2001.

     

    The change in Income Tax was primarily the result of the decrease in Income before Income Taxes in 2001, the impact of which was partly offset by a slight increase in the average tax rate.

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    » Operating and Financial Review and Prospects

    Goodwill Amortization

    Goodwill Amortization increased by € 31 million, owing to:

    • an exceptional amortization of goodwill at Techpack International;
    • the goodwill recorded in 2001 on recent acquisitions (mainly Techpack
     

    America Cosmetic Packaging L.P., the Soplaril Group, the companies Eurofoil S.A. and Eurofoil Belgium S.A., and the additional 15.5% equity interest acquired in Tomago Aluminium Company Pty Ltd).

    Net Income (Restated)

    Net Income in 2001 totaled € 234 million, compared with € 318 million in 2000.

    The Group’s share of the net earnings of equity affiliates increased by € 37 million from an expense of € 13 million in 2000 to income of € 24 million in 2001. This trend mainly reflected the recognition in 2000 of a loss of € 46 million corresponding to the Group’s share in the non-recurring amortization of goodwill on ANC.

     

    At € 28 million, minority interests in consolidated results remained stable.

    For information as to the impact of foreign currency fluctuations and the extent to which impacted investments are hedged, see section on "Derivative Instruments - Currency Fluctuations".

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    »Operating and Financial Review and Prospects

    Item 5

    Liquidity and Capital Resources

    In 2002, the Group’s principal source of liquidity was cash provided by operating activities.

    The funds obtained were used primarily to fund capital expenditures and financial investments, payment of pensions and other employee benefits. The Group believes that currently available sources of liquidity will provide sufficient financial resources for the Group’s ongoing operations for the near term.

     

    The Group’s cash flow from operating activities, investing activities and financing activities for each of the years in the three-year period ended December 31, 2002, were as follows.


    (millions of euros) 2002   2001   2000  
          (Restated) (Restated)  







    Net cash provided by operating activities 629   588   396  







    - Investments (580)   (947)   (546)  
    - Divestitures 43   30   496  
    Net cash used in investing activities (537)   (917)   (50)  







    Net cash (used in) provided by financing activities
    (104)
    (354)
    (361)
     







    Net effect of foreign currency transaction on cash
    14
    (43)
    (10)
     







    Net increase (decrease) in cash and cash equivalents
    2
    (18)
    (5)
     







    Cash Flows from Operating Activities (Restated)

    Net cash provided by operating activities increased by € 41 million in 2002 to € 629 million, compared with € 588 million in 2001 and € 396 million in 2000.

    The increase in net cash provided by operating activities in 2002 compared with 2001 was mainly due to a € 134 million improvement in the change in working capital requirements, for € 83 million in trade payables and to a lesser extent in trade receivables and inventories.

     

    The increase in net cash provided by operating activities in 2001 compared with 2000 was mainly due to the following factors:

    • a decline in cash from operations, which decreased by € 30 million to € 751 million in 2001 from € 781 million in 2000, reflecting the trend in the Group’s operating results;
    • change in working capital requirements, which improved by € 247 million in 2001 versus 2000;
    • expenditures related to restructuring, pensions and the environment, which increased by € 25 million to € 197 million in 2001, compared with € 172 million in 2000.

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    Cash Flows from Investing Activities

    Capital expenditures for acquisitions of property, plant and equipment totaled € 479 million in 2002, compared with € 389 million in 2001 and € 287 million in 2000.

    Capital expenditures in Aluminum totaled € 263 million in 2002, compared with € 188 million in 2001 and € 150 million in 2000. Capital expenditures in Packaging totaled € 196 million in 2002, compared with € 177 million in 2001 and € 106 million in 2000. For the Group’s other activities and Holdings, capital expenditures represented € 20 million in 2002, compared with € 24 million in 2001 and € 31 million in 2000.

    These expenditures principally related to the modernization of existing facilities, in particular:

    • in Primary Aluminum, the increase in the capacity of existing smelters and replacement of industrial equipment;
    • in Aluminum Conversion, further expenditures related to the launch of a modernization plan for industrial facilities, especially at the Ravenswood plant in the United States (€ 43 million);
    • in Packaging, the modernization of production facilities, especially in Plastic Packaging.

    Financial and other long-term investments totaled € 101 million in 2002, compared with € 558 million in 2001 and € 259 million in 2000.

     

    The 2002 amount concerned:

    • the acquisition of equity interests in the amount of € 42 million with the acquisition of Phœnix, Envaril and APS, in the packaging sector, as well as the buyout of minority interests in Danaflex;
    • an increase in fixed assets in the amount of € 38 million, € 17 million of which was linked to the acquisition of computer licenses.

    In 2001, financial investments concerned the acquisition, in the packaging sector, of Soplaril and, in the aluminum sector, of Eurofoil in Belgium and Luxembourg and of AMP’s equity interest in Tomago in Australia. The 2000 amount concerned investments in the packaging sector, i.e. the acquisition of JPS Packaging and Anchor Cosmetics, both in the United States, Metalpack in Brazil and Capalux in Canada.

