20-F 1 lafarge20f.htm LAFARGE FORM 20-F LAFARGE 20-F Annual Report 2005




As filed with the Securities and Exchange Commission on March 24, 2006



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 20-F

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE

SECURITIES EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report__________


For the transition period from _________ to ________________


Commission File Number 001-15218


LAFARGE

(Exact name of Registrant as specified in its charter)


France

(Jurisdiction of incorporation or organization)


61, rue des Belles Feuilles, 75116 Paris, France

(Address of principal executive offices)


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


Title of each class

 

Name of each exchange on which registered

American Depositary shares, each representing one-fourth of an ordinary share, par value €4 per share.

 

The New York Stock Exchange

Ordinary Shares, par value €4 per share*

  


* listed, not for trading or quotation purposes, but only in connection with with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission


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 :

175, 985, 303 Ordinary Shares at December 31, 2005


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

  Yes  No


If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.


Yes  No



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  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


 Large accelerated filer  Accelerated filer   Non-accelerated filer


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


Item 17  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes   No

 




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Mère-Enfant hospital in Nantes, France, made with high performance self placing concrete Agilia®, created by Rémi Butler, architect. Photo credits: Claude Cieutat, Images et Concepts/Laurence Prat




Annual Report

On Form 20-F 2005


PRESENTATION OF INFORMATION

In this Annual Report, the following terms have the meanings indicated below:

Group” or “Lafarge”: Lafarge S.A. and its consolidated subsidiaries.

Company” or “Lafarge S.A.”: our parent company Lafarge S.A., a société anonyme organized under French law.

Division”: one of our four Divisions: Cement, Aggregates & Concrete, Roofing and Gypsum. Each Division, as well as our “Other activities”, constitutes a business segment for purposes of reporting our results of operations.

Business Unit”: a management organization for one of our four Divisions in one geographic area, generally one country.

ERP”: enterprise resource planning.

France”: the Republic of France.

 “E.U.”: the European Union.

“United States”, the “U.S.” or the “U.S.A.”:  the United States of America.

Growing markets”: all countries outside Western Europe and North America, except Japan, Australia and New Zealand.

 “Euro” or “”: the currency of the European Union member states participating in the European Monetary Union.

 “U.S. dollars” or “$”: the currency of the United States, unless otherwise indicated.  

IFRS”: International Financial Reporting Standards

Tonne”: 1,000 kilograms, or 2,204 pounds, or 1,102 short tons.

Due to rounding of amounts and percentages for presentation in this annual report, some data may not total.

We publish our consolidated financial statements in euro. Solely for the convenience of the reader, this annual
report contains translations into U.S. dollars of certain amounts in euros at the December 30, 2005 Noon Buying Rate of 1 euro = $1.1842.



 

1

SELECTED FINANCIAL DATA

RISK FACTORS

INFORMATION ON LAFARGE

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

MAJOR SHAREHOLDERS

THE LISTING

OTHER INFORMATION

CONTROL AND PROCEDURES

AUDITING MATTERS

EXHIBITS

CONSOLIDATED FINANCIAL STATEMENTS

CROSS-REFERENCE TO FORM 20-F ITEMS

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements regarding prices and demand for our products, our financial results, our plans for investments, divestitures and geographic expansion, expected cost increases, including with respect to energy, and other matters. When used in this report, the words “aim(s)”, “expect(s)”, “intend(s)”, “will”, “may”, “believe(s)”, “anticipate(s)”, “seek(s)” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Specifically, statements herein regarding the future, including our strategy, plans, product and process developments, facility expansion and improvements, synergies, acquisitions, our ability to manage rising energy costs, partnerships and general business prospects are subject to uncertainty arising from numerous factors outside our control, including market conditions, raw material prices, currency fluctuations, customer demand, the actions of competitors and regulators, technological developments and other factors, as more fully set forth in Chapter 2 (Risk factors). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report. We do not undertake, except as required by law, to update any forward-looking statements set forth in this annual report to reflect new information or subsequent events or circumstances.

This document, together with the exhibits refered to herein, has been filed with the United States Securities and Exchange Commission on March 24, 2006 as our Annual Report on Form 20-F for the year ended December 31, 2005.





 

 




1
Selected
Financial
Data




LAFARGE 20-F - Annual Report 2005 - 2


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You should read the following selected consolidated financial data together with Chapter 4 (Operating and Financial Review and Prospects) and our consolidated financial statements.

In accordance with European Regulation no. 1606/2002 issued July 19, 2002, we have prepared our consolidated financial statements for the year ended December 31, 2005, in accordance with the International Financial Reporting Standards (“IFRS”) endorsed by the European Union, which do not differ, for the Group, from IFRS published by the International Accounting Standards Board (“IASB”).

Until December 31, 2004, the Group’s consolidated financial statements were prepared in accordance with the provisions of French accounting legislation and standards (“French GAAP”). We have therefore restated our consolidated financial information at and for the year ended December 31, 2004, in accordance with IFRS 1, on “First Time Adoption of IFRS”, and financial information set forth in this Annual Report for the year ended December 31, 2004, may differ from information previously published.

As a first-time adopter of IFRS at January 1, 2004, the Group has followed the specific prescriptions described in IFRS 1. The options selected for the purpose of the transition to IFRS are described in the Notes to the consolidated financial statements.

Impacts of the transition on the balance sheet at January 1, 2004, the profit and loss for the year ended December 31, 2004 and the balance sheet at December 31, 2004 are presented and commented upon in Note 39 to our consolidated financial statements.

The first table below sets forth selected consolidated financial data under IFRS at and for the years ended December 31, 2005 and 2004. The selected financial information is derived from our consolidated financial statements, which have been audited by Deloitte & Associés. The audited consolidated financial statements at and for the years ended December 31, 2005 and 2004 appear at the end of this report.

IFRS and French GAAP differ in some respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). A description of the main differences between U.S. GAAP and IFRS is set forth in Notes 36 and 37 to our consolidated financial statements.

The second table below sets forth selected financial information under U.S. GAAP at and for the years ended December 31, 2005, 2004, 2003, 2002 and 2001.

The third table below sets forth the dividend information.



LAFARGE 20-F - Annual Report 2005 - 3


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PRIMARY IFRS ACCOUNTS

(MILLIONS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

AT OR FOR THE YEAR ENDED DECEMBER 31,

2005

2004

$ *

STATEMENTS OF INCOME

   

Revenue

18,910

15,969

14,436

Current operating income

2,791

2,357

2,201

Operating income

2,649

2,237

2,074

NET INCOME

1,686

1,424

1,334

Out of which:

   

Group share

1,298

1,096

1,046

Minority interests

388

328

288

Basic earnings per share

7.57

6.39

6.26

Diluted earnings per share

7.51

6.34

6.13

BASIC AVERAGE NUMBER OF OUTSTANDING SHARES (IN THOUSANDS)

171,491

171,491

167,204

BALANCE SHEETS

   

Non current assets

24,327

20,543

18,241

Current assets

8,706

7,352

6,259

TOTAL ASSETS

33,033

27,895

24,500

Shareholder’s equity - parent Company

11,555

9,758

7,782

Minority interests

3,045

2,571

2,119

Non current liabilities

11,410

9,635

9,774

Put options on shares of subsidiaries

311

263

299

Current liabilities

6,712

5,668

4,526

TOTAL EQUITY AND LIABILITIES

33,033

27,895

24,500

STATEMENTS OF CASH FLOWS

   

Net cash provided by operating activities

2,233

1,886

1,877

Net cash (used in) investing activities

(1,994)

(1,684)

(972)

Net cash (used in) financing activities

(219)

(185)

(854)

Increase in cash and cash equivalents

20

17

51

* Amounts in U.S. dollars presented in the table have been translated solely for the convenience of the reader using the Noon Buying Rate on December 30, 2005 of €1 = $1.1842.




LAFARGE 20-F - Annual Report 2005 - 4


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U.S. GAAP

(MILLIONS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

AT OR FOR THE YEAR ENDED DECEMBER 31,

2005

2004

2003

2002

2001

$*

STATEMENTS OF INCOME

      

Revenue

17,886

15,104

13,371

12,468

13,406

12,434

Operating income

2,430

2,052

1,811

1,854

1,580

1,403

NET INCOME

1,299

1,097

987

831

436

702

Basic earnings per share

7.58

6.40

5.90

5.66

3.36

5.57

Diluted earnings per share

7.30

6.17

5.70

5.45

3.34

5.47

BASIC AVERAGE NUMBER OF OUTSTANDING SHARES (IN THOUSANDS)

171,491

171,491

167,204

146,891

129,629

125,974

BALANCE SHEETS

      

Current assets

7,761

6,554

5,498

5,252

5,096

5,817

Non current assets

24,670

20,833

18,129

19,046

21,302

23,872

TOTAL ASSETS

32,431

27,387

23,627

24,298

26,398

29,689

Current liabilities

5,680

4,796

3,735

3,968

3,864

5,345

Non current liabilities

11,300

9,543

9,387

10,767

14,204

14,332

Minority interests

2,990

2,525

2,244

2,063

1,936

2,201

Shareholder’s equity

12,461

10,523

8,261

7,500

6,394

7,811

TOTAL EQUITY AND LIABILITIES

32,431

27,387

23,627

24,298

26,398

29,689

* Amounts in U.S dollars presented in the table have been translated solely for the convenience of the reader using the Noon Buying Rate on December 30, 2005 of €1 = $1.1842.


DIVIDENDS

 

2005

2004

2003

2002

2001

$ *

Total dividend paid (millions)

529 **

447 **

408

383

303

297

Basic dividend per share

3.02 **

2.55 **

2.40

2.30

2.30

2.30

Loyalty dividend per share ***

3.32 **

2.80 **

2.64

2.53

2.53

2.53

* Amounts in U.S. dollars presented in the table above have been translated solely for the convenience of the reader using the Noon Buying Rate on December 30, 2005 of €1 = $1.1842.

** Proposed dividend.

*** See Section 8.2 (Articles of Association (Statuts) - rights, preferences and restrictions attaching to shares) for an explanation of our “Loyalty dividend”.




LAFARGE 20-F - Annual Report 2005 - 5


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Beginning January 1, 2002, the historical cost of cement plant assets was reclassified into specific cost categories based upon their distinct characteristics. Each cost category represents cement plant components with specific useful lives. This new definition was based on a detailed technical study performed by the Company. Prior to January 1, 2002, cement plant assets were depreciated over their estimated useful lives, using a broader definition of cost classification. The new system of classifying costs has been applied prospectively as of January 1, 2002. On average, for a new cement plant, this change in estimate resulted in increasing the depreciable useful life from 20 years to 28 years, which more closely reflects actual experience with modern cement plants.

Exchange Rate Information

The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in New York City as defined by the Federal Reserve Bank of New York.

As of March 22, 2006, the Noon Buying Rate was €1 = $1.2095.

As used in this report, the term “Noon Buying Rate” refers to the rate of exchange for the euro, expressed in U.S. dollars per euro, as announced by the Federal Reserve Bank of New York for customs purposes as the rate in the City of New York for cable transfers in foreign currencies. Such rate is not necessarily the rate we used in the preparation of our consolidated financial statements included elsewhere in this registration statement. No representation is made that the euro amounts have been, could have been or could be converted into U.S. dollars at the rates indicated or at any other rates.


 

$ PER €1.00

 

YEAR/PERIOD CLOSING RATE

AVERAGE RATE *

HIGH

LOW

YEARLY RATES

    

2001

0.89

0.89

0.95

0.84

2002

1.05

0.95

1.05

0.86

2003

1.26

1,13

1.17

1.08

2004

1.35

1.24

1.36

1.18

2005

1.18

1.24

1.35

1.18

MONTHLY RATES

    

September 2005

1.21

1.22

1.25

1.20

October 2005

1.20

1.20

1.21

1.19

November 2005

1.18

1.18

1.21

1.17

December 2005

1.18

1.19

1.20

1.17

January 2006

1.22

1.21

1.23

1.20

February 2006

1.19

1.19

1.21

1.19

March 2006 (through March 22)

1.21

1.20

1.22

1.19

* For any year, the average of the Noon Buying Rates on the last business day of each month during such year; in the case of a month or partial month, the average of the Noon Buying Rates on the business days occurring during such month or partial month.




LAFARGE 20-F - Annual Report 2005 - 6


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[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]




LAFARGE 20-F - Annual Report 2005 - 7


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2
Risk
Factors


LAFARGE 20-F - Annual Report 2005 - 8


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2.1

CONSTRUCTION SECTOR ACTIVITY

10

2.2

ADVERSE WEATHER

10

2.3

COMPETITION

10

2.4

GROWING MARKETS

10

2.5

ENERGY AND FUEL COSTS

10

2.6

EXCHANGE RATE FLUCTUATIONS

11

2.7

ACQUISITION OF OTHER BUSINESSES

11

2.8

CONTROL OVER OUR BUSINESSES

11

2.9

RIGHTS OF MINORITY INVESTORS

11

2.10

INCREASE IN INDEBTEDNESS

11

2.11

TRANSFER OF INCOME AND DIVIDENDS FROM OUR SUBSIDIARIES

12

2.12

RAW MATERIALS

12

2.13

GOVERNMENTAL POLICIES AND LAWS AND THE PROTECTION OF THE ENVIRONMENT

12

2.14

PRICE AND VALUE OF OUR ADSs AND DIVIDENDS

12

2.15

NO PREEMPTIVE RIGHTS

13

2.16

HOLDING OF ADSs

13

2.17

SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS

13

2.18

INTERNAL CONTROL

14


The above titles of sub-chapters identify the topics discussed in each risk factor for convenience purposes. These titles are not meant to summarize or limit in any way the meaning and understanding of each risk factor as described in the following paragraphs.



LAFARGE 20-F - Annual Report 2005 - 9


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The following factors may have material adverse effects on our business, financial condition, results of operations and cash flows. There may be other risks which are not known to the Group or which may not be material now but could turn out to be material.

2.1 We depend heavily on construction sector activity levels, which tend to be cyclical and which differ throughout the countries in which we operate

Our results depend heavily on residential, commercial and infrastructure construction activity and spending levels. Construction activity and spending levels vary across our many markets, and the construction industry in a given market tends to be cyclical, especially in mature economies. The construction industry is sensitive to interest rates and economic and other factors outside our control. Economic downturns may lead to recessions in the construction industry, either in individual markets or globally, and construction spending can fall even in growing economies. While our geographic diversification mitigates risks associated with downturns in construction spending, we may be affected significantly by downturns globally or in individually significant markets.

2.2 Adverse weather lessens demand for our products, which is seasonal in many of our markets

Construction activity, and thus demand for our products, decreases substantially during periods of cold weather, when it snows or when heavy or sustained rains fall. Consequently, demand for our products is significantly lower during the winter in temperate countries and during the rainy season in tropical countries. Our principal markets are located in Western Europe and in North America, where winter weather significantly reduces our first quarter sales, and to a lesser extent our fourth quarter sales. Our operations in these and similar markets are seasonal, with sales generally increasing during the second and third quarters because of normally better weather conditions. However, high levels of rainfall can adversely impact our operations during these periods as well. Such adverse weather conditions can materially and adversely affect our results of operations and profitability if they occur with unusual intensity, during abnormal periods, or last longer than usual in our major markets, especially during peak construction periods.