    In 2002, proceeds from divestitures totaled € 43 million, € 25 million of which was proceeds from the sales of equity interests and fixed assets and € 18 million received from the repayments of long-term loans within the framework of the Group’s contribution to the financing of working capital requirements at Aluminium Dunkerque. In 2001, proceeds from divestitures totaled € 30 million and were mainly composed of proceeds from the sale of Gerzat shares. In 2000, proceeds from divestitures totaled € 496 million and mainly included proceeds from the sale of the residual interest held by Pechiney in the ANC Group, Inc.

    Indebtedness (Restated)

    As of December 31, 2002, Pechiney’s long-term indebtedness (excluding the current portion) totaled € 1,465 million, compared with € 971 million as of December 31, 2001, and € 734 million as of December 31, 2000. The increase in the long-term portion of the Group’s indebtedness was due to the issue of "Océanes" convertible bonds in May 2002 for a total of € 595 million(1), which enabled the Group to refinance its short-term debt.

    The maturities of the Group’s long-term debt range from 2003 to 2013. Debt, before currency hedges, is denominated in euros (82%) and in U.S. dollars (17%) (see "Note 15 to the Consolidated Financial Statements").

    As of December 31, 2002, the Group’s bank overdrafts totaled € 390 million (€ 912 million as of December 31, 2001, and € 594 million as of December 31, 2000) and the current portion of long-term debt totaled an additional € 39 million (€ 37 million as of December 31, 2001, and € 31 million as of December 31, 2000). As of December 31, 2002, the Group had a total of € 436 million in cash and marketable securities (€ 445 million as of December 31, 2001, and € 463 million as of December 31, 2000) and € 821 million in non-utilized committed medium-term and long-term lines of credit (€ 967

     

    million as of December 31, 2001, and € 860 million as of December 31, 2000). These short-term investments and non-utilized committed lines of credit covered 293% of Pechiney’s total short-term financial debt (bank overdrafts, short-term borrowings and current portion of long-term debt) in 2002, 148% in 2001 and 208% in 2000.

    The Group’s net financial debt totaled € 1,437 million as of December 31, 2002, compared with € 1,473 million as of December 31, 2001, and € 869 million as of December 31, 2000.

    The decrease in 2002 principally reflected the following factor:

     In 2002, the Group generated excess net cash (before changes in indebtedness) of € 92 million, representing the sum of € 629 million in net cash provided by operating activities minus € 537 million in net cash used in investing activities, to which should be added the impact on the debt of foreign currency variations in the amount of € 134 million (mainly linked to the U.S. dollar), the impact of the capital increase reserved for employees in the amount of € 36 million, minus the impact of cash dividends paid (€ 122 million) and the cost of the acquisition of the Company’s own shares (€ 40 million).

    1 - Excluding amortization premium of € 9 millions.

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    The increase in 2001 principally reflected the following factor:

    • In 2001, the Group generated a need for net cash (before changes in indebtedness) of € 522 million, representing € 588 million in net cash provided by operating activities minus € 917 million in net cash used in investing activities, € 134 million in cash dividends paid and € 59 million in share buyback and other changes in capital.

    The decrease in 2000 principally reflected the following factor:

    • In 2000, the Group generated excess net cash (before changes in indebtedness) of € 274 million, representing the sum of € 396 million in net cash provided by operating activities and € 50 million in net cash used in investing activities, minus € 72 million in cash dividends paid.
     

    With total shareholders’ equity and minority interests of € 3,163 million, € 3,569 million and € 3,446 million (French GAAP) at the end of 2002, 2001 and 2000, respectively (€ 3,058 million, € 3,411 million and € 3,349 million respectively in U.S. GAAP), the Group’s net financial debt to equity and minority interests ratio was 0.45, 0.41 and 0.25 (French GAAP) at the end of 2002, 2001 and 2000, respectively (0.47, 0.43 and 0.26 respectively in U.S. GAAP).

    The main currencies, in which cash and cash equivalents are held by Pechiney, are the euro and the U.S. dollar.

    Contingencies

    The Group’s contingent liabilities include sales to financial institutions of selected receivables with limited recourse, pension and retirement indemnity liabilities, obligations for post-retirement benefits other than

     

    pensions, variable interest rate loans, guarantees, unresolved litigation liabilities and environmental expenses (see "Notes 11, 14, 15 and 20 to the Consolidated Financial Statements").

    Option on an affiliate

    Aluminium Dunkerque

    In June 1990, the Group entered into an agreement pursuant to which the shareholders of Aluminium Dunkerque other than the Group (representing in the aggregate 65% of its capital) were granted an option to sell their shares of Aluminium Dunkerque. This put option will become exercisable in part beginning on September 1 following the date at which 80% of Aluminium Dunkerque’s project financing indebtedness is reimbursed, which, according to present estimates, should occur in 2003. The option will thereafter remain open for a period of five years. The options may be exercised each year in an amount up to 30% of the part of the share capital held by the other shareholders of Aluminium Dunkerque.