2.3 Competition in our industry could adversely affect our results of operations

We operate in many local or regional markets around the world, and many factors affect the competitive environments we face in any particular market.

These factors include the number of competitors in the market, the pricing policies and financial strength of those competitors, the total production capacity serving the market, the barriers to enter the market and the proximity of natural resources, as well as general economic conditions and demand for construction materials within the market. These factors combine in varying ways in each of our markets, and can adversely impact demand for our products and our results of operations.

2.4 We are exposed to risks inherent in the growing markets in which we operate

In 2005, we derived approximately 33% of our revenues from growing markets, which we define as countries outside Western Europe and North America other than Japan, Australia and New Zealand. Our growth strategy focuses significantly on opportunities in growing markets and we expect that an increasing portion of our total revenues will continue to come from such markets. Our presence in such markets exposes us to risks such as volatility in gross domestic products, significant and unstable currency fluctuations, political, financial and social uncertainty and unrest, high rates of inflation, the possible implementation of exchange controls, less certainty regarding legal rights and enforcement mechanisms and potential nationalization or expropriation of private assets, any of which could damage or disrupt our operations in a given market.

2.5 Increased energy and fuel costs may have a material adverse effect on our results

Our operations consume significant amounts of energy and fuel, the cost of which in many parts of the world has increased substantially in recent years.



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We protect ourselves to some extent against rising energy and fuel costs through long-term supply contracts and forward energy agreements, and by outfitting many of our plants to switch among several fuel sources, including many alternative fuels such as used oil, recycled tires and other recycled materials or industrial by-products. Despite these measures, energy and fuel costs have significantly affected, and may continue to affect, our results of operations and profitability.

See Sections 3.3 (Business description) and 4.6 (Market risks).

2.6 Exchange rate fluctuations could adversely affect our results of operations and financial condition

While we report our results in euros, in 2005 we earned approximately 70% of our revenues in currencies other than the euro, with approximately 30% being denominated in U.S. dollars and Canadian dollars. In addition, at the end of 2005, approximately 73% of our capital employed were located outside the member states of the European Monetary Union. Consequently, exchange rate fluctuations may significantly affect our financial condition and results of operations. This effect may be positive or negative depending on the actual exchange rate movement as well as the nature of any currency hedging instruments we may put in place from time to time.

See Sections 4.4 (Liquidity and capital resources) and 4.6 (Market risks).

 

2.7 We are subject to risks associated with the acquisition of other businesses

Our growth strategy involves, in part, the acquisition of new operations and the integration of those operations with our own. Our strategy may not be successful if we cannot identify suitable acquisition targets or complete acquisitions at appropriate prices. Also, synergies from acquisitions may prove less than we originally expect. Further, acquisition candidates may have liabilities or adverse operating issues that we fail to discover prior to the acquisition. If we fail to implement a successful acquisition strategy, we may not be able to grow in the long term at an acceptable rate.

In connection with our growth strategy through external acquisitions, we may announce potential or actual acquisitions or investments at any time. Financing for these acquisitions may be secured through the issuance of new shares or on an increase in our debt. Such acquisitions and investments could dilute the interests of our existing shareholders or increase our debt burden and may cause our share price to fall.

2.8 We do not control some of the businesses in which we have invested

We do not have a controlling interest in some of the businesses in which we have invested and may make future investments in which we will not have a controlling interest. Some key matters, such as approval of business plans and the timing and amount of cash distributions, may require the consent of our partners or may be approved without our consent. These and other limitations arising from our investments in companies we do not control may prevent us from achieving our objectives for these investments.

2.9 We are restricted by the rights of minority investors in some of our subsidiaries

We conduct our operations through many subsidiaries, some of which have one or more minority investors.

The interests of such minority investors are not always aligned with ours. Restrictions arising from minority interests may adversely impact our operating and financial strategies and results by, among other things, impeding our ability to implement organizational efficiencies through transferring cash and other assets from one subsidiary to another to allocate assets most effectively.

2.10 An increase in our indebtedness could limit our operating and financial flexibility

We have significant indebtedness outstanding, which may increase in the future, for example as a result of the offer we launched recently to purchase the outstanding shares of Lafarge North America Inc. that we do not already own. If our total debt increases materially a) we could face increased financial charges, b) we may need to allocate a greater portion of our operating cash flow to cover debt service payments, c) our credit ratings may be downgraded, with resultant increases in our borrowing costs and a possible decrease in the availability of adequate financing sources, d) our exposure to interest and exchange rate fluctuations may increase substantially, and e) lenders may impose significant restrictions on our capital resources and/or operations. Some of our debt agreements contain and some of our future debt agreements may contain financial, operating and other covenants and obligations that could limit our operating and financial flexibility. Our ability to comply with these obligations depends on the future performance of our businesses. Our failure to abide by these obligations or to meet these covenants may impair our ability to finance operations, distribute dividends, finance acquisitions and expansions and maintain flexibility in managing our operations.


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2.11 Our ability to pay dividends and repay debt depends on our ability to transfer income and dividends from our subsidiaries

We are a holding company with no significant assets other than direct and indirect interests in the many subsidiaries through which we conduct operations. A number of our subsidiaries are located in countries that may impose regulations restricting the payment of dividends outside of the country through exchange control regulations. To our knowledge, there are currently no countries in which we operate that restrict payment of dividends. However, there is no assurance that such risk may not exist in the future.

Furthermore, the continued transfer to us of dividends and other income from our subsidiaries may be limited by various credit or other contractual arrangements and/or tax constraints, which could make such payments difficult or costly. We do not believe that any of these covenants or restrictions will have any material impact on our ability to meet our financial obligations. However, if in the future these restrictions are increased and we are unable to ensure the continued transfer of dividends and other income to us from these subsidiaries, our ability to pay dividends and make debt payments will be impaired.

2.12 Changes in the cost or availability of raw materials supplied by third parties may adversely affect our operating and financial performance

We generally maintain our own reserves of limestone, gypsum, aggregates and other materials that we use to manufacture our products. Increasingly, however, we obtain certain raw materials from third parties who produce such materials as by-products of industrial processes, such as synthetic gypsum, slag and fly ash. While we try to secure our needed supply of such materials through long-term renewable contracts, we have not always been, and may not in the future be, able to do so. Should our existing suppliers cease operations or reduce or eliminate production of these by-products, our costs to procure these materials may increase significantly or we may be obliged to procure alternatives to replace these materials which may affect our results of operations.

2.13 Governmental policies and laws, particularly those relating to protection of the environment, significantly impact our operations

Our operations are regulated extensively by national and local governments, particularly in the areas of land use and protection of the environment (e.g. regulations relating to greenhouse gases). Our operations require numerous governmental approvals and permits, which often require us to make significant capital and maintenance expenditures to comply with zoning and environmental laws and regulations. In addition, future developments, such as the discovery of new facts or conditions, stricter laws and regulations, or stricter interpretation of existing laws or regulations, may impose new liabilities on us, require additional investments by us, or prevent us from opening or expanding plants or facilities that could have a material adverse effect on our financial condition or results of operations.

While we are not currently aware of any environmental liabilities or of any non-compliance with environmental regulations that we expect will have a material adverse effect on our financial condition or results of operations, environmental matters cannot be predicted with certainty and there can be no assurance that the amounts we have budgeted and reserved will be adequate.

See Section 3.5 (Environment).

 

2.14 The price of our ADSs and the U.S. dollar value of our dividends or other distributions fluctuate with changes in the U.S. dollar/euro exchange rate

Since our ADSs trade in U.S. dollars and the underlying shares trade in euros on the Eurolist of Euronext Paris, the value of our ADSs will change with fluctuations in the U.S. dollar/euro exchange rate. Further, since any dividends we declare will be denominated in euros, exchange rate fluctuations will affect the U.S. dollar equivalent of dividends received by holders of ADSs.


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2.15 You may not be able to exercise preemptive rights for shares underlying our ADSs, nor may you be able to sell such rights

French law provides our shareholders with preemptive rights (“droits préférentiels de souscription”) to subscribe on a pro rata basis for cash for the issuance of new shares or other securities whenever we issue such shares or securities. Our shareholders may waive such rights with respect to a particular offering, either individually or collectively, at an extraordinary general meeting of our shareholders. Preemptive rights not waived are transferable during the subscription period for the applicable offering and may be quoted on the Eurolist. U.S. holders of ADSs may not exercise preemptive rights associated with the shares underlying their ADSs unless a registration statement is filed and effective or an exemption from registration is available under the U.S. Securities Act of 1933, as amended. We cannot assure you that we will file such a registration statement (and if filed, that it will be declared effective) or that an exemption will be available for any particular offering we may make in the future. Whether we file such a registration statement will depend on our evaluation at the time of the costs and potential liabilities associated with such a registration statement and the benefits of enabling the exercise by U.S ADS holders of preemptive rights associated with the underlying shares, as well as any other factors we consider appropriate at the time. If ADS holders are unable to exercise any preemptive rights in the future, their interests in us will be diluted.

As ADS depository, JP Morgan Chase Bank may sell unexercisable preemptive rights and distribute the net proceeds to ADS holders. If the depository determines, in its discretion, that such rights cannot be sold, the rights will lapse. If the depository does not sell applicable preemptive rights and they lapse, not only will ADS holders’ interest in us be diluted, but they also will not realize any value from the granting of preemptive rights.

2.16 Holders of ADSs may be subject to additional risks related to holding ADSs rather than shares

ADS holders may lose some or all of the value of a dividend or other distribution arising from their interest in us because of the depository’s need to effect further transactions to transfer such value to ADS holders. For example, the depository may be unable to convert a foreign currency into dollars when the applicable exchange rates are fluctuating, thereby reducing the value of the ultimate distribution to ADS holders. Also, there can be no assurance that the depository can convert any currency at a specified exchange rate or sell any property, rights, shares or other securities at a specified price, or that any of such transactions can be completed within a specified time period, all of which may reduce the value to ADS holders of the original transaction.

ADS holders may not receive voting materials in time to instruct the depository to vote on matters that come before holders of the underlying shares. ADS holders, or those who hold ADSs through brokers, dealers or other third parties, may not have the opportunity to exercise a right to vote at all. ADS holders may not receive copies of all reports from us or from the depository. ADS holders may need to visit the depository’s offices to inspect any reports issued.

We and the depository may amend or terminate the deposit agreement without ADS holders’ consent in a manner that could prejudice ADS holders.

2.17 You may not be able to effect claims or enforce judgments against us or our directors or officers for violations of the U.S. securities laws

We are a société anonyme organized under the laws of France.

A majority of our directors and officers are non-U.S. residents. A substantial portion of our assets and the assets of our directors and officers are, and we expect will continue to be, located outside the United States. Consequently, you may not be able to effect service of process within the United States upon us or most of these persons, enforce judgments against us or them in United States courts or enforce or obtain judgments in French courts against us or these persons predicated upon the securities laws of the United States.


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2.18 If we fail to maintain proper and effective internal control, our ability to produce accurate financial statements could be impaired

Our business organization is complex in scope. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we produce accurate financial statements on a timely basis is a costly and time-consuming effort. In connection with Section 404 of the Sarbanes-Oxley Act, we have instituted an annual assessment of the effectiveness of our internal control over financial reporting and our independent auditor issues an attestation report on management’s assessment of such internal control. During this process, we may identify material weaknesses or significant deficiencies in our internal control over financial reporting, or areas for further attention or improvement.

Implementing any appropriate changes to our internal control may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, or take a significant period of time to complete. Such changes may not be effective in maintaining the adequacy of our internal control.

Any failure to maintain that adequacy or our ability to produce accurate financial statements on a timely basis could increase our operating costs and materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or subject to material weaknesses or significant deficiencies or are otherwise perfectible, or that we are unable to produce accurate financial statements may adversely affect our stock price.



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3
Information
on Lafarge

 

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3.1 GROUP HISTORY AND EVOLUTION

18

3.2 INVESTMENTS

19

Significant acquisitions

19

Significant divestures

19

Summary of our consolidated capital expenditures in 2005

19

Capital expenditures in progress or planned for 2006

20

3.3 BUSINESS DESCRIPTION

20

Overview

20

Cement

21

Aggregates & Concrete

27

Roofing

31

Gypsum

34

3.4 ORGANIZATIONAL STRUCTURE

38

Lafarge S.A.’s relationship with its subsidiaries

38

Group relationship with minority shareholders of its subsidiaries

38

3.5 ENVIRONMENT

38

3.6 INSURANCE MANAGEMENT

39

Insurance policies excluding Lafarge North America Inc.

40

Lafarge North America Inc. Insurance Policies

40

3.7 INTELLECTUAL PROPERTY

41



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General presentation

Lafarge S.A. is a limited liability company incorporated in France and governed by French law (société anonyme). We produce and sell construction materials — cement, aggregates, concrete, roofing products, gypsum wallboard, and related products — worldwide, primarily under the commercial name “Lafarge”. Based on sales, we are the world leader in construction materials. Our products are used for residential, commercial and public works construction projects throughout the world, whether for new construction or renovation. Based on both internal and external analyses, we believe that Lafarge is co-leader of the cement industry, the second largest producer of aggregates and concrete worldwide, the largest producer of concrete and clay roofing tiles worldwide and the third-largest manufacturer of gypsum wallboard worldwide.

Our financial reporting currency is the euro (€). In fiscal 2005, we generated 16.0 billion euros in sales and we earned current operating income of 2.4 billion euros and net income Group share of 1.1 billion euros. At year-end 2005, our assets totaled 27.9 billion euros. We currently employ approximately 80,000 people throughout the 76 countries in which we operate. Our shares have traded on the Paris stock exchange since 1923. They are a component of the French CAC-40 market index (and have been since its inception) and are included in the SBF 250 index and the Dow Jones Eurostoxx 50 index. Our shares also trade on the New York Stock Exchange (“NYSE”) under the symbol “LR” in the form of American Depositary Shares (“ADS”). Each ADS represents one-fourth of one share. Our market capitalization totaled 15.9 billion euros at the close of the market on March 22, 2006 including 0.2 billion euros attributable to our treasury shares.

Our strategy

Our strategy is based on two fundamental components: performance and development.

Performance: We strive to benefit from our experience across a broad range of products, geographies and cultures to accelerate internal sharing of best practices and pursue energetically the development and implementation of our performance programs. Each of our Divisions has developed its know-how in strategy, innovation, customer orientation, production, maintenance and logistics as well as administrative efficiency. These programs allow us to use the same managerial and systematic approach in each of our local operations, focusing our teams on the same priorities and using proven models. They contribute to the improvement of the efficiency and responsiveness of our organization, and hence allow us to better unlock all the potential of the Group. With this approach, we believe that we can differentiate our products and services, increase our operating margins, better use our assets and hence create additional value for our customers. One of our key performance indicators is the “return on capital employed after tax”.

Development: We are disciplined in our use of capital, both for internal development and acquisitions. We concentrate on the projects that fit strategically with our existing product lines and satisfy our criteria for financial performance. Our solid financial position, and our strategy of partnership, allow us to finance development in different economic environments and to take advantage of attractive opportunities. This development policy is part of our multi business strategy, comprised of our four Divisions: Cement, Aggregates & Concrete, Roofing and Gypsum.

In summary, we seek to achieve global leadership through excellence in local business management (which we call “multi-local management”) and to grow providing maximum value for our stakeholders.

3.1 Group history and evolution

Lafarge S.A. was incorporated in 1884 under the name “J. et A. Pavin de Lafarge”. Our corporate existence continues through December 31, 2066, which may be extended pursuant to our by-laws. Our registered office is located at 61, rue des Belles-Feuilles, 75116 Paris, France, and our telephone number is +33 1 44 34 11 11. We are registered under the number “542 105 572 RCS Paris” with the registrar of the Paris Commercial Court (Tribunal de commerce de Paris).

We began operations in the early 1800’s when Auguste Pavin de Lafarge founded a lime exploitation enterprise in France. Through steady acquisitions of lime and cement companies throughout France, we became France’s largest cement producer by the late 1930s. We first expanded internationally in the 1860’s when we supplied lime for construction of the Suez Canal. Our international expansion continued in the early twentieth century with new operations in North Africa and the United Kingdom and later when we began operations in Brazil and Canada. Through our 1981 acquisition of General Portland Inc., we became one of the largest cement manufacturers in North America, the operations of which we conduct principally through Lafarge North America Inc., our 53.18% (at December 31, 2005) owned subsidiary whose common stock is traded on the New York Stock Exchange. After further external developments, principally in Western Europe, around the Mediterranean Basin, in Eastern Europe and in Asia Pacific, and following our acquisition of Blue Circle Industries plc in 2001, we are now the co-leader of the cement industry worldwide with production facilities in 43 countries.



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While growing our cement operations internationally, we have also broadened our other longstanding product lines: aggregates, concrete and gypsum. Our aggregates and concrete business expanded slowly over the years, but jumped significantly in 1997 with our acquisition of Redland plc, then one of the principal manufacturers of aggregates and concrete worldwide, and to a lesser extent through our acquisition of Blue Circle in 2001. We first entered the market for gypsum products in 1931, with the production of powdered plaster. Since then we have become the third largest wallboard producer in the world offering a full range of gypsum-based building solutions with operations in 23 countries throughout the world. We entered the roofing business through our acquisition of Redland plc in 1997. Since then, we have developed our roofing activities significantly, both with respect to our industrial presence in 35 countries and the focus on complete roofing solutions we offer today.

In order to achieve higher levels of performance, the Group has an organizational structure based on four Divisions with decentralized local operations and a strong corporate center at the heart of major strategic decisions. Beyond this formal organization, the Group exists through an ambition and a culture that are shared by all our employees, and which are expressed by our Principles of Action.

3.2 Investments

Significant acquisitions

Over the past three year period, we have pursued a strategy of making small-to-medium size acquisitions. Our small-to-medium size acquisitions had an overall positive effect on our revenues amounting to 207 million euros for 2005 compared to 2004.

Significant divestures

Materis. In September 2003 we sold our 33.36% stake in Materis Participations to LBO France, a French investment fund, for a total of approximately 210 million euros. We invested approximately 20 million euros from the proceeds of the sale into a newly created company, Materis Holding Luxembourg SA (equivalent to a 7.27% equity stake). On February 10, 2006 we entered into an agreement with Matinvest 1 for the sale of the totality of the remaining 7.27% in Materis Holding Luxembourg SA. This agreement provides that completion of the sale is conditional upon obtaining antitrust clearances. If the sale is completed we will hold no remaining interest in Materis Holding Luxembourg SA nor in the Materis Group in general.

Molins. In September 2004 we sold our 40.9% stake in Cementos Molins in Spain for 265 million euros.

In the aggregate, negative scope effects on revenues resulting from divestitures amounted to 98 million euros for 2005 compared to 2004.

Summary of our consolidated capital expenditures in 2005

The following table presents our consolidated capital expenditures for each of the two years ended December 31, 2005 and 2004 (i) for sustaining expenditures to maintain or replace equipment and internal development expenditures to enhance productivity or increase capacity and (ii) for external development, which comprises acquisition of industrial assets and equity interests in companies.


 

SUSTAINING AND INTERNAL DEVELOPMENT EXPENDITURES

EXTERNAL DEVELOPMENT EXPENDITURES

2005

2004

2005

2004

Western Europe

475

365

152

136

North America

427

367

149

149

Mediterranean Basin

70

39

4

0

Central and Eastern Europe

71

46

14

44

Latin America

102

51

3

109

Africa

80

62

16

0

Asia/Pacific

115

91

180

98

TOTAL

1,340

1,021

518

536


See Section 4. 4 (Liquidity and capital resources – Net cash used in investing activities) for more information on 2005 capital expenditures.



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Capital expenditures in progress or planned for 2006

We have recently filed an offer in cash to purchase the remaining 46.8% minority stake in Lafarge North America Inc., that we do not own at a price of $ 75 per share. The transaction also includes an offer to purchase all outstanding exchangeable preference shares of Lafarge Canada Inc., a subsidiary of Lafarge North America Inc. This offer, which amounts in total to approximately $3 billion,  will be financed from indebtedness.

See Section 8.4 (Material contracts) and Note 35 to our consolidated financial statements for more details on the offer and its financing terms.

Capital expenditures for 2006 for each of our four Divisions are expected to be approximately:

·

900 million euros for Cement;

·

300 million euros for Aggregates & Concrete;

·

180 million euros for Roofing; and

·

250 million euros for Gypsum.

These amounts, which are geographically spread across our Operational Units, are composed of maintenance expenditures and of internal development expenditures.

See Section 3.3 (Business description) for more information on internal development expenditures.

All of the capital expenditures above will be financed from operating cash flows.

3.3 Business description

Overview

We manage our operations through our Cement, Aggregates & Concrete, Roofing, and Gypsum Divisions. Each Division holds a leading position in its respective industry and represents a separate strategic Business Unit with its own capital requirements and marketing strategies.

We have vertically integrated our operations to varying degrees across and within our Divisions. Our Cement Division supplies most of the cement used by our concrete operations, which also acquires from internal sources most of the aggregates used to produce concrete. We supply aggregates to our asphalt and paving operations. The Gypsum Division manufactures half of the paper used in its gypsum wallboard operations.


In 2005, the contributions to our consolidated sales by Division (after elimination of inter-Division sales) and by geographic area (by destination) were as follows, compared to 2004:

SALES BY DIVISION

2005

VARIATION 2005/2004

2004

 

(MILLION EUROS)

(%)

(%)

(MILLION EUROS)

(%)

Cement

7,595

47.6

11.5

6,810

47.2

Aggregates & Concrete

5,377

33.7

13.3

4,747

32.9

Roofing

1,514

9.5

1.4

1,493

10.3

Gypsum

1,462

9.2

9.1

1,340

9.3

Other

21

0

(54.3)

46

0.3

TOTAL

15,969

100.0

10.6

14,436

100.0




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SALES BY GEOGRAPHIC AREA

2005

VARIATION 2005/2004

2004

 

(MILLION EUROS)

(%)

(%)

(MILLION EUROS)

(%)

Western Europe

6,280

39.3

4.3

6,020

41.7

North America

4,516

28.3

14.7

3,938

27.3

Mediterranean Basin

671

4.2

25.7

534

3.7

Central & Eastern Europe

905

5.7

21.3

746

5.2

Latin America

707

4.4

22.1

579

4.0

Africa

1,414

8.9

18.8

1,190

8.2

Asia/Pacific

1,476

9.2

3.3

1,429

9.9

TOTAL

15,969

100.0

10.6

14,436

100.0


The following schedule presents, for each of the four Divisions, the contribution to consolidated sales and current operating income for the year ended December 31, 2005.

(%)

CONTRIBUTION TO CONSOLIDATED SALES

CONTRIBUTION TO CURRENT OPERATING INCOME

Cement

47.6

75.1

Aggregates & Concrete

33.7

16.9

Roofing

9.5

4.2

Gypsum

9.2

6.4

Other *

-

(2.6)

TOTAL

100.0

100.0

* Mainly holdings. See Chapter 4 (Operating and financial review and prospects).


In the following discussion in this Chapter 3, data regarding sales are presented “by destination”. They include all amounts both produced and sold in the market, as well as any amounts imported into the market by our operations, and exclude the occasional exports to other markets. They are presented before elimination of inter-Division sales.

Data regarding the number of sites and production capacity include 100% of the number of sites and production capacity of all our subsidiaries, whether fully or proportionately consolidated.

The percentage of sales for each region is computed in relation to the total sales of the relevant Division, before elimination of inter-Division sales.

Cement

Cement is a fine powder that is the principal strength-giving and property-controlling component of concrete. It is a high quality, cost-effective building material that is a key component of construction projects throughout the world, including the 43 countries in which our Cement Division has production facilities. Based on both internal and external analyses, and taking into account annual sales, production capacity, broad geographical presence, technological development and quality of service, we believe that we are the world’s co-leading producer of cement. At the end of 2005, our consolidated businesses operated 122 cement, 24 clinker grinding and 6 slag grinding plants, with an annual cement production capacity of 164 million tonnes and sales for the year of approximately 123 million tonnes.

Products

We produce and sell a wide range of cements and hydraulic binders for the construction industry, including basic portland and masonry cements and a variety of other blended and specialty cements and binders. We offer our customers a broad line, which varies somewhat by region. Our cement products (all of which are referred to as “cement” in this report) include speciality cements adapted for use in a variety of environmental conditions (e.g. exposure to seawater, sulfates and other natural conditions hostile to concrete) and specific applications (e.g. white cement, oil-well cements, blended silica fume, blended fly-ash, blended pozzolana, blended slag cements and road surfacing hydraulic binders), natural lime hydraulic binders, masonry cements and ground blast furnace slag.



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We design our cements to meet the varying needs of our customers, including high performance applications where enhanced durability and strength are needed. We also offer our customers technical support in connection with the use of our cements, ordering and logistical assistance to facilitate timely delivery to the customers, and documentation, demonstrations and training relating to the characteristics and appropriate use of our cements.

Production and facilities information

Composition and production of cement

Cement is made by crushing and grinding in proper proportion calcium carbonate (limestone), silica (sand), alumina and iron ore and heating the resulting mixture in a kiln to approximately 1,500˚C. The ore mixture enters the kiln dry. This process is called the “dry process” (by opposition to the older process which uses water) and is used by more than 85% of our plants. Each process produces “clinker,” which is then finely ground with gypsum to make cement. The breakdown of the production cost of cement is estimated as follows: energy 29%, raw materials and consumables 27%, direct production labor and maintenance 32% and depreciation 12%.

Raw materials for making cement (calcium carbonate, silica, alumina and iron ore) are usually present in limestone, chalk, marl, shale and clay and are generally available in most countries. Cement plants are normally built beside large deposits of these raw materials. For most of our cement plants, we obtain these materials from nearby land that we either own or in which we have long term quarrying rights. The cost to obtain these materials historically has not been volatile. We believe the quantity of proven and permitted reserves at our cement plants is adequate to operate the plants at their current levels for their planned life.

Where available, we may substitute ground blast furnace slag or fly ash for certain raw materials when making cement, or mix slag or fly ash with cement at the end of the process. Ground blast furnace slag is a by-product of steel manufacturing and fly ash results from the burning of coal in electric utility plants. These materials may improve certain characteristics of cement. Whether and how they are used depends on the physical and chemical characteristics of the slag or ash and the physical and chemical characteristics required of the cement being produced. These materials help lower our capital costs per tonne of cement produced. Their use is environmentally friendly since it increases cement supplies by recycling post industrial material that otherwise would be used as land-fill. Our ratio of slag and fly ash used in 2005 to produce cement to total cement produced increased to 15.0% from 13.2% in 2004. Use of these materials remains part of our long-term development strategy.

Sourcing and use of fuel optimization

We emphasize efficiency in our sourcing and use of fuel. When possible, we use improved plant designs (such as preheaters to heat raw materials prior to entering the kiln) and less costly fuel waste materials (e.g. tires, used oils) to decrease our dependency on more expensive fossil fuels. In 2005, fuel waste materials accounted for 9% of our worldwide cement manufacturing fuel consumption, with 74 of our cement plants using some form of fuel waste materials. The availability of fuel waste materials varies widely from region to region, and in particular between developed countries (where it is more plentiful) and growing markets (where it is less plentiful). In addition, many of our plants can switch between several fuels with minimal interruption in production, allowing us to benefit from lower cost fuels when available.

Manufacturing expertise

We have developed significant cement manufacturing expertise through our experience operating 122 cement production facilities worldwide. We strive to share our collective knowledge throughout the Group to improve our asset utilization, lower our production costs and increase the performance of our products. Through this culture of knowledge sharing, we seek to spread best production practices and employ benchmarking tools worldwide to drive superior performance and ongoing operating improvements.

Customers

In each of the major geographic regions in which we operate, we sell cement to several thousand customers, primarily concrete producers, pre-cast concrete product manufacturers, contractors, builders, municipal authorities and masons, as well as building materials wholesalers. Our cement is used in three major segments of the construction industry:

·

civil engineering projects;

·

residential and commercial construction and

·

renovation;

for a wide range of projects, such as offices, homes, dams, highways, tunnels, plants and airports.

Cement performance characteristics and the service requirements of our customers vary widely depending on the projects in which our cement is used, as well as the experience and expertise of our customers. We strive to meet our customers’ diverse requirements and to deliver differentiated solutions that enable them to create more value in their businesses.



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Our customers generally purchase cement from us through current orders in quantities sufficient to meet their immediate requirements. Occasionally, we will enter into contracts to supply some or all of the cement required for a larger construction project over the life of the project or with certain purchasers to supply certain volumes of cement in their respective markets. However, backlog orders for our cement is normally not significant.

Markets

Cement industry

Historically, the cement industry has been globally fragmented, with most markets served by local producers. Beginning in Europe in the 1970s, the United States in the 1980s, and later continuing through Asia (outside China), the cement industry experienced significant worldwide consolidation. Today, there are a handful of multinational cement companies, including Lafarge and our major worldwide competitors: Holcim (Switzerland), Cemex (Mexico), HeidelbergCement (Germany) and Italcementi (Italy). These companies compete against each other and local producers in various markets around the world. New entrants to the industry face significant initial capital costs, since cement production is capital intensive: to construct a new 1 million tonnes annual dry process cement production line costs between 50 million euros and 160 million euros depending on the country in which it is located.

Cement markets

The world’s major cement markets are Western Europe, North America and Asia. We conduct substantial operations in each of these markets, along with other multinational cement companies and local cement producers. In more mature markets, a country’s cement demand generally follows the country’s level of infrastructure and construction spending, which in turn typically rises and falls in connection with that country’s economic cycles. Our worldwide diversification offers protection against dramatic regional swings in cement demand.