     

    In the event that this put option is exercised in full, the Group could become the majority shareholder of Aluminium Dunkerque as early as the first year of exercise. As a result, the Group would be required to consolidate Aluminium Dunkerque, including all of its project financing indebtedness then outstanding (which could represent up to 20% of the original amount, or approximately U.S.$135 million). The exercise price of the put option is the fair market value of the shares as determined each year during the exercise period by independent experts. On July 9, 2003, Pechiney announced that it had reached an agreement with its financial partners to purchase, as of December 30, 2003, the 65% equity interest for a price of approximately € 250 million, for further information, see "Item 4. Information on the Company - Recent Developments".

    Other Contingencies

    Aluminium Dunkerque

    The Group held an equity investment of € 99 million in Aluminium Dunkerque as of December 31, 2002, (€ 98 million as of December 31, 2001, and € 85 million as of December 31, 2000) which is recorded as Investment in Equity Affiliates in the Consolidated Balance Sheet. This amount corresponds to an initial total investment of € 91 million, subsequently increased by the Group’s participation in a capital increase in 1996 and decreased by an amount corresponding to the Group’s share of Aluminium Dunkerque’s accumulated losses since its inception.

     

    In addition, the Group has extended to Aluminium Dunkerque a long-term loan which as of December 31, 2002, totaled € 33 million, compared with € 50 million as of December 31, 2001. Moreover, Aluminium Dunkerque had extended short-term advances to the Group (recorded as "Short-Term Bank Loans" in the Consolidated Balance Sheet), the net amount of which, as of December 31, 2002, totaled € 19 million, compared with € 40 million as of December 31, 2001, and € 9 million as of December 31, 2000.

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    Finally, in June 1990, in the framework of the agreements relating to the creation of Aluminium Dunkerque, the Group committed itself to take off the facility’s total production and to finance a share of the plant’s working capital requirements.

     

    As of December 31, 2002, Aluminium Dunkerque had statutory shareholders’ equity of € 205.5 million, compared with € 189.2 million as of December 31, 2001, and € 130 million as of December 31, 2000.

    Bauxilum Project

    In April 2001, Aluminium Pechiney SPV, a wholly-owned Group subsidiary, entered into a technical, commercial, financial and management support agreement ("Investment and Liquidation Agreement") with CVG Bauxilum ("Bauxilum"), a subsidiary of the Venezuelan state holding company Corporacion Venezolana de Guyana (see "Acquisitions"). The purpose of this agreement is to modernize Bauxilum’s bauxite and alumina production facility so as to increase in a lasting manner its annual alumina production from 1.7 million to 2 million metric tons and to ensure compliance of the installations in environmental matters. Within the framework of this agreement, the Group will provide equipment, technology, technical assistance and other services to Bauxilum for a total value of approximately U.S.$228 million which shall be financed, on the one hand by two loans of a maximum amount of U.S.$110 million granted by a banking syndicate to Aluminium Pechiney SPV, and for the remainder, by the Group. Reimbursements of the loan amounts shall be carried out through the sales of alumina which shall be taken off by the Group. In light of the project’s

     

    structure, the credit risk incurred by the Group should not exceed an estimated U.S.$120 million. Within the framework of this project, it is provided that the Group will deliver several guarantees, in particular as to performance and that it will subcontract, under its responsibility, a part of the project. This project also calls for a feasibility study of the expansion of the facility so as to allow the increase of annual alumina production from 2 million to 3 million metric tons. As of December 31, 2002, the conditions precedent to the closing of the transaction contemplated by the Investment and Liquidation Agreement were satisfied, and the amounts determined in the agreement have been made available to Aluminium Pechiney SPV. As of December 31, 2002, the expenses incurred by the Group within the framework of the Bauxilum project amounted to € 17 million, and drawdowns on the loans granted by the banking syndicate totaled € 14 million.

    General Information

    Trends and Prospects

    In the course of 2002, the global economic situation did not witness the expected recovery. In the United States, the economy remained hesitant. In spite of successive decreases in interest rates by the Federal Reserve, the prospect of a short-term economic recovery in the United States remains uncertain, according to most economists.

    The decrease in the value of the dollar with respect to the euro from 0.88 to 1.05 during the course of 2002 reinforced the stagnancy of the economic situation.

    In Europe, the economic situation is hardly more encouraging and a recovery has proven difficult. The following trends characterized the Group's principal markets.

    • The demand for primary aluminum grew significantly in 2002, rising 6 % to 25.5 million metric tons, mainly owing to increased consumption in Asia (excluding Japan). Production rose even more, by 6.9 % to 26.1 million metric tons, a fact which explains the persistence of a surplus in
     

    the world aluminum market. This marked increase in the supply of aluminum can be attributed to the sharp rise in Chinese production, linked to the startup of new smelting capacity at a rapid rate. The increase in inventories resulting from this imbalance between supply and demand explains the decrease in the price of aluminum on the LME – the year's average stood at U.S.$ 1,356 per metric ton, down 6.1 % from 2001 and 12.9 % from 2000.

    • In aluminum conversion, the European situation showed contrasting trends in the different markets served. As the level of consumption remained relatively high in spite of the lackluster economic environment, consumption-oriented markets remained profitable, contrary to those related to investment. European can and automotive markets therefore benefited from the increased penetration of aluminum compared with steel, while the foil and thin foil market profited from high sustained demand. In the United States, most aluminum conversion markets continued to be affected by the low level of industrial production. Nevertheless, the rise in shipments of standard rolled products in the middle of 2002, compared
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    with the particularly difficult situation in 2001, was most likely due to the combined effect of an upswing in demand and efforts to rebuild inventories by large aluminum consumers in North America.