We believe the potential for long-term growth in the cement industry is greatest in the world’s growing markets, which we define as countries outside Western Europe and North America other than Japan, Australia and New Zealand. A country’s cement demand generally follows growth in per capita income, which generally correlates with changes in the country’s industrialization. As growing markets become industrialized, cement consumption tends to grow rapidly with increased expenditures on public works and housing. Because of the growth potential they offer, Lafarge has invested (and will continue to consider investment opportunities) in the world’s less mature, growing markets. In these markets, we sold 3,955 million euros and 3,411 million euros of cement during 2005 and 2004. These sales accounted for 48% and 46% of our total cement sales for each such year.

Location of cement plants and of cement markets

Cement is heavy and costly to transport over land. Consequently, the competitive radius of a typical cement plant for most common types of cement extends no more than 300 kilometers. However, cement can be shipped economically by sea and inland waterway over great distances, extending greatly the competitive radius of cement plants with access to waterborne shipping lanes. Thus, the location of a cement plant and the cost to transport the cement it produces through its distribution terminals bear significantly on the plant’s competitive position and the prices it may charge.

Cement quality and services

Price, however, is not the only basis on which cement is sold. The reliability of the producer’s supply, the quality of a producer’s cement, and the service and technical capabilities of the manufacturer also impact a cement producer’s competitive position. Thus, we strive to ensure consistent cement quality over time, to maintain a high degree and quality of support services, and to offer special purpose cements as a means to differentiate ourselves from our competitors.

Breakdown by geographic market

We produce and sell cement in those regions and countries listed in the tables below.

The following presentation shows the region’s percentage contribution to our 2005 cement sales in euros “by destination”, as well as the number of plants we operate, our cement production capacity and our approximate market share (measured by sales volumes) in each country as of or for the year ended December 31, 2005.

The approximate market shares have been calculated based on information and estimations contained in the Construction & Building Materials Sector report published by JP Morgan in August 2005 (the “JP Morgan Report”).



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Western Europe (30.9% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

France

10

3

9.2

37

United Kingdom

8

-

7.8

45

Greece

3

--

10.0

53

Spain

3

1

5.3

10

Germany

3

-

3.4

10

Austria

2

-

1.9

28

Italy

2

-

1.2

3


Most Western European cement markets are mature. Consumption varies dramatically within the region, however, with Greece and Spain consuming much greater volumes per capita than France. The region as a whole consumed close to 205 million tonnes of cement in 2005, based on the JP Morgan Report estimations. We sold 31.9 million tonnes of cement in Western Europe in 2005, 32.0 million tonnes in 2004 and 30.6 million tonnes in 2003. The cement industry is highly competitive in all major Western European markets. A number of active local producers remain present despite the relative concentration of production among several multinational cement producers.

North America (21.5% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

United States

13

2

13.2

13

Canada

7

2

7.0

35


North America is a mature cement market. Sales are seasonal in Canada and much of the East Coast and Mid West as temperatures in the winter fall below minimum setting temperatures for concrete. The region as a whole consumed close to 135.3 million tonnes of cement in 2005, based on the JP Morgan Report estimations. We sold 21.2 million tonnes of cement in North America in 2005, 21.0 million tonnes in 2004 and 18.0 million tonnes in 2003. Approximately 12% of our cement shipments in North America were made to our Aggregates & Concrete Division. The cement industry is highly competitive in all major North American markets, with production generally concentrated among the major multinational cement producers.



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Central and Eastern Europe (7.1% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

Poland

2

-

4.4

20

Romania

2

1

4.5

30

Moldavia

1

-

1.4

54

Russia

2

-

4.1

10

Ukraine

1

-

1.3

11

Serbia-Montenegro

1

-

2.0

50

Slovenia

1

-

0.6

38

Czech Republic

1

-

1.2

9


We believe that entry into the European Union of a number of countries in this region will influence positively their long-term growth prospects. The region as a whole consumed close to 93 million tonnes of cement in 2005, based on the JP Morgan Report estimations. We sold 11.2 million tonnes of cement in Central and Eastern Europe in 2005, 10.1 million tonnes in 2004 and 9.0 million tonnes in 2003. A portion of the cement and clinker production capacity of this region produced exports for sale to other regions. The cement industry is competitive in all major Central and Eastern European cement markets, with production spread across a variety of multinational, regional and local cement producers.

Mediterranean Basin (6.7% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

Jordan

2

-

4.6

90

Morocco

4

-

4.2

41

Turkey

4

4

5.2

8

Egypt

2

-

3.1

8


Many Mediterranean Basin cement markets have only recently opened up to competition after years of state ownership. We believe that growing markets in this region have high growth potential in the medium to long-term as they industrialize and urbanize. The region as a whole consumed close to 138.4 million tonnes of cement in 2005, based on the JP Morgan Report estimations. We sold 10.5 million tonnes of cement in the Mediterranean Basin in 2005, 9.7 million tones in 2004 and 9.9 million tonnes in 2003. A portion of the cement and clinker production capacity of this region produced exports for sale to other regions. The cement industry is competitive in all major Mediterranean Basin cement markets, with production spread across a variety of multinational, regional and local cement producers.



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Latin America (6.1% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

Brazil

5

-

4.0

7

Chile

1

-

2.0

38

Venezuela

2

-

1.6

23

Ecuador

1

-

0.7

20

Honduras

1

1

1.3

55

Mexico

1

-

0.4

NS

French Antilles

-

3

1.0

100


Recent cement activity has been slow in many Latin American markets due to both political and economic uncertainties. Retail sales, mainly for individual construction use, account for much of the demand in several Latin American markets. The region as a whole consumed 98.3 million tonnes of cement in 2005, based on the JP Morgan Report estimations. We sold 6.9 million tonnes of cement in Latin America in 2005 following our entry into Ecuador, 6.0 million tonnes in 2004 and 6.2 million tonnes in 2003. The cement industry is competitive in all major Latin American cement markets, with production spread across a variety of multinational, regional and local cement producers.

Sub-Saharan Africa (13.8% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

South Africa

1

1

2.4

18

Zambia

2

-

0.7

91

Malawi

-

1

0.2

75

Tanzania

1

-

0.3

38

Zimbabwe

1

-

0.4

29

Kenya

1

1

2.0

60

Uganda

1

-

0.3

56

Nigeria

3

-

3.0

19

Cameroon

1

1

1.1

95

Benin

1

-

0.7

34


Political and economic uncertainties impact many of the markets in Sub-Saharan Africa from time to time, causing consumption in individual markets to fluctuate over time. Sub-Saharan Africa as a whole consumed 45.7 million tonnes of cement in 2005, based on the JP Morgan Report estimations and our internal analysis. We sold 12.8 million tonnes of cement in the countries where we are present in 2005, 12.4 million tonnes in 2004 and 11.2 million tonnes in 2003. Strong sales volume increase (approximately +10%) in our core markets was partially offset by lower sales to non-core markets. The cement industry is competitive in Sub-Sahara African cement markets, with production spread across a variety of regional and national cement producers.



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Asia (13.9% of Division sales for 2005)

 

NUMBER OF

CEMENT PRODUCTION CAPACITY

APPROXIMATE MARKET SHARE

 

CEMENT PLANTS

GRINDING PLANTS

(MILLION TONNES)

(%)

China

11

4

12.9

2

South Korea

2

1

8.5

10

India

2

1

6.2

3

Malaysia

3

1

12.0

41

Philippines

6

2

6.5

32

Indonesia

1

-

0.0 *

3

* Our Banda Aceh, Indonesia, plant was severely impacted during the 2004 tsunami and is under reconstruction.


We believe that long-term growth prospects for the Asian region remain very favorable. The region as a whole consumed close to 1,345 million tonnes of cement in 2005, based on the JP Morgan Report estimations. We sold 28.7 million tonnes of cement in the region in 2005, 28.2 million tonnes in 2004 and 23.1 million tonnes in 2003. The cement industry is highly competitive in Asia, with production spread across a variety of regional and national cement producers. We are building a 1.2 million tonnes plant in northeastern Bangladesh at an expected total project cost of approximately 260 million euros, including other facilities and added installations. Our interest in this plant is held through a subsidiary which we hold through a 50/50 joint venture with Cementos Molins. We are also engaged in the construction of a cement grinding plant in Vietnam. In Japan, we hold a 39% indirect interest in Lafarge Aso Cement (accounted for by the equity method and therefore not included in the table above), which operates two plants with a combined capacity of 3 million tonnes. A number of national and  international cement producers are present on these markets, which are highly competitive.

Cement Trading Activities

We also manage worldwide cement trading activities, which are conducted primarily through our subsidiary Cementia Trading. They allow us to increase our international sales and explore new markets without investing the significant capital usually required to enter a market. They also allow us to balance our worldwide production capacities to meet changes in demand throughout the world. During 2005, Cementia Trading, purchased and sold approximately 11 million tonnes of cement and clinker. Our subsidiary Marine Cement acts mainly as an importer and distributor of cement in Reunion, the Seychelles and the Red Sea countries. Marine Cement sold approximately 2.4 million tones of cement in 2005, which it purchased from our own subsidiaries as well as third-parties.

Aggregates & Concrete

Aggregates, concrete and asphalt are, like cement, key components of construction projects throughout the world. Based on volumes sold in 2005, we believe that Lafarge is the second largest producer of aggregates and concrete worldwide. At the end of 2005, our consolidated businesses operated 567 aggregates quarries and 1,141 concrete plants in 27 countries and sold during the year approximately 240 million tonnes of aggregates and 39 million m3 of concrete. Our Aggregates & Concrete Division also produces pre-cast concrete products and asphalt in several markets, and provides road contracting and surfacing services.

We manage our aggregates, concrete and asphalt businesses in the same Division for a number of reasons:

·

the customer base is similar across these lines of products and services;

·

each product line generally serves local markets through large numbers of subsidiaries;

·

finally, it is generally efficient to produce concrete and asphalt at or close to our aggregate quarries, so we can pool management, equipment, services and marketing efforts, thereby reducing overall operating costs.

We are vertically integrated to varying degrees between our Aggregates & Concrete and Cement Divisions, and within our Aggregates & Concrete Division itself. In many of our markets, our Cement Division supplies substantial volumes of cement to our own concrete operations. Similarly, our aggregates operations supply a substantial volume of aggregates required for our concrete, asphalt and paving operations.



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Products

Aggregates

Aggregates are used as raw material for concrete, masonry, asphalt and other industrial processes, and as base materials for roads, landfills and buildings. The primary aggregates we produce and sell are hard rock (usually limestone and granite), which we crush to various sizes for differing construction applications, natural sand and gravel, and to some extent, depending on the market, recycled asphalt and concrete. Aggregates differ in their physical and chemical properties, particularly as relates to granularity and hardness. Local geology determines the type of aggregates available in a given market and not all types of aggregates are available in all markets.

Concrete

Concrete is a blend of cement, aggregates, admixtures and water which hardens to form the world’s most used building material. We produce and sell a wide range of concrete and masonry mixes to meet our customer’s diverse needs. Tensile strength, resistance to pressure, durability, set times, ease of placing, workability under various weather and construction conditions are but a few of the characteristics that our customers consider when buying concrete. From the very basic to the cutting edge, we strive to offer as broad an inventory of concrete mixes as reasonably possible. Through our research and development resources, we attempt to develop concrete mixes for specific purposes. In recent years, we have developed new products such as: Agilia®, which offers superior coverage and filling abilities and self-leveling capability with enhanced durability and appearance; and Ductal®, a self-placing ductile concrete that can “bend” without breaking and which has approximately ten times the compressive strength of traditional concrete. In addition, in some markets we recently introduced decorative concretes through our Artevia Color™ series.

Asphalt and Paving

In North America and the United Kingdom, we also produce and sell asphalt for road surfacing and paving. Asphalt consists of 90-95% of dried aggregates mixed with 5-10% of heated liquid bitumen, a by-product of the oil refining process, that acts as a binder. In these markets, we also provide road contracting and surfacing services.

Production and facilities information

Aggregates

Aggregates production involves primarily blasting hard rock from quarries and then crushing and screening it to various sizes to meet our customer’s needs. Aggregates production also involves the extraction of sand and gravel from both land and marine locations, which generally requires less crushing but still requires screening to different sizes. The production of aggregates is heavy equipment intensive and involves the regular use of loaders, large haul trucks, crushers and other heavy equipment at our quarries.

We obtain our hard rock, sand and gravel from land that we either own or in which we have long term quarrying rights, and for which we have obtained applicable government permits allowing us to perform quarrying operations. Across our markets, we regularly search for new material reserves to replace depleting deposits well in advance of their exhaustion and we work to obtain necessary government permits allowing for the extraction of our raw materials. At December 31, 2005 we estimate that we have permitted reserves in our different markets in excess of 20 years for serving such markets at current production levels. Significant aggregate reserves also exist for which we have either not yet received or requested extraction permits.

Concrete

Concrete is produced by blending aggregates, cement, chemical admixtures in various ratios and water at concrete production plants and placing the resultant mixture in the drums of concrete trucks where it is mixed further and delivered to our customers. We obtain most of our concrete raw materials (e.g. cement and aggregates) from internal sources and purchase the remainder from other suppliers when necessary. Concrete is produced at low capital-intensive plants consisting of raw material storage facilities and equipment for combining the raw materials in the desired ratio and placing the mixture into concrete trucks. Most concrete production plants are fixed facilities, although we operate a number of portable concrete plants which we can locate at our customers’ (usually larger) construction sites if needed.

A myriad of concrete mix designs are possible to achieve the performance characteristics desired by our customers. Cement and aggregate chemistries may be varied, chemical admixtures may be added (such as retarding or accelerating agents) and other cementitious materials (such as fly ash or slag) may be substituted for portions of cement, all to adjust the concrete performance characteristics desired by the customer. Consequently, significant technical expertise and quality control are required to address the many construction issues our customers face, such as concrete setting time, pumpability, placeability, weather conditions, shrinkage and structural strength. Through our extensive research and development activities, we focus on supplying concrete that meets these various needs of our customers.



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Because of concrete’s limited “setting” time, delivery logistics are key when selling concrete. Consequently, we have focused significant energies throughout our markets to ensure the cost efficient and timely delivery of our concrete.

Raw material prices vary considerably across the many markets in which we operate and generally account for approximately 70% of the costs to supply concrete. Cement generally accounts for over half of the raw material cost. Given the significantly high percentage of raw materials costs, we strive to adjust concrete mix designs to optimize our raw material usage. Delivery represents the next largest cost component, approximately 20% depending on the market.

Pre-cast concrete blocks, pavers and other products

These products are manufactured by pouring the proper type concrete into molds and compacting the concrete through pressure, vibration or a combination of the two. These products are normally produced and sold in standard sizes, which may vary from market to market.