    Finally, in Europe as well as in the United States, the low end of the aerospace cycle was compounded by the consequences on the air transport industry of the terrorist attacks of September 11, 2001. Demand in this market dropped significantly compared with 2001. Nevertheless, in Europe, shipments seemed to pick up at the end of the fourth quarter.

    • Packaging markets suffered from persistent sluggish demand, due, first, to the difficult economic environment and the direct consequences of the terrorist attacks of September 11, 2001, and, second, to the impact of inventory depletion and changes in marketing strategy by major customers in this sector, who were confronted with the erosion of end-user markets and therefore focused on high value added products to the detriment of sales volume. The beauty and luxury market was particularly vulnerable in both the United States and Europe.
     

    The year 2003 has begun in an environment marked by major political and economic uncertainty which affects all of the Group’s activities, in particular the impact of the very unfavorable trend in the parity of the U.S. dollar and current market conditions. In Aluminum Conversion and Packaging, sales should, nevertheless, benefit from the end of the destocking phase observed in 2002, with pressure on prices which will remain strong in certain segments. In such an environment, the Group’s priority is to continue to achieve the benefits of the Pechiney Continuous Improvement System, in line with the objectives defined a year ago. These efforts will be complemented by the restructuring, and on some occasions the closing, of activities which are unable to demonstrate their viability. These measures, though often difficult, are necessary to allow the Group to preserve its competitive position and continue to grow.

    Volatility of World Aluminum Prices

    World aluminum prices as quoted on the London Metal Exchange (LME) are marked by high volatility. The evolution of the price of aluminum is strongly influenced by supply and demand conditions in the market, while the consumption of aluminum is strongly linked to the state of the economy. Aluminum is used for a multitude of activities throughout the world. Many of the end-user markets served by the Group, such as the construction and transport industries, are cyclical and are significantly affected by changes in general and local economic conditions. These include employment levels, interest rates, consumer confidence and housing demand. Changes in these conditions significantly affect the demand for aluminum. Over the years, the cyclical nature of the demand for aluminum has decreased with the increase in the importance of more stable industries, such as packaging.

     

    Aluminum producers are not able to adapt to short-term fluctuations in demand by stopping and starting aluminum production due to the nature of the production process and the heavy costs this would imply. On the other hand, aluminum can be easily stored. In the medium term, mismatches in supply and demand resulting from the startup of new production operations may also affect the market.

    Prices of aluminum as quoted on the LME may likewise be affected by participants in the aluminum trading markets anticipating the market impact of developments in the industry and the world economy and by speculative trading in the aluminum markets.

    Sensitivity of the Group’s Industrial Operations to Fluctuations in Aluminum Prices

    Primary Aluminum

    With respect to aluminum prices, the pricing of most commercial transactions is linked to the LME. Therefore, fluctuations in LME aluminum quotations directly impact Aluminum revenues and earnings.

    The Group estimates that, on a consolidated basis, its sales to third parties of primary aluminum and aluminum semi-finished products contributing directly to its Earnings from Operations are approximately 876,000 metric tons per year, excluding sales by affiliates accounted for under the equity method. Of this amount, a large majority is accounted for by sales of primary aluminum on which the Group is fully exposed to any change in the price of aluminum, except to the extent it is partly offset by certain costs, principally electricity, which are indexed on LME aluminum quotations. This

     

    slightly reduces the degree to which the Group’s operating results are directly exposed to LME fluctuations.

    Since 1995, the Group has implemented a policy to reduce its exposure to fluctuations in the market price of aluminum. This policy consists of:

    • not entering into long-term and medium forward sales contracts except on a limited basis where special circumstances warrant such treatment (e.g., project financing);
    • occasionally covering the risk of an aluminum price decrease by entering into put options, having recourse to such options only at satisfactory cost and aluminum price levels.

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    Other Industrial Activities

    In order to reduce their exposure to fluctuations in the market price of aluminum, Aluminum Conversion activities and Cebal either enter into aluminum purchase contracts which match their respective sales contracts or use commodity hedge instruments (principally aluminum forward purchase and sale contracts) (see "Item 4. Information on the Company -Dependence on the Economic Environment").

    On the basis of the open positions of all the Group’s industrial companies on aluminum hedge instruments as of December 31, 2002, Pechiney

     

    believes that an immediate and adverse 10% movement in the price of aluminum would have an adverse impact of approximately € 23 million on the fair value of such instruments. Since the Group’s objective in entering into these contracts is to cover its purchase and sale transactions, this adverse impact would offset all or some of the positive effect of changes in aluminum prices on the contracts being covered.

    Sensitivity of the Group’s Trading Operations to Fluctuations in Metal Prices

    The Group’s results of operations from trading activities conducted by International Trade are influenced by fluctuations in metal prices. In connection with its activities, International Trade purchases and sells forward and futures contracts as well as options for the purchase and sale of metal, both on organized exchanges (principally) and in over-the-counter transactions with counterparties. In addition, it operates within specific risk limits, which attenuate sensitivity to metal prices.