Asphalt and Paving

As described above, asphalt is produced by blending aggregates with liquid bitumen at asphalt production plants. We obtain much of the aggregates needed to produce asphalt from internal sources and purchase the bitumen from third party suppliers. Bitumen is a by-product of petroleum refining, the price of which is tied to oil prices. Asphalt is produced at low capital-intensive plants consisting of raw material storage facilities and equipment for combining raw materials in the proper ratio under heat. Our asphalt plants range in output from 5,000 to 500,000 tonnes per year and are located in certain regions of North America and the United Kingdom. In conjunction with our asphalt production, we also provide road contracting and surfacing services in these regions, where we frequently have leading positions based on sales.

Customers

We sell our aggregates, concrete and asphalt primarily in local markets to thousands of unaffiliated customers throughout the world. Markets are local because of the high cost to transport these products over land and because most of these products are delivered via trucks. However, where our quarries have access to shipping lanes or railroads, we may ship aggregates over significant distances.

We sell aggregates primarily to concrete producers, manufacturers of pre-cast concrete products (pipes, curbs, building blocks, block pavers), asphalt producers, road contractors, masons and construction companies of all sizes. In some markets, we sell substantial volumes of aggregates for use in various industrial processes, such as steel manufacturing. We also use a significant portion of our aggregates to produce concrete and asphalt that we sell. We sell concrete primarily to construction and road contractors ranging from major international construction companies to small residential builders, farmers or do-it-yourself enthusiasts. We sell asphalt primarily to road contractors for the construction of roads, driveways and parking lots, as well as directly to state and local authorities.

Our customers generally purchase aggregates, concrete and asphalt through current orders in quantities sufficient to meet their immediate requirements, often through competitive bidding processes. Occasionally, we enter into agreements to supply aggregates to certain plants, which produce concrete, asphalt or pre-cast concrete products. These contracts tend to be fairly short term in nature and many are negotiated annually. Backlog orders for our aggregates, concrete and asphalt are normally not significant.

Markets

Description of markets and of our position in these markets

Most local aggregates, concrete and asphalt markets are highly fragmented and are served by any number of multinational, regional and local producers.

Globally the aggregates industry is in the early stages of consolidation. We face competition within our local markets from independent operators but also regional producers such as in the United States (i.e. Vulcan Materials and Martin Marietta Materials) and international players (i.e. Hanson and CRH). Industry consolidation is more advanced in the United Kingdom, where the top five producers account for approximately 75% of the market.

Barriers to enter the aggregates industry are high. Environmental and planning laws in many countries constrain new quarry development. Further, plant and equipment costs for a new quarry generally range from 2 million to 4 million euros (less than 500,000 tonnes quarry) to in excess of 45 million euros for a “super” quarry, excluding the cost of land and minerals rights. Consequently, aggregates prices are less price constrained, particularly in markets where there are limited reserves. However, substantial aggregates industrial capacity already exists in most markets and, to the extent new reserves are available for which permits can be obtained, only moderate capital investment is usually required for incumbent producers to bring additional aggregate sources into production.



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We believe we have a strong competitive position in aggregates. Generally, our reserve positions are strong in most markets. Our worldwide experience permits us to develop, employ and refine performance programs through which we share and implement best practices relating to strategy, sales and marketing, manufacturing and land management. Also, we have a strong understanding of the needs of most of our aggregates customers since we are vertically integrated in their predominant lines of business. Finally, we believe that we have a reputation for responsible environmental stewardship and land restoration, which assists us in obtaining new permits more easily and encourages landowners to deal with us as the operator of choice.

Consolidation in the concrete industry is less pronounced and, as with aggregates, we face competition from numerous independent operators throughout our markets; however, we do compete with multinational firms such as Cemex plc, HeidelbergCement, Holcim, Hanson, CRH and Rinker internationally. Several of these competitors (i.e. Holcim, Cemex and CRH) have followed our strategy of vertically integrating from cement downstream into aggregates and concrete operations.

Low barriers to entry in the concrete industry, along with readily available and competitively priced raw materials enable competitors to quickly bring additional capacity to market, thereby tending to constrain concrete prices.

To improve our competitive position in local concrete markets, we try to cluster our plants to optimize our delivery flexibility, production capacity and backup capability. We evaluate each local market periodically and may realign our plants to maximize profitability when market demand declines or capacity rises too high. Recently, we increased our use of mobile plants in a number of markets to increase our flexibility in realigning plants in response to market changes and to meet customers’ needs. We have developed substantial technical expertise relating to concrete. Consequently, we can provide significant technical support and services to our customers to differentiate us from competitors. Also, as a consequence of this technical expertise, we recently developed several new products, such as Agilia® and Ductal®. Again, our worldwide experience permits us to further differentiate ourselves based on product quality and capability.

Like concrete, asphalt must be delivered fairly quickly after it is produced. Thus, the competitive radius of an asphalt plant is fairly limited and asphalt markets tend to be very local. Asphalt sales are, on the whole, made directly between the asphalt producer and the customer, with only very limited use of intermediate distributors or agents since prompt and reliable delivery in insulated vehicles is essential.

Location of our markets

A majority of our aggregates, concrete and asphalt operations are located in Western Europe and North America, where national demand generally moves in line with a country’s level of infrastructure and construction spending. It is not economical to ship aggregates over large distances and concrete and asphalt cannot be transported over distances that involve more than about one hour of traveling time. Consequently, markets for these products tend to be local in nature and while brand recognition and loyalty do play a role in sales of these products, local customers tend to choose producers based on location, quality of product, reliability of service and price. Furthermore, demand for aggregates, concrete and asphalt depends mostly on local market conditions, which can vary dramatically within and across a broader regional or national market.

Generally, we restrict our aggregates and concrete operations to markets where the nature and enforcement of applicable regulations provide a “level playing field”. We usually avoid countries where local operators have an unfair competitive advantage because they are not obliged to follow appropriate environmental and labor standards, since they either do not exist locally or are not enforced. Consequently, we are very selective in choosing the growing markets in which we wish to conduct our aggregates and concrete operations, selecting only those where the appropriate standards are in place.

Breakdown by geographic market

We produce and sell aggregates and concrete in those regions and countries of the world listed in the table below. The table shows the number of sites we operated at December 31, 2005 and the volume of aggregates and concrete our consolidated operations sold in 2005.

Volumes sold take into account 100% of volumes from fully consolidated subsidiaries and the consolidation percentage for proportionately consolidated subsidiaries.



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REGION/COUNTRY

NUMBER OF INDUSTRIAL SITES

VOLUMES SOLD

 

AGGREGATES

CONCRETE

AGGREGATES(MILLION TONNES)

CONCRETE(MILLION M3)

WESTERN EUROPE

    

France

133

262

46.7

7.3

United Kingdom

62

131

19.1

2.5

Spain/Portugal

15

125

9.8

3.6

Greece

4

21

2.3

1.4

Other

4

24

2.2

0.8

NORTH AMERICA

    

Canada

215

143

62.0

4.9

United States

74

164

73.2

6.9

OTHER

    

South Africa

21

48

6.1

2.0

Brazil

4

44

2.2

0.7

Chile

4

53

3.5

2.3

Malaysia/Singapore

2

49

1.0

3.2

Turkey

9

20

2.3

1.5

Other

20

57

9.5

1.9


In 2005, our asphalt operations produced and sold a total of 10.5 million tonnes in the United States, Canada and the United Kingdom.

Roofing

We manufacture and sell clay and concrete roof tiles designed to cover pitched residential and non-residential roofs, the predominant type of roof used in residential housing in Western Europe and North America. We also sell a variety of other roofing components used in the construction or renovation of pitched roofs and provide related services to customers who use our roofing products. Through our product offering, we offer complete roofing systems providing total roof solutions for our customers’ buildings.

Based on volumes sold, we believe we are the world’s largest producer of concrete and clay roof tiles and the leading manufacturer of chimney systems in Europe. At the end of 2005, our consolidated businesses operated 104 concrete tile production plants (with 557 million square meters maximum annual capacity), 25 clay tile production plants (with 41 million square meters maximum annual capacity) and 33 other plants where we produce chimneys and other roofing products. During 2005, we sold 124 million square meters of concrete roof tiles, 27 million square meters of clay roof tiles and 3.8 million meters of chimneys. We conduct industrial roofing operations in 35 countries, principally in Western Europe which accounted for 72% of our 2005 roofing sales, and through a joint venture in North America which accounted for 9% of our 2005 roofing sales. We are expanding into other regions — such as Asia Pacific — which accounted for 19% of our 2005 roofing sales.

Products

Roof tiles

We produce and sell a wide variety of clay and concrete roof tiles in many shapes, profiles, surfaces and colors. Through production and coating technology innovations, our tiles are designed to meet varying aesthetic, quality and durability demands, including improved dirt-repellant surfaces, longer color durability, more colors, and larger sizes designed to improve efficiency of installation.

Our concrete tiles range from uncoated tiles and classic red polymer coated tiles to premium tiles, designed to look like traditional clay tiles or like wood or slate shingles. Our clay tiles come in a variety of sizes (ranging from 10 to 60 tiles per square meter) and surfaces, including single colored tiles, multicolored tiles that appear aged, and premium-glazed tiles.

Sales of concrete and clay tiles accounted for approximately 48% and 18% of total Roofing Division 2005 sales, respectively.



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Roofing components

We sell a wide range of complementary roofing products designed to cover all functional aspects of roof construction, including safety gratings, snow guard tiles, ventilation underlays, skylights and prefabricated roof elements. In addition, we also offer photovoltaic and solar thermal roof systems that generate electricity and warm water, respectively. Sales of such products accounted for approximately 20% of total Roofing Division 2005 sales.

Chimneys

We sell ready-to-install insulated ceramic chimneys (comprised of flue liners, insulation and blockstones), ceramic chimney ventilation systems and a wide range of complementary accessories. Our chimney products include multi-wall chimneys with cavity ventilation designed to prevent moisture damage and isostatic ceramic liners designed to withstand temperature variations. In the United Kingdom, we also sell steel chimney systems. We also offer accessories necessary to assemble chimneys on site, including flue gas connection to the boiler, cleaning doors, condensate handling, chimney coverage, glue, mortar and top cover plate, as well as chimney restoration products. Chimney and related product sales accounted for approximately 14% of total Roofing Division 2005 sales.

Production and facilities information

Concrete roof tiles

Concrete roof tiles are manufactured by extruding sand-based concrete mixes into molds or pallets, removing the tiles once dry and curing them for two to four weeks, after which they are ready to be installed. Surface textures and colors may be varied by adding additional layers to the weather side of the tile while in the mold. Our simple tiles are made with a single layer of concrete. More advanced tiles require additional layers.

To construct a new concrete tile plant costs between 4 million euros and 20 million euros depending on the location, capacity, degree of automation and product range. Raw materials (cement and sand) account for approximately 46% of the cost to produce concrete roof tiles, and we obtain such materials either from Lafarge or from outside suppliers. The cost of such raw materials historically has not been volatile. Direct labor, other fixed costs, depreciation and energy account for approximately 17%, 24%, 10% and 3%, respectively, of our concrete tile production costs.

Clay roof tiles

Clay roof tiles are manufactured by molding under pressure a mixture of natural clays and heating them in a tunnel kiln to approximately 900 – 1,100˚C. Different surface coatings are applied depending on the tile finish desired. The clay tile production process, which is used for the majority type of our new plants, requires significant capital investments (between 40 million to 50 million euros depending on plant location and capacity), but produces higher quality tiles in larger sizes.

The quality and delivered cost of clay is critical to the performance of clay tile plants. The cost of clay historically has not been volatile. We procure clay either from our own reserves or through long-term supply contracts extending over the expected life of the applicable plants. Clay accounts for approximately 15% of the cost to produce clay roof tiles, substantially less than the cost of raw materials for concrete tiles. However, energy costs are much higher (approximately 17% of total cost in 2005) because of the need to heat clay tiles in kilns. Direct labor, other fixed costs and depreciation account for approximately 23%, 27%, and 18%, respectively, of our clay tile production costs.

Roofing components

We manufacture or purchase from manufacturers a variety of roofing components, including safety gratings, snow guard tiles, ventilation underlays, skylights, and prefabricated roof elements. The production process for each is specific to the type of component manufactured.

Chimneys

Most of our ceramic chimney products consist of a simple blockstone reinforced with a three-layered product comprising a ceramic flue liner, mineral wool insulation and a light weight concrete blockstone. Our ceramic chimneys are produced either as single parts to be assembled by masons on site or as prefabricated story-high chimneys which can be mounted on site without specialists. Our metal-based chimneys are constructed mainly from stainless steel and small amounts of aluminum generally in the same manner as our ceramic chimneys. We have 22 chimney manufacturing plants, 5 in Germany and the remainder throughout Europe. We manufacture approximately 90% of our chimney products in our own factories.

We produce chimneys in 13 European countries (Austria, Belgium, Bosnia-Herzegovina, Croatia, Czech Republic, Denmark, Germany, Hungary, Ireland, Italy, Poland, Slovenia, United Kingdom) and have sales offices in 10 others: Finland, France, Norway, Romania, Russia, Slovakia, Sweden, Switzerland, Turkey and Serbia-Montenegro.

Customers

Our ultimate customers are private, corporate or public owners of residential and non-residential buildings, as well as house builders and developers in European, North American and Asian Pacific countries. These customers use our products in new-built and renovation projects for residential and non-residential buildings.



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Additionally, we develop relationships with installers, architects, local governments, planners and housing associations to encourage them to specify our roofing products in the renovation or construction of homes when possible.

We sell our products primarily through merchants to roofing and building professionals, as well as homeowners. In some countries, a part of our sales goes directly to house builders. Our customers generally purchase our products from us through current orders in quantities sufficient to meet their immediate requirements, often through competitive bidding processes.

Markets

Description of markets and of our position in these markets

Diverse building traditions have developed across and within the markets in which we operate. In Europe, concrete and clay tiles dominate the pitched roof market, but the style of tile varies considerably between each country. Consequently, our tile plants tend to supply regional markets, which are defined by local design preferences and limited by the cost to transport tiles. In North America, low-cost, easily installed cladding materials dominate (e.g. asphalt shingles). Within all our roofing markets, producers compete primarily on a regional basis based on price, product quality and customer service.

Our principal European competitors for pitched roofing products are Etex, Imerys, Terreal, Wienerberger, Tondach Gleinstätten and Nelskamp, and for chimneys they are Poujoulat, Raab and Plewa. Our MonierLifetile joint venture is, we believe, the largest North American manufacturer of premium-quality concrete roof tiles in term of sales. Asphalt shingles dominate the North American market, however, with approximately 87% of the market, while concrete and clay tiles account for approximately 7%. The primary North American asphalt shingle manufacturers are Owens Corning, GAF and Certain Teed (Saint-Gobain). We do not compete in the North American chimney market.

Roofing product demand is linked to overall construction activity within a given region, population and demographic growth (measured by the number of households), economic development and growth in average household income and the willingness to spend this income for housing, as well as climate, government regulations (e.g. Spain’s requirement that all new buildings be equipped with solar technology), insurance requirements and availability and affordability of land for new construction. In general, roofing product demand in developing countries is driven by utility and durability, whereas aesthetics is more important in developed countries. Consequently, our roofing tiles compete against a variety of other roofing materials in the markets in which we operate: fiber cement and corrugated steel in low-end residential segments of growing markets, fiber cement and metal in the non-residential sector worldwide and slate in high-end residential segments in western Europe, slate and asphalt in the northeast United States.