     

    On the basis of the Group’s trading activities’ exposure to fluctuations in metal prices as of December 31, 2002, International Trade estimates that an immediate and adverse 10% fluctuation in the price of each metal in which it deals would have a cumulative adverse impact of approximately € 4.7 million on the aggregate fair value of its contracts.

     

    Derivative Financial Instruments

    In order to reduce the Group’s exposure to the risks of currency and interest rate fluctuations, the Group manages the hedging operations of its principal subsidiaries, to the extent permitted by local laws, on a central basis through its treasury department. The Group uses various derivative financial instruments, such as rate and currency swaps, collars, caps and forward rate agreements, to hedge currency and interest rate fluctuations on assets, liabilities and future commitments, in accordance with guidelines established by Pechiney’s Executive Committee. All foreign exchange and interest rate derivative instruments are either quoted on recognized exchanges or represent over-the-counter transactions with

     

    highly rated counterparties. Income or loss on these instruments is accounted for in the same manner and period as the loss or income on the hedged transaction. If, in very limited cases, the instruments do not constitute a hedge, they are marked to market with the income or loss immediately recorded in the statement of income (see "Notes 1(l) and 19 to the Consolidated Financial Statements").

    The Group’s positions on derivative financial instruments are managed using various techniques, including fair value approach, sensitivity analysis and impact on consolidated results of operations.

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    Currency Fluctuations

    For the fiscal year ended December 31, 2002, Pechiney’s consolidated financial statements were prepared in euros. The Group operates in many geographic regions (notably France, the rest of Europe and North America) and many currencies (see "Note 22(b) to the Consolidated Financial Statements").

    Approximately 58% of Pechiney’s Consolidated Net Sales in 2002 were generated by subsidiaries located outside of France, primarily in North America and in other countries whose currencies are linked to the U.S. dollar. In addition, a substantial portion of Aluminum Net Sales are denominated in U.S. dollars or linked to the U.S. dollar as well as in currencies other than the euro and are sensitive over time to changes in exchange rates. Because a majority of Pechiney’s Consolidated Net Sales are generated in foreign currencies, currency fluctuations have a significant effect on Pechiney’s consolidated financial results of operations. The two primary effects are:

    • the effect on the results of operations of those subsidiaries that incur costs in currencies not linked to the U.S. dollar while all or part of their revenuesare denominated in or determined by reference to the U.S. dollar;
    • to a lesser extent, the effect on translations into euros of revenues, costs and values of assets and liabilities in other currencies to be reported in Pechiney’s consolidated statements of income and balance sheets.

    In general, an appreciation of the euro relative to other currencies has an adverse effect on the translation into euros of the Net Sales and Income (Loss) from Operations generated in foreign currencies. Conversely, this effect is offset by reductions in the value in euros of the costs, interest expenses and depreciation and tax charges incurred in foreign currencies. Similarly, an appreciation of the euro relative to other currencies has an adverse effect on the translation into euros of the value of assets denominated in foreign currencies, with this negative effect being offset by the positive effect of reductions in the euro value of liabilities denominated in foreign currencies. Such translation effects are greatest at the level of Net Sales and Earnings from Operations and are progressively less at the levels of Income (Loss) from Operations, Income (Loss) Before Income Tax and Net Income (Loss). The Group attempts to reduce its sensitivity to the translation effects of currency fluctuations by financing assets located in foreign countries with debt denominated in the corresponding local currency.

    A significant portion of the Group’s consolidated indebtedness is denominated in foreign currencies, particularly U.S. dollars. As of December 31, 2002, net consolidated indebtedness totaled € 1,437 million, of which approximately € 345 million was denominated in U.S. dollars (without accounting for hedging operations).

    The average exchange rates for 2002, 2001 and 2000 were € 1.00 = $ 0.94, $ 0.90 and $ 0.92, respectively. The depreciation of the U.S. dollar vis-à-vis the euro between 2001 and 2002 had a negative effect on the Group’s

     

    consolidated results of operations when translated into euros.

    The Group’s policy is to cover the commercial foreign exchange risks of its subsidiaries on exports and imports by systematically hedging firm commitments of less than one year, at the time customers’ orders are recorded, through centralized risk management. Hedging of exposure on commitments of more than one year may be undertaken with the approval of the members of the Company’s Executive Committee. The principal currencies for which the Group hedges are, in order of importance, the U.S. dollar, the British pound and the Japanese yen (see "Note 19 to the Consolidated Financial Statements").

    The aggregate amount of derivative foreign exchange instruments handled by the Group’s treasury department and its principal subsidiaries represents on average $32.7 billion per year with respect to covering various exchange rate guarantees granted by the Company to its operating subsidiaries. Although from time to time the Group purchases or sells currencies forward to hedge currency risk in liabilities or receivables, the Group’s policy is not to take speculative positions through forward currency contracts. In 2002, 2001 and 2000, the Group did not experience significant gains or losses as a result of its hedging activities through the use of derivative foreign exchange instruments. The Group’s strategies to reduce exposure to fluctuations in exchange rates have made it possible to mitigate, but not eliminate, the positive or negative impact of such fluctuations.