Location of our markets

Approximately 72% of our total 2005 Roofing Division sales were made in Western Europe. Our four principal markets in Western Europe are France, Germany, Italy and the United Kingdom, but we also conduct operations in Austria, Belgium, Denmark, Finland, Ireland, Netherlands, Norway, Sweden and Switzerland. Renovation markets in Western Europe are relatively stable, but new home construction has been declining. We have seen a growing trend towards more expensive clay tiles versus concrete, given their greater decorative value, particularly in southern Europe, where they have traditionally been used and in parts of northern Europe, mainly Germany. Faced with declining concrete tile sales in several countries, we have closed certain older, less efficient and smaller scale plants, thereby reducing overall capacity and shifting remaining capacity to more efficient plants. We estimate that Western Europe consumed close to 113 million square meters of concrete tiles and 214 million square meters of clay tiles in 2005, based on internal and external research, and we sold approximately 57 million square meters of concrete tiles and 24 million square meters of clay tiles in Western Europe during 2005. The Roofing Industry is competitive in all major Western European markets with mostly national or regional producers and a few international producers.

North America accounted for approximately 9.0% of our total 2005 Roofing Division sales, most of which occurred in the southern part of the United States. We operate in North America through MonierLifetile, our 50/50 joint venture with Boral Limited of Australia. We believe that MonierLifetile is the largest manufacturer of premium-quality concrete roof tiles in the United States based on sales and volumes. We believe that North America consumed as a whole close to 111 million square meters of concrete tiles and 10 million square meters of clay tiles in 2005, based on internal and external researches. We sold approximately 24 million square meters of concrete tiles in the region during 2005. Our main competitors are Eagle, Hanson and Westile.



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We continue to expand into Eastern and Central Europe. Our principal markets in this region are in the Czech Republic, Hungary, Poland, Russia and Slovakia, but we also conduct operations in Bulgaria, Croatia, Estonia, Slovenia and Romania and have sales offices in Bosnia-Herzegovina, Latvia, Lithuania, Serbia-Montenegro and the Ukraine. We also have been expanding into Asia, where we conduct operations in China, India, Indonesia, Japan, Malaysia, Philippines and Thailand. We operate one concrete tile plant in Turkey, three concrete tile plants in Brazil and a joint venture with Boral in Mexico. We also conduct substantial operations in South Africa, where we sold 6.6 million square meters of tiles in 2005. In 2005 two clay plants in Mexico, which were equity consolidated in prior years, became proportionately consolidated.

Our roofing products sales in growing markets totaled 277 million euros and 253 million euros during 2005 and 2004, respectively. These sales accounted for 18.3% and 16.9% of our total roofing products sales for each such year.

Breakdown by geographic market

The table below shows the regions and countries in which our principal roofing production plants are located as of December 31, 2005.

Number of plants

COUNTRY/REGION

CONCRETE TILES

CLAY TILES

ROOFING COMPONENTS METAL AND OTHER PRODUCTS

CHIMNEYS

Germany

11

5

4

5

United Kingdom

9

1

1

2

France

5

4

-

-

Italy

9

4

-

1

Other Western Europe

10

5

4

4

North America

13

-

-

-

Central & Eastern Europe

15

1

1

10

Mediterranean Basin

1

-

-

-

Latin America

3

2

-

-

Sub-Saharan Africa

6

-

1

-

Asia

22

3

-

-


Gypsum

Gypsum wallboard (also known as “plasterboard”) and other gypsum-based products (e.g. plaster, plaster blocks, joint compounds and related products such as metal studs and accessories) are used primarily to offer gypsum-based building solutions for constructing, finishing or decorating interior walls and ceilings in residential, commercial and institutional construction projects throughout the world, as well as for sound and thermal insulating partitions. Other gypsum-based products include industrial plaster (used for special applications such as moldings or sculptures) and self-leveling floor-screeds.

We believe, based on our experience in this industry, that we are the third largest manufacturer of gypsum wallboard worldwide, as measured by wallboard sold in 2005. At the end of 2005, our consolidated businesses operated the following number of plants throughout 23 countries: 36 wallboard plants (with an annual production capacity of approximately 993 million square meters), 39 other plants which produced primarily plaster, plaster blocks or joint compounds and 3 wallboard paper plants.

Products

Wallboard

Our predominant gypsum product is wallboard. We produce wallboard in a number of standard lengths, widths and thicknesses and with a variety of characteristics depending on the intended use of the board. We offer a full line of wallboard and finishing products: “standard” wallboard; wallboard designed for various decorative treatments; and wallboard for use in a variety of applications - e.g. sound and thermal insulating partitions, high humidity, fire retardant, water-resistant, sag-resistant and high traffic areas.



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We regularly seek to expand and improve the range of our wallboard products. Our recently introduced SIGNA™ wallboard, a new generation wallboard with all four edges tapered, is designed to help installers achieve top quality finishes in many applications. In North America, we recently launched our Rapid Deco® Level 5™ Skim-Coated Drywall and Joint Finishing System, a simple and fast solution to certain performance, lighting and painting design issues. The Rapid Deco System allows installers to homogenize the appearance of installations by installing wallboard that is pre-coated with the same joint compound that is used to install the board. We have also recently added certain fireproofing plasters, ceiling tiles and our PLA-tec® tailor made gypsum board architectural components, which has shown much success with installers of complex architectural parts.

Other products

We also produce gypsum plaster, plaster block, joint compounds, metal studs, anhydrite binders for self-leveling floor screeds and industrial plasters, which are targeted to the construction and decorating industries. Sales of such products comprised approximately 30% of our Gypsum Division sales in 2005.

Production and facilities information

Gypsum wallboard exploits the crystalline structure of gypsum (calcium sulfate dihydrate - a naturally occurring mineral common in sedimentary environments), within which water molecules are physically locked. Wallboard is made by grinding and heating gypsum to release the trapped water molecules, mixing the residue with water to form a slurry, extruding the slurry between two continuous sheets of paper, and drying and cutting the resulting board into proper sizes. When drying, the slurry rehydrates into gypsum crystals, which interlock with each other and “grow” into the liner paper, giving the board three-dimensional strength. We use both naturally occurring gypsum and synthetic gypsum to produce wallboard. Synthetic gypsum is produced as a by-product of certain chemical manufacturing and electrical power production operations. Historically, the cost of each has not been volatile.

We use synthetic gypsum principally in some of our plants in France, Germany, the Netherlands, the United States, South Korea and China. To minimize transportation costs for gypsum, we try to locate our plants as close as reasonably possible to gypsum supply sources.

At the end of 2005, our consolidated businesses operated 19 gypsum quarries worldwide, including 12 in Western Europe. Certain of our plants have long-term supply contracts with third parties to supply natural gypsum. Generally, we procure synthetic gypsum through long-term contracts extending approximately 20 years, most of which contain one or more options to renew. Occasionally, depending on our supply needs and local market conditions, we contract over shorter periods. We believe our current supply of gypsum, both natural and synthetic, is adequate for present and foreseeable operating levels.

Paper and gypsum account for approximately 26% and 12%, respectively, of our wallboard production costs. We produce about half of our wallboard paper at our own mills in France and Sweden, and at one mill in the United States operated through a joint venture in which we have an interest. The major raw material for our paper is recycled paper fibers, the price of which is volatile as it is influenced by worldwide trading. Energy, labor and other costs accounted for approximately 23%, 16% and 23%, respectively, of our wallboard production costs in 2005.

Customers

We sell our gypsum wallboard products mostly to general building materials distributors, wallboard specialty dealers, lumber yards in the United States, decorating companies in growing markets and do-it-yourself home centers. In some markets, specifiers (such as architects) may impact which products are to be used to construct specific projects. We focus our marketing efforts on not only actual purchasers, but also those who may indirectly determine which materials are to be used.

Our customers generally purchase gypsum wallboard products from us through current orders in quantities sufficient to meet their immediate requirements. Our sales of wallboard and related products typically do not involve long-term contractual commitments and the amount of backlog orders is normally not significant.

Markets

Description of markets and of our position in these markets

Seven producers hold approximately 80% of today’s worldwide wallboard market. These companies are BPB(1), Georgia Pacific, Knauf, Lafarge, National Gypsum, U.S. Gypsum Corporation and Yoshino. These companies operate gypsum wallboard plants and usually own the gypsum reserves they use to produce their wallboard.



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The gypsum wallboard industry is highly competitive. Because wallboard is expensive to transport and does not travel well in large quantities, producers compete on a regional basis, primarily based on price, product range, product quality and customer service. Our largest competitors in Western Europe are BPB (a Unit of Saint-Gobain) and Knauf, and in the United States they are BPB (a Unit of Saint-Gobain), Georgia Pacific, National Gypsum and U.S. Gypsum Corporation.

Wallboard demand is closely linked to the gross national product of the country in which it is sold and to the type of construction methods employed within that country. Demand is generally higher in the United States, Japan and Australia where “drywall” construction methods are commonly used (with steel or wood structures) and lower in Western Europe where “wet walls” construction methods are commonly used (i.e. masonry, stone and brick). “Dry” countries consume on average between 4 and 10 square meters per person annually, while “wet” countries consume on average between 1 and 4 square meters per person annually. We believe that original construction accounts for approximately 60% of our wallboard sales in our major markets, with renovation activities accounting for the balance.

We believe the potential for long-term growth in the wallboard industry is greatest in the world’s growing markets, which we define as countries outside Western Europe and North America other than Japan, Australia and New Zealand. We have focused significant efforts to expand our gypsum operations in such markets.

However, we sold most of our volumes in Western Europe and North America.

Breakdown by geographic market

Our primary markets for wallboard and related products are Western Europe and North America. The following presentation shows for each of these regions the percentage contribution to our 2005 Gypsum Division sales in euros, the countries in which we operate, the number of plants we operate and our wallboard production capacity in each country as of December 31, 2005.


Western Europe (51.8% of Division sales for 2005)

 

WALLBOARD

OTHER PRODUCTS

 

NUMBER OF PLANTS

PRODUCTION CAPACITY(MILLION M2)

NUMBER OF PLANTS

France

4

129

18

Germany/Netherlands

5

129

3

Other

2

76

3


In 2006 we will start the construction of a new wallboard plant in the United Kingdom with an annual capacity of 25 million square meters. In Spain we have a minority interest in a wallboard plant and three plaster plants.

Western Europe is the second largest worldwide regional wallboard market. In most Western European wallboard markets the drywall solutions have replaced traditional construction modes (brick and mortar/plaster); Spain and Italy are still in the substitution process. Technical performance of products and systems plays a critical role in this market. The region as a whole consumed close to 1.1 billion square meters of wallboard in 2004, based on our estimates. We sold 273 million square meters of wallboard in Western Europe in 2005, 266 million square meters in 2004 and 246 million square meters in 2003. The wallboard industry is competitive in all major Western European markets, with production generally concentrated among the major multinational wallboard producers.



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North America (22.4% of Division sales for 2005)

 

WALLBOARD

OTHER PRODUCTS

 

NUMBER OF PLANTS

PRODUCTION CAPACITY(MILLION M2)

NUMBER OF PLANTS

United States

4

223

1

Canada

1

12

1



We are upgrading and doubling the capacity of our Buchanan, New York, wallboard plant to 60 million square meters, at an estimated cost of 60 million euros. The renovation is expected to be completed in mid-2006. In 2006, we will begin an investment of approximately 90 million euros to expand the capacity of our wallboard plant in Silver Grove, Kentucky. The new wallboard line will increase the annual capacity of the plant to 150 million square meters.

North America is the largest worldwide regional wallboard market. North American wallboard markets are mature. The region as a whole consumed close to 3.5 billion square meters of wallboard in 2004, based on our estimates. We sold 213 million square meters of wallboard in North America in 2005, 202 million square meters in 2004 and 194 million square meters in 2003. The wallboard industry is competitive in all major North American markets, with production generally concentrated among the major national wallboard producers and two multinational producers: BPB (a Unit of Saint-Gobain) and Lafarge.

Other Markets (25.8% of Division sales for 2005)

We conduct wallboard and related operations in Poland, Ukraine, Romania and Morocco. In Romania, starting in 2006 Lafarge will triple its production capacity to support market expansion. In Ukraine a plant with plasterboard capacity of 15 million square meters, extendable to 30 million square meters, and 40,000 tonnes of gypsum capacity will be constructed in 2006.

In Turkey, through a joint venture with Dalsan Insaat, we operate a wallboard plant and a construction plaster plant near Ankara. Together, we intend to build a new wallboard plant in Istanbul and double the plaster production capacity in Ankara. In January 2006 we signed an agreement, subject to administrative clearance, to sell the shares of another joint venture, which operates a quarry and production facilities near Istanbul.

In South Africa, Lafarge is building a plasterboard plant with a capacity of 15 million square meters, in addition to its existing manufacture of gypsum components.

In Algeria, Lafarge intends to build a plaster plant with a capacity of 150,000 tonnes. In Saudi Arabia, Lafarge has signed a joint venture agreement with local players to become the leader in gypsum production, and build a new plaster pant with a capacity of 150,000 tonnes.

In Australia, we operate two wallboard plants with a combined annual capacity of approximately 36 million square meters.

In Latin America, through companies we control jointly with the Etex Group, we operate one wallboard plant in each of Argentina, Brazil and Chile and a plaster plant in each of Brazil and Chile. In Mexico, Lafarge recently signed a joint venture agreement with majority partner Comex, to build a wallboard plant and establish a leadership position in the plasterboard market in the country.

In Asia, we conduct gypsum wallboard and related operations through a 50/50 joint venture with Boral Limited, which we manage jointly. In 2004, our interest in the venture increased to 50% when we bought out our minority financial partners. At the end of 2005, the joint venture’s wallboard capacity in the region was 292 million square meters. The joint venture operates three wallboard plants in South Korea, three in China, one in Malaysia, two in Thailand and two wallboard plants and a metal stud plant in Indonesia. The joint venture intends to build a new wallboard plant in China, which should increase its annual capacity in China to more than 70 million square meters annually. It will also double the capacity of its Dangjin plant in South Korea to 75 million square meters. The joint venture has started the construction of a plasterboard plant in the Ho Chi Minh City area of Vietnam. This plant will be the first plasterboard plant to be built and operated in Vietnam.

Our wallboard and related products sales in growing markets totaled 317 million euros and 286 million euros during 2005 and 2004, respectively. These sales accounted for 21.4% and 21.1% of our total wallboard and related products sales for each such year.


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3.4 Organizational structure

See Note 38 to our consolidated financial statements for more information on our principal subsidiaries, including their full legal name and country of incorporation.

Lafarge S.A. is a holding company. We conduct our operations through over 1,000 direct and indirect majority owned subsidiaries and approximately 280 companies in which we have an equity participation. We have a large number of operating companies because our businesses are local in nature, we have installations in 76 countries and because we conduct operations through four Divisions.

Lafarge S.A.’s relationship with its subsidiaries

Lafarge S.A.’s relationship with its subsidiaries includes a financial component and an assistance component.

The financial component covers the repatriation of dividends from subsidiaries, the financing by Lafarge S.A. of most of subsidiaries’ operations and the pooling of cash generated by subsidiaries where possible.

At December 31, 2005, Lafarge S.A. held approximately 72% of the Group’s debt. Lafarge S.A. has access to short-term and long-term financial markets and large banking networks and provides financing to its subsidiaries through inter-company loans. To fund such loans, we draw primarily on our Euro Medium Term Note program for medium to long-term financings and related Commercial Paper program for short-term financings.

If we cannot obtain financing through these programs in a subsidiary’s local currency, we finance locally to ensure the subsidiary’s operations are financed in the relevant local currency. Also, certain of our subsidiaries in North America, which have minority shareholders, can access financial markets on their own, and, thus, obtain and carry their own financings.

For those subsidiaries for which it is possible (most subsidiaries located in the euro zone, the United Kingdom and Switzerland), Lafarge S.A. uses a cash pooling program through which cash generated by such subsidiaries is consolidated and managed by Lafarge S.A. in connection with the financing of the subsidiaries’ operations.

The assistance component relates the supply by Lafarge S.A of an administrative and technical support to the subsidiaries of the Group. Lafarge S.A also grants rights of use of its brands, patents and its industrial know-how to its various subsidiaries. The activity of research and development is managed by Lafarge Centre de Recherche (LCR). Regarding the Cement Division, the technical support services are done by the various technical centers of the Group.

These various services and licenses of use are charged to subsidiaries under franchising contracts, support contracts or brand licenses.

Group relationship with minority shareholders of its subsidiaries

Beyond some of our subsidiaries which have a broadly dispersed public minority shareholder base, certain others have industrial or financial partners, governmental entities, prior employees or prior owners as minority shareholders. Occasionally, such minority shareholders are required by local laws or regulations (e.g. in the case of a partial privatization). Other times, we have partnered with them to share our business risk. We often have entered into shareholder agreements with such minority shareholders, which agreements contain board membership or other similar provisions, shareholders’ information rights and control provisions. Approximately 18% of our consolidated revenues and 20% current operating income is derived from subsidiaries that are subject to such agreements. We have not recently experienced any difficulties in managing these subsidiaries vis-à-vis our partners, which could present a risk to our financial structure.

Certain of these shareholder agreements contain exit provisions to the benefit of our minority shareholders that can be exercised at any time, at certain fixed times or in specific instances, such as a continuing disagreement between Lafarge S.A. and the shareholder or a change in control of the relevant subsidiary or Lafarge S.A. In particular, our shareholder agreements relating to our cement operations in Morocco and Egypt, our gypsum operations in Asia and our roofing business in North America (the last two being joint ventures with the Boral Group) contain provisions that enable our partners to buy back our shareholding in these businesses in case of a change in control of Lafarge S.A.

See Note 27 to our consolidated financial statements for more information on put options on shares of subsidiaries.

3.5 Environment

Our operations involve the use, release, discharge, disposal and clean up of substances regulated under regional, national and local environmental laws and regulations, as well as compliance with laws and regulations governing land use and the rehabilitation of exploited quarries.



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Such laws and regulations impose increasingly stringent environmental protection standards for industrial operations such as ours and expose us to an increased risk of substantial costs and liabilities arising from environmental matters.

We encourage our worldwide operations not only to respect local environmental laws, but also to meet internal standards relating to the use of non-renewable resources and the generation and discharge of materials from our operations. We encourage our subsidiaries to be proactive regarding environmental matters and to cooperate with regulatory authorities to evaluate the costs and benefits of proposed regulations. We maintain a Group wide environmental program designed to monitor environmental matters and maintain compliance with applicable laws, regulations and standards.

In recent years, we have participated in a number of environmental initiatives. In 2000, we entered into a voluntary environmental conservation partnership with the World Wildlife Fund (“WWF”), and became a founding member of its Conservation Partner program. This partnership was renewed in 2005. Under the renewed agreement, we will continue working on climate change under the framework of our voluntary commitment to reduce our worldwide CO2 emissions by 20% per tonne of cement produced worldwide over the period 1990-2010. Our teams will also work on biodiversity issues, on persistent pollutants and on the development of sustainable construction initiatives.

We are currently involved in the remediation of certain contaminated properties (at most of which the contamination occurred before we acquired the properties). Based on current information, we do not believe such activities will have a material adverse effect on our financial condition or results of operations.

In 2003, the European Union adopted a directive implementing the Kyoto Protocol on climate change. This directive established a CO2 emissions trading scheme in the European Union: within the industrial sectors subject to the scheme, each industrial facility is allocated a certain amount of CO2 allowances. Industrial operators who keep their CO2 emissions below the level of allowances granted to their facilities can sell their excess allowances to operators, which have emitted more CO2 than the allowances they were initially granted. Another provision allows European Union companies to use credits arising from investments in emission reduction projects in developing countries to comply with their obligations in the European Union.

The Emissions Trading directive came into force on January 1 2005, and each Member State issued a National Allocation Plan (NAP) defining the amount of allowances allocated to each industrial facility. These NAPs were then approved by the European Commission.

The Emissions Trading Directive and its provisions apply to all our cement plants in the European Union and, to a lesser extent to our Roofing and Gypsum operations. We are operating cement plants in 10 out of the 25 European Union Member States. Allowances that were allocated to these facilities represent some 25 million tonnes of CO2 per year over the 2005-2007 period. Based on our production forecasts, these allowances should cover our needs on a consolidated basis, that is to say after trading allowances between our countries with a deficit and countries with an excess of CO2 allowances. At the end of 2005, we had a small surplus of allowances that we sold on the market.

In 2005, our capital expenditures and remediation expenses for environmental matters were not material to our financial condition, results of operations or liquidity, nor were environmental liabilities recorded at December 31, 2005. However, our expenditures for environmental matters generally have increased over time and are likely to increase in the future. Because of the complexity of environmental laws, differing environmental requirements throughout the world, and uncertainties surrounding environmental compliance, permitting, technology and related matters, we cannot predict whether capital expenditures and remediation expenses for future environmental matters will materially affect our financial position, results of operations or liquidity.

3.6 Insurance management

The Group’s general policy in insurance matters is predicated on three principles:

·

implement an active loss prevention plan for the protection of our assets;

·

retain exposure to frequency risks through self-insurance and captive insurance techniques and transfer only severity risks to the insurance and reinsurance markets (special attention is paid to the financial strength of these market participants);

·

cover under Group-wide policies subsidiaries in which the Group owns a majority shareholding, subject to local regulatory constraints and specific geographical exclusions.



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Two insurance programs have been implemented within the Group, one covering Lafarge North America Inc. and the other covering operations in the rest of the world.

Insurance policies excluding Lafarge North America Inc.

The main insurance programs in Europe, Africa, Latin America and Asia primarily cover property risks (fire, explosion, natural events, etc.), machinery breakdown and ensuing business interruption. Assets are insured at their actual cash value. The largest sites are assessed in advance by independent appraisers to establish the asset values covered. They vary significantly depending on the Division. Total insured value amounts to 16.5 billion euros. Loss control engineers evaluate potential losses for the largest sites. The highest “probable maximum loss” stands at 112 million euros, an amount for which we are covered.

Different sub-limits on coverage have been introduced into the insurance market, particularly for natural events. The Property Damage Group’s policy carries a limit of 75 million euros per year and per event for earthquakes. A specific sub-limit applies in certain higher-risk countries, including Australia, China, Greece, Indonesia, Italy, Japan, Kenya, Malawi, Mexico, the Philippines, Serbia, Slovenia, Tanzania, Turkey, the U.S., Venezuela and Zambia. In Indonesia, this sub-limit stands at 50 million euros per event. The Group property damage program is renewed each July 1. Following the earthquake and tsunami on December 26, 2004, which very seriously affected our plant located in the Aceh province (Indonesia), the Group reinstated the Natural Events coverage on the same terms and conditions as prior to the disaster. In addition, this disaster claim is a substantial and complex claim and settlement is still currently under discussion with underwriters.

The risk of business interruption caused by a damage to an insured property is generally considered to be relatively low. Given the size of our manufacturing network in most countries and within each business, we are generally in a position to continue our operations with minimal delay. Business interruption risk is generally insured by our subsidiaries, with a deductible of five days following a direct damage and fifteen days following a machinery breakdown and a maximum coverage period of 12 months. Furthermore, the continued operation of our plants is not dependent on any particular supplier or sub-contractor.

Lastly, the loss control program continued along the same lines as in previous years. A total of 62 site inspections were carried out during 2005 by qualified loss prevention engineers.

Public liability, product liability, directors and officers liability and environmental Impairment policies are the main casualty-related policies. They cover amounts commensurate with the nature of our business activities, the countries in which we operate, our loss experience and the available capacity of the insurance market.

The Group has two captives:

·

one reinsurance captive, which was set up in 2000, covers the frequency risk of the Group’s subsidiaries. The risk retained by this captive stands at 2 million euros per casualty claim for general and product liability, and 5 million euros per property damage claim;

·

the other is a direct insurance captive, which was set up in 2004. It covers Property Damage risks of main subsidiaries within the European Union (EU countries prior to May 2005) and assets located in the USA in particular former Blue Circle plants.

The captive which originated from the former Redland and Blue Circle activities had its portfolio transferred to the Group’s main reinsurance captive in August 2005.

The total cost of the Group’s insurance programs, including the risks self-insured via the captives, amounted to 3.30 per thousand of the insured turnover, representing a reduction of 7% compared with the previous year.

Lafarge North America Inc. Insurance Policies

We maintain a comprehensive insurance program to protect the company from certain types of property and casualty losses, which utilizes commercial insurance and two captive insurance companies. Commercial property insurance with replacement coverage is purchased to insure against losses to plants and equipment. Additionally, the property policy provides business interruption coverage for the cement manufacturing plants and the gypsum manufacturing plants.

We also purchase commercial insurance for our risks associated with workers compensation, auto liability and general liability exposures. The deductibles on this coverage range from $1 million to $5 million per claim. The captive insurance companies are used to fund losses below these amounts. We maintain other insurance programs as appropriate. We believe the insurance programs, policy limits and deductibles are appropriate for the risks associated with our business and in line with coverage available in the market.


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3.7 Intellectual property

Lafarge has a diverse portfolio of intellectual property rights including patents, trademarks, domain names and registered designs, which are used as a strategic tool in the protection of its business activities. The Group’s Intellectual Property (IP) department aims to enhance the value of this intellectual property by coordinating, centralizing and establishing our title through patents, trademarks, copyright and other relevant laws and conventions and by using legal and regulatory recourse in the event of infringement of the rights by a third party.

The Group’s IP department has evolved during 2005, reflecting Lafarge’s increased commitment to innovation. The Group’s IP department represents each Division, thereby implementing a common intellectual property policy across the Group. In 2005, the Lafarge intellectual property portfolio has grown considerably due to product development efforts, in particular, with a significant increase in the submission of patent applications, trademark and domain name registrations.

The Group’s IP department is also in charge of protecting the Group’s Trade Name and implementing the necessary legal recourse against third party unauthorized use of the Lafarge name. 2005 has seen a marked increase in the illegal use of the Lafarge name in various countries for example, China, and an IP enforcement policy has been put in place with the appropriate Divisions and business units in order to best protect their business interests.

The use of, and access to, the Group’s intellectual property rights are governed by the terms of industrial franchise agreements. The procedure implemented during 2004 to replace the former royalty agreements with revised industrial franchise agreements, which provide a series of licenses to our subsidiaries, permitting the use of intangible assets developed by the Group (such as know-how, trademark, trade name, patents and best practices), has continued during 2005.




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4
Operating
and Financial Review
and Prospects

 

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4.1 OVERVIEW

44

Summary of our results for 2005

44

Recent events

44

Seasonality

44

Critical accounting policies

45

Effects on our reported results of changes in the scope of our operations and currency fluctuations

46

Reconciliation of our non-GAAP financial measures

47

4.2 SALES AND CURRENT OPERATING INCOME

49

Consolidated Sales and Current Operating Income

49

Sales and Current Operating Income by Division

51

Cement

51

Aggregates & Concrete

56

Roofing

59

Gypsum

61

Other (including holdings)

63

4.3 OPERATING INCOME AND NET INCOME

63

4.4 LIQUIDITY AND CAPITAL RESOURCES

65

Net cash provided by operating activities

65

Net cash (used in) investing activities

65

Net cash (used in) provided by financing activities

66

Level of debt and financial ratios at December 31, 2005

67

Cash surpluses

68

Effect of currency fluctuations on our results and balance sheet

69

4.5 CONTRACTUAL AND CONTINGENT COMMITMENTS

69

4.6 MARKET RISKS

70

Foreign Currency Risk

71

Interest Rate Risk

71

Interest Rate Sensitivity

71

Exchange Rate Sensitivity

72

Counterparty risk

73

4.7 RESEARCH AND DEVELOPMENT

73

4.8 TREND INFORMATION

74




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The discussion in this Chapter 4 should be read in conjunction with our consolidated financial statements prepared in accordance with IFRS, which are included elsewhere in this Report.

IFRS differs in some respects from accounting principles generally accepted in the United States of America (“U S. GAAP”). A description of the main differences between U.S. GAAP and IFRS is set forth in Notes 36 and 37 to our consolidated financial statements.

Each of our Divisions, as well as our “Other” activities, constitutes a “business segment” for purposes of reporting our results of operations.

4.1 Overview

Summary of our results for 2005

In 2005, we continued the pace of solid growth in our existing operations.

Sales increased by 10.6% compared to 2004 and current operating income increased by 7.1%. In the majority of our markets, we were able to absorb the impact of a record rise in energy costs by successful price increases.

Current operating income(1) recorded solid growth in Cement, Aggregates & Concrete and Gypsum, while the current operating income of Roofing decreased, particularly affected by the German construction market.

Net income Group share increased by 4.8% compared to 2004, despite the impact of a higher effective tax rate.

At the end of 2005, we benefited from a solid financial structure. At December 31, 2005 our net debt to equity ratio had improved significantly at 59% compared to 70% at year-end 2004, and our cash flow from operations to net debt ratio remained stable year on year at 31%(2).

We made significant efforts to ensure compliance with the internal control standards of the Sarbanes-Oxley Act (Section 404) for the first time at the end of 2005. We consider this initiative to be a major improvement to further enhance the quality of our internal control and the efficiency of our processes.

In Cement, the construction of additional capacity in China, Bangladesh, Mexico, Morocco and Vietnam progressed in 2005 according to plan. This new capacity should be operational in 2006. With the creation of the Lafarge Shui On Joint venture in China, in November 2005, we have established a key strategic alliance which enables us to be active in areas of strong economic growth in China.

In Aggregates & Concrete, in addition to continuing to strengthen our position in our major markets, North America and Western Europe, we strengthened our position in growing markets. These markets have again in 2005 significantly increased their contribution to Division results.