    The Company has utilized a sensitivity approach to determine the maximum potential one-day loss, on the basis of the Group’s aggregate exposure to foreign exchange rate fluctuations as of December 31, 2002. The method used includes all foreign exchange derivative instruments as well as all debt, accounts receivable and accounts payable denominated in its principal foreign currencies (U.S. dollar and British pound). Anticipated transactions (including firm commitments) denominated in such currencies which certain of these derivative instruments are intended to hedge were excluded from the sensitivity analysis. The estimated maximum potential one-day loss in fair value of these instruments resulting from an adverse 10% fluctuation in the U.S. dollar and British pound is € 17 million. However, since the Group utilizes currency sensitive derivative instruments for hedging anticipated foreign currency transactions (including firm commitments), a loss in the fair value of these instruments is generally offset by an increase in the fair value of the underlying anticipated transactions.

    Fluctuations in the value of other currencies do not materially affect Pechiney’s consolidated results.

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    Interest Rate Fluctuations

    Approximately 38% of the Group’s financial debt is indexed on variable interest rates. This results in exposure to interest rate fluctuations which the Group hedges by using interest rate derivative instruments.

    Taking into account the effect of hedging instruments, the interest rate payable on approximately 51% of the Group’s indebtedness is variable.

    Fees and interest rate spreads are accounted for as financial income or expense over the life of the relevant instruments.

     

    On the basis of average interest rates prevailing at the end of 2002 and of its aggregate exposure to interest rate fluctuations, taking into account all market sensitive debt and derivative interest rate instruments, the Company estimates that a 1% increase in interest rates, used as a reference for euro and dollar denominated borrowings, would increase the Group’s annual financial expense by approximately € 9 million.

    Research and Development

    Research and development activities are conducted at the central R&D laboratory in Voreppe, France, and at six specialized laboratories (alumina,primary aluminum production, ferroalloys, tubes and aerosols and flexible packaging) located in France and the United States.

     

    The following table sets forth information regarding Pechiney’s research centers, their division and location.


         
    Sector Division Research center

    Aluminum Bauxite – Alumina CRG Gardanne (France)
      Aluminum Metal LRF St-Jean-de-Maurienne (France)
      (primary aluminum)  

    Packaging Tubes Aerosols Europe CRM Sainte-Menehould (France)
      Tubes Aerosols USA Washington, N.J. (USA)
      Plastic Packaging NTC Neenah, Wis. (USA)
      Techpack Centre d’Innovation Chevilly Larue (France)

    Group R&D Pechiney CRV CRV Voreppe (France)


    The Group’s research and development expenses totaled € 90 million in 2002, € 97 million in 2001 and € 90 million in 2000.
    Research and development projects are managed by the corporate
    divisions. Placed under the responsibility of operating managers, they are conducted in cooperation with the Group’s customers and production units.Approximately 80% of these projects are integrated into industrial programs and 20% are dedicated to maintaining and developing expertise and promoting exploratory investigation.

    Co–development, which is intrinsic to packaging, has also become the rulein aluminum. Pechiney conducts research programs with its major customers in aerospace, automotive and packaging markets. Examples include:

    • the development of new alloys to meet the requirements of new aerospace programs such as Airbus’s A380;
    • the development of new applications for automobile bodies and structural parts in the automotive industry with the main manufacturers and European subcontractors;
     
    • the definition of new alloys with a much longer service life for use in heat exchangers (Evalife ®).

    All these developments require resources and new skills in order to recognize and anticipate customer needs better. The Voreppe Research Center therefore acquired the following equipment and expertise in 2002:

    • a press to bend aluminum sections to meet the needs of automotive manufacturers and subcontractors;
    • a scientific supercalculator which is capable of conducting 64 billion operations per second (13 times more powerful than the previous model) and accessible online from Group facilities; it is used to study mechanical resistance, shock absorption and corrosion resistance;
    • greater expertise in design and calculation for automotive and aerospace applications.

    In environmental protection, further efforts were accomplished in 2002:

    • continued research on new inert materials for use in an alternative processes to replace carbonaceous anodes in electrolysis cells;

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    • new odorless rolling oils and new effluent processing solutions to limit the use of kerosene and reduce scrap;
    • new varnishes for can stock to reduce the consumption of chemical products and scrap at the Neuf Brisach facility;
    • new initiatives to recycle the aluminum contained in packaging and waste from automobile crushing and demolition operations by using new optical sorting technology.
     

    Finally, Pechiney pursued its active participation in European projects. In particular, it was the leader of two projects launched in 2002:

    •  AGEFORM on the forming during tempering of heavy and thin plate for aerospace applications;
    • ALUMOPLA on the development of injection molds for plastic.

    For information relating to the Company’s patents, see "Item 4 - Information on the Company - Intellectual Property".

    Divestitures

    Direct Divestitures

    In 2002, Pechiney did not itself undertake any divestitures, which would have significantly modified the Group’s scope of consolidation or the extent of its activities.

     

     

    Indirect Divestitures

    In April 2002, Almet, a Group subsidiary specialized in the distribution of semi-finished aluminum and stainless steel, sold its equity interest in Etablissements Lafay et Cie, based in Sassenage, France, and specialized in the manufacture of signing and signaling plates, particularly for the construction and automotive (license plate) sectors.

    In May 2002, Cebal, a Pechiney subsidiary, sold its equity interest in its Finnish subsidiary Cebal Printal Oy, which owns an aluminum tube and aerosol production facility at Hanko, in the south of Finland, through a management buyout (MBO). The former subsidiary took back its original name (Printal Oy) and kept all its aluminum tube equipment and related activities in the Scandinavian market. In aerosols, its second manufacturing focus, Printal Oy is expected to continued to work closely with Cebal’s

     

    aerosols division by providing technical and development assistance and production subcontracting. Some of the aerosol equipment is planned to be acquired by Cebal’s aerosols division, particularly for its new plant in Velim, Czech Republic, the construction of which began in September 2001. The facility is now operational. While avoiding job loss at the Finnish plant, this divestiture is an example of Cebal’s strategy to focus on a number of optimized facilities.

    On October 23, 2002, Techpack Deutschland, a German subsidiary of the Techpack division, sold its equity interest in the German companies Kaesmacher Verwaltung and Kaesmacher GmbH, specialized in the manufacture of packaging products for the cosmetics market.

    Acquisitions

    At the beginning of 2002, Pechiney Plastic Packaging, Inc., Pechiney’s North American subsidiary, acquired Phœnix Healthcare Products, specialized in flexible packaging for the medical sector. Phœnix Healthcare operates a plant in Milwaukee, Wisconsin, where it manufactures a diversified range of products, including packaging for surgical gloves, hospital jackets and gowns, catheters, syringes, bandages and other medical and hospital equipment. This acquisition expands the line of products offered by the Healthcare and Specialty unit of the Group’s Pechiney Plastic Packaging division.

    On February 4, 2002, Pechiney announced the acquisition of the German

     

    company Alufin GmbH Tabularoxid, specialized in the production of tabular alumina by high temperature sintering. This firm operates from its production base in Teutschenthal, near Leipzig, with an annual capacity of approximately 18,000 metric tons, a figure which will soon be doubled. This acquisition should allow Pechiney to penetrate a new market for the technical alumina produced by its subsidiary Aluminium Pechiney in Gardanne, France - high performance refractories. This operation is expected to strengthen the position of Gardanne’s Altech technical alumina business, which is a leader in Europe with an annual capacity of approximately 340,000 metric tons. In addition to refractories, Altec specialty alumina is used to make ceramics, tile and enamel and in polishing.

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    On April 2, 2002, Pechiney announced the signing of a letter of intent with the local partners Dubai Investments PJSC and Al-Ghurair LLC to create a new aluminum thin foil rolling facility in the Emirate of Dubai. It is expected that Pechiney will be the operator of the new company (Emiroll), in which it would have a 30% equity interest. It is also contemplated that the new facility would use Pechiney’s state-of-the-art continuous casting and rolling technology. Construction of the new plant is scheduled to begin once the agreement will have been finalized, and the facility should be operational some two years later. It would have an annual capacity of approximately 33,000 metric tons of aluminum foil, thin foil and rolls for the local market and export.

    In July 2002, the Group’s International Trade division, Pechiney World Trade (PWT) acquired the Belgian distribution company S.A. De Cleene -Vereecken, with positions in the Benelux market for cast products, which is specialized in the sale of consumable goods (resins, refractories, inoculants and nodularizers), capital goods and spare parts (molding machines and dust removal installations). It is expected that this acquisition will allow PWT to bolster, within Pechiney Belgium, the distribution of PEM casting products in Benelux and to extend the scope of its commercial and technical expertise in casting throughout northern Europe.

    On September 17, 2002, the Techpack division signed an agreement with the aim to allow it to strengthen its presence in South East Asia by acquiring the cosmetics assets of the Indonesian group Tiger, a recognized specialist in plastic injection, coating and metalizing, with which Techpack has worked closely for more than ten years through its Promotions and Accessories business. It is expected that the acquisition vehicle will be based in Semarang on the island of Java and named Techpack Asia; Techpack would own a 95% equity interest and the remaining 5% would be held by the present owners of Tiger, who would become part of the executive management of Techpack Asia. This operation should provide Techpack with a major industrial base in Asia for makeup cases, lipstick and beauty cream jars in the division’s Promotions and Accessories business, with competitive facilities for short and medium runs. This operation should also enable Techpack to increase its penetration of the South East Asian market, which is very profitable in the areas of makeup

     

    and personal care. This agreement remains subject to certain conditions precedent to the closing of the transaction. Within the framework of this operation, the equity interest in the joint venture PT Cosmetech Tigermandiri Packaging was sold to the Indonesian partner.

    On October 23, 2002, Pechiney announced the signing of a preliminary agreement for the acquisition by Pechiney of the aluminum conversion activities of the British-Dutch group Corus. The planned acquisition was defeated by the supervisory board of Corus' Dutch Subsidiary, which decision was upheld by the Amsterdam Enterprise Court on an appeal brought by the management board of Corus Group plc. As a consequence, Corus Group plc is required to pay Pechiney an agreed break-up fee of € 20 million, according to its contractual obligations.

    In December 2002, Pechiney Emballage Flexible Europe, a Group subsidiary, acquired Avenir Print Service (APS), based at Montreuil Bellay (France), which operates a recent facility specialized in the production of plastic film for pharmaceuticals and cosmetics. This acquisition should facilitate the integration into the Group of a business that is a leader in short runs for cosmetics samples and promotional items as well as pharmaceutical pouches. It should enable the business acquired to benefit from synergies with the Group’s research and development and marketing and sales teams in packaging for the healthcare and beauty sector. It should also lead to a strengthened position in Europe for this segment of the Group’s packaging activities in the market for short runs.

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    »Operating and Financial Review and Prospects

    Item 5

    Other operations

    In April 2001, Pechiney Aluminium SPV, a wholly-owned Group subsidiary, signed an Investment and Liquidation Agreement with CVG Bauxilum, a subsidiary of the Venezuelan national holding company Corporacion Venezolana de Guyana. This agreement, which involves technical, commercial, financial and management support aspects, concerns modernization and increased output at the Bauxilum bauxite (at Los Pijiguados) and alumina (at Puerto Ordaz) production complex in Venezuela. The project targets a durable increase in the facility’s annual production of alumina from 1.7 million metric tons to 2 million metric tons and, at the same time, compliance with environmental standards. The project would be financed through Pechiney’s sale of the supplemental aluminum production. 45% of the basic engineering necessary for the realization of the project has been completed. The agreement took effect as of December 23, 2002. It also contemplated to complete a feasibility study on an expansion of the facility to increase production from 2 million to 3 million metric tons of aluminum.

    In December, 2002, Pechiney announced, through its subsidiary Aluminium Pechiney, the signing of an agreement with the South African company Eskom for the long-term supply of electricity to an aluminum smelter in the industrial development area of Coega, near Port Elizabeth, South Africa. This agreement is an important step towards the construction of a new aluminum smelter using AP50 technology developed by Aluminium Pechiney, and opens the way to more advanced discussions with the South African government and provincial authorities, potential partners and local governments. Such advanced discussions remain a perequisit to the realization of a project to build a new aluminum smelter using AP50 technology in South Africa. In addition to the electric power made available locally, the discussions precedent to the realization of such a project particularly pertain, whatever the country concerned, to the conditions locally proposed to welcome the project and the possibilities offered in terms of port infrastructures and road and rail connections. This initiative reflects Pechiney’s consistent strategy - as a leader in smelting technology, to promote and operate new smelters using AP50 technology in the coming years and to ensure that its needs in alumina are covered. In 2002, the technical development teams achieved their objective of

     

    ensuring stable operation of AP50 cells at very high intensity (500,000 amperes), with sufficient experience to envisage the study and construction of a first industrial unit with a future annual production capacity of at least 460,000 metric tons This new technology aims to reduce per-ton investment costs by 15% and is also more environmentally friendly.

    On April 29, 2002, Pechiney and its partners in the Tomago aluminum smelter (in which Pechiney has an equity interest of 51.55%, Gove 36.05% and Hydro Aluminium 12.4%) announced they had approved a project to augment the facility’s production capacity by upgrading the productivity of the electrolysis cells (Pechiney AP18 technology) through an increase in the electric intensity utilized from 194,000 to 225,000 amperes. The project, which would provide for the production of supplemental metal in the form of ingots, aims to increase the smelter’s production from 460,000 to 530,000 metric tons per year. An initial increase in tonnage is planned for 2004, and the objective of 530,000 metric tons is scheduled for 2006. All the partners in this joint enterprise have approved the project, but Gove must decide by November 2003 whether it will participate. If this partner decides not to participate the other two partners, Pechiney and VAW will share the corresponding supplemental tonnage, proportionally to their respective equity interests in the joint venture.

    On May 1, 2002, Pechiney finalized the acquisition of certain assets of McCook Metals, a North American company based near Chicago, Illinois. The assets so purchased are mainly industrial equipment for the manufacture of heavy plate for the aeronautic market and industry. This equipment is expected to make it possible to accompany a future rise in the need for capacity by the Group’s Aerospace Transport Industry division in these markets. The assets thus acquired also include industrial casting equipment for the production of aluminum lithium sheets and billets for the aeronautic, aerospace and defense markets. This industrial equipment should enable the division to strengthen its relations with large customers in North America in these sectors.

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    »Directors, Senior Management and Employees

    Item 6

    Directors and Senior Management

    Board of Directors

    For a discussion of certain powers of the directors of the Company, see "Item 10 - Additional Information - Memorandum and Articles of Association - Directors".

    The Company’s by-laws provide that the Board of Directors must be composed of no fewer than 11 and no more than 22 directors. The Company’s Board of Directors currently consists of 12 directors: nine directors were elected by the Shareholders at the meeting held on March 28, 2002. Anne Lauvergeon whose appointment to the Board of Directors was renewed by the Shareholders at the March 28, 2002 meeting, resigned on December 16, 2002. The other three current directors were elected by the employees of the Group’s French companies on June 11, 2002. They officially took up their posts on July 24, 2002 at the first meeting of the Board following the announcement of the results of their election (in accordance with article 15 (A) 2 of the by-laws).