In Roofing, which was particularly affected by the weak German construction sector, we made new restructuring efforts. To strengthen our strategy of product innovation and increase our proximity to customers in France, we started the construction of a new plant in Limoux (Aude), completed the modernization of our Marseilles plant and decided to enhance our industrial position in the Champagne-Ardennes region of northern France with the construction of a new production unit for clay roofing tiles.

In Gypsum, two consecutive years of strong improvements in results have confirmed the success of our strategy. In 2005, we decided to further expand our production capacity in selected markets, such as the United States, the United Kingdom and Asia.

Recent events

We have recently filed with the U.S. Securities and Exchange Commission an offer to purchase in cash the remaining 46.8% minority stake in Lafarge North America Inc. that we do not own at a price of $75 per share, representing a total transaction value of approximately $3.0 billion. The transaction also includes an offer to purchase all outstanding exchangeable preference shares of Lafarge Canada Inc, a subsidiary of Lafarge North America Inc. In 2005 and 2004, Lafarge North America Inc. minority interests in our consolidated statement of income accounted for 98 million euros and 113 million euros, respectively. With respect to our consolidated balance sheet, if consummated, this transaction would increase our indebtedness by approximately 2,5 billion euros equivalent with a corresponding increase in our goodwill and decrease in minority interests.

See Section 8.4 (Material Contracts) and Note 35 (Subsequent events) to our consolidated financial statements for more details on this offer and its financing terms.

Seasonality

Demand for our cement, aggregate and concrete and roofing products is seasonal and tends to be lower in the winter months in temperate countries and in the rainy season in tropical countries. We usually experience a reduction in sales on a consolidated basis during the first quarter, reflecting the effect of the winter season in our principal markets in Western Europe and North America, and an increase in sales in the second and third quarters, reflecting the summer construction season.

(1) “Current Operating Income” was previously identified as “Operating Income on Ordinary Activities”.
(2) See Section 4.1 (Overview - Reconciliation of our non-GAAP financial measures).




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Critical accounting policies

We prepare the consolidated financial statements of Lafarge in conformity with IFRS. We also prepare a reconciliation of our consolidated financial statements to U.S. GAAP. The Notes to our consolidated financial statements summarize the significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results.

See Note 2 to our consolidated financial statements for more information on the significant accounting policies we apply under IFRS and Notes 36 and 37 for a description of the principal differences between IFRS and the U.S. GAAP as they relate to Lafarge.

Certain of our critical accounting policies require the use of judgment in their application or require estimates of inherently uncertain matters. Although our accounting policies are in compliance with generally accepted accounting principles, a change in the facts and circumstances of the underlying transactions could significantly change the implication of the accounting policy and the resulting financial statement impact. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.

Impairment of Goodwill

In accordance with IAS 36, “Impairment of Assets”, the net book value of goodwill is reviewed at least annually, during the second half of the year, to take into consideration factors that may have affected the assets value and recoverability.

For the purposes of the test, the Group’s net assets are allocated to Cash Generating Units or reporting units (CGUs). Our four Divisions are considered to be our four reporting/operating segments, each comprised of multiple CGUs. Our CGUs represent businesses that are one level below the reporting/operating segment and, generally, perform one of our four activities in a particular country. The CGU is the level used by the Group to organize and present activities and results in its internal reporting.

In its goodwill impairment test, the Group uses a combination of a market approach (fair value) and an income approach (value in use). In the market approach, we compare the carrying value of our CGUs with multiples of their current operating income before depreciation and amortization. For CGUs presenting an impairment risk according to the market approach we then use the value in use approach. In the value in use approach, we estimate the discounted value of the sum of the expected future cash flows. If the carrying value of the CGU exceeds the higher of the fair value or the value in use of the related assets and liabilities, the Group records an impairment of goodwill (in “other operating expenses”).

Evaluations for impairment are significantly impacted by estimates of future prices for our products, the evolution of expenses, economic trends in the local and international construction sector, expectations of long-term development of emerging markets and other factors. This also depends on the discount rates and perpetual growth rates used. The Group has defined country specific discount rates for each of its CGUs based on their weighted-average cost of capital.

In some cases, the Group uses a third party valuation as part of its impairment test.

See Note 9 to our consolidated financial statements for more information on Goodwill.

Pension Plans and Other Postretirement Benefits

The accounting for pension plans and other postretirement benefits requires us to make certain assumptions that have a significant impact on the expenses and liabilities that we record for pension plans, end of service indemnities, and other post employment benefits.

The main defined pension plans and other postretirement benefits provided to employees by the Group are in the United Kingdom and North America (the United States of America and Canada). The related projected benefit obligations as of December 31, 2005 represent 59% and 24%, respectively, of the Group’s total obligations in respect of pension plans, end of service indemnities and other post employment benefits.

See Note 23 to our consolidated financial statements for more information on the primary assumptions made to account for pension plans, end of service indemnities and other post employment benefits.

The expected long-term rate of investment return on pension plan assets is based on historical performance, current and long-term outlook and the asset mix in the pension trust funds. The discount rates reflect the rate of long-term high-grade corporate bonds.



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The 2005 pension plans, end of service indemnities and other post employment benefits expenses are impacted by the year-end 2004 assumptions for the discount rate and the expected return rate on assets (pension plans only). For North America and the United Kingdom, if the 2004 discount rate assumption had been lowered by one percent, the 2005 pension plan and other postretirement benefit expenses would have increased by approximately 22 million euros, partially offset by an increase in the value of bonds held by pension trust funds. If the 2004 long-term rate of investments on pension plan assets assumption had been lowered by one percent, the 2005 pension and other benefit plans expenses would have increased by approximately 29 million euros.

The pension and other postretirement benefit obligations are impacted by the 2005 discount rate. The impact of decreasing the discount rate assumption by one percentage point as of December 31, 2005 for the valuation of the most significant benefit plans located in the United Kingdom and North America would have been to increase the total benefit obligation by approximately 633 million euros.

Because of the typically long-term nature of the Group’s obligations in respect of its main post employment benefit schemes, and the short-term volatility of financial markets, which has an impact on both the discount rate used and actual investment returns obtained, Group accounting standards require recognition of any differences between the expected and actual investment returns, as well as any impact of a modification of discount rates used, over the expected remaining active life of beneficiaries.

Environmental costs

Costs that result in future economic benefits, such as extending useful lives, increased capacity or safety, and those costs incurred to mitigate or prevent future environmental contamination are capitalized. Environmental costs are expensed as incurred. When the Group determines that it is probable that a liability for environmental costs exists and that its resolution will result in an outflow of resources, an estimate of the future remediation is recorded as a provision without the offset of contingent insurance recoveries (only virtually certain insurance recoveries are recorded as an asset in the balance sheet). When the Group does not have a reliable reversal time schedule or when the effect of the passage of time is not material, the provision is calculated based on undiscounted cash flows.

The other environmental costs are accounted for in charges when they occur.

See Note 24 to our consolidated financial statements

Site restoration

When the Group is legally, contractually or constructively required to restore a quarry site, the estimated costs of site restoration are accrued and amortized to cost of sales on a units-of-production basis over the operating life of the quarry. The estimated future costs for known restoration requirements are determined on a site by site basis and are calculated based on the present value of estimated future costs.

See Note 24 to our cnsolidated financial statements.

Income taxes

In accordance with IAS 12–Income Taxes, deferred income taxes are accounted for by applying the balance-sheet liability method to temporary differences between the tax basis of assets and liabilities and their carrying amounts in the balance sheet (including tax losses available for carry forward). Deferred taxes are measured by applying currently enacted tax laws. Deferred tax assets are recognized and their recoverability is then assessed. If it is not reasonably certain that they will be recovered in future years, a valuation allowance is recorded to reduce the deferred tax asset to the amount that is reasonably certain to be recovered.

The Group offsets deferred tax assets and liabilities in the balance sheet if the entity has a legally enforceable right to offset current tax assets against current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxing authority.

The Group computes its income tax obligations in accordance with the prevailing tax legislation in the countries where the income is earned.

See Note 22 to our consolidated financial statements.

Effects on our reported results of changes in the scope of our operations and currency fluctuations

Changes in the scope of our operations, such as acquisitions and divestitures, together with changes in how we account for our business units, such as a change from proportionate to global consolidation, may increase or decrease our consolidated sales and operating results in comparison to a prior year and thus make it difficult to discern the evolution of the underlying performance of our operations.

Changes in the scope of our operations

In order to provide a meaningful analysis between any two years (referred to below as the “current” year and the “prior” year), sales and current operating income are adjusted in order to compare the two years at a constant scope of consolidation. With respect to businesses entering the scope of consolidation at any time during the two years under comparison, current year sales and current operating income are adjusted in order to take into account the contribution of these businesses during the current year only for a period of time identical to the period of their consolidation in the prior year. With respect to businesses leaving the scope of consolidation at any time during the two years under comparison, prior year sales and current operating income are adjusted in order to take into account the contribution of these businesses during the prior year only for a period of time identical to the period of their consolidation in the current year.



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Currency fluctuations

Similarly, as a global business operating in numerous currencies, changes in exchange rates against our reporting currency, the euro, may result in an increase or a decrease in the sales and current operating income reported in euros, which are not linked to the evolution of underlying performance. Except as otherwise noted, we calculate the impact of currency variances as the difference between the prior year’s figures as published (adjusted if necessary for the effects of businesses leaving the scope of consolidation) and the result of converting the prior year’s figures (adjusted if necessary for the effects of businesses leaving the scope of consolidation) using the current year’s exchange rates.

Reconciliation of our non-GAAP financial measures

Net debt and cash flow from operations

To assess the financial strength of the Group, we use various indicators, in particular the net debt-to-equity ratio and the cash flow from operations to net debt ratio. We believe that these ratios are useful to investors as they provide a view of the Group level of debt as compared to its total equity and its cash flow from operations.

See Section 4.4 (Liquidity and capital resources - level of debt and financial ratios at December 31, 2005) for the value of these ratios in 2005 and 2004.

As shown in the table below, our net debt is defined as the sum of our long-term debt, short-term debt  and current portion of long-term debt, derivative instrument liabilities-non-current, derivative instrument liabilities-current and put options on shares of subsidiaries less our cash and cash equivalents, derivative instruments assets-non-current and derivative instruments assets-current.

(million euros)

2005

2004

Long-term debt

6,856

6,959

Short-term debt and current portion of long-term debt

1,886

1,387

Derivative instruments liabilities - non-current

10

29

Derivative instruments liabilities - current

88

43

Put options on shares of subsidiaries

263

299

Cash and cash equivalents

(1,735)

(1,550)

Derivative instruments assets - non-current

(49)

-

Derivative instruments assets - current

(98)

(209)

NET DEBT

7,221

6,958


We calculate the net debt-to-equity ratio by dividing the amount of our net debt, as computed above, by our total equity, which we define as the sum of shareholder’s equity-parent Company and minority interests as set out in our consolidated balance sheet.



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We calculate the cash flow from operations to net debt ratio by dividing our cash flow from operations by our net debt as computed above. Cash flow from operations is the net cash provided by operating activities, less changes in operating working capital items, excluding financial expenses and income taxes, as follows:

(million euros)

2005

2004

Net cash provided by operating activities

1,886

1,877

- Changes in operating working capital items, excluding financial expenses and income taxes

(352)

(271)

CASH FLOW FROM OPERATIONS

2,238

2,148


Return on capital employed after tax

One of the key profitability measures used by our Group and Division management for each Division is the “return on capital employed after tax”. This non-GAAP measure is calculated by dividing the sum of “current operating income after tax” and “income from associates” by the average of “capital employed” at the ends of the current and prior year.


In both 2005 and 2004, return on capital employed after tax was determined using a stable tax rate of 28.6% which was the 2003 effective consolidated tax rate allowing comparison from one year to the other, the rates of 2005 and 2004 being not representative.

 See Note 3 to our consolidated financial statements for more information on the current operating income, the share of “income from associates” and the “capital employed by Division”.

For 2005 and 2004, return on capital employed after tax for each Division and the Group was calculated as follows:

2005

Current operating income

Current operating income after tax

Income from associates

Current operating income after tax with income from associates

Capital employed at December 31, 2005

Capital employed at December 31, 2004*

Average capital employed

Return on capital employed after tax %

 (million euros)

(a)

(b) = (a)x(1-28.6%)

(c)

(D) = (B)+(C)

(e)

(f)

(G) = ((E)+(F))/2

(H) = (D)/(G)

Cement

1,770

1,264

8

1,272

13,982

12,167

13,075

9.7

Aggregates & Concrete

398

284

8

292

3,932

3,337

3,634

8.1

Roofing

98

70

7

77

2,181

2,118

2,149

3.6

Gypsum

151

108

15

123

1,267

1,147

1,207

10.2

Other

(60)

(43)

-

(43)

290

139

215

N.A.

TOTAL

2,357

1,683

38

1,721

21,652

18,908

20,280

8.5

* Restated from French GAAP to IFRS.


2004 *

Current operating income

Current operating income after tax

Income from associates

Current operating income after tax with income from associates

Capital employed at December 31, 2004

Capital employed at December 31, 2003

Average capital employed

Return on capital employed after tax %

(million euros)

(a)

(b) = (a)x(1-28.6%)

(c)

(D) = (B)+(C)

(e)

(f)

(G) = ((E)+(F))/2

(H) = (D)/(G)

Cement

1,597

1,140

40

1,180

12,167

12,182

12,175

9.7

Aggregates & Concrete

357

255

5

260

3,337

3,061

3,199

8.2

Roofing

149

106

10

116

2,118

2,118

2,118

5.5

Gypsum

132

94

13

107

1,147

1,166

1,156

9.3

Other

(34)

(23)

6

(17)

139

198

169

N.A.

TOTAL

2,201

1,572

74

1,646

18,908

18,725

18,817

8.7

* Restated from French GAAP to IFRS.



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4.2 Sales and current operating income

All data presented in the discussions below and elsewhere in this Chapter 4 regarding sales, current operating income and sales volumes, include the proportional contributions of our proportionately consolidated subsidiaries.

Consolidated Sales and Current Operating Income

Sales

Consolidated sales increased by 10.6% to 15,969 million euros from 14,436 million euros in 2004. Currency fluctuations had a positive impact of 227 million euros or 1.7% reflecting mainly the strong appreciation of the Canadian dollar, the South Korean won, the Brazilian real, the Polish zloty, the Romanian leu and the Chilean peso against the euro. Changes in the scope of consolidation had a net positive impact of 109 million euros or 0.7%, including in particular the effect of the acquisition of Cementos Selva Alegre in Ecuador by the Cement Division and of several smaller acquisitions in North America and Europe by the Aggregates & Concrete Division. Consolidated sales at constant scope and exchange rates grew by 8.2%, positively affected by overall favorable market conditions and by the significant price increases implemented to cover the sharp rise in energy costs in most of our markets.

Contributions to our sales by Division (before elimination of inter-Division sales) for the years ended December 31, 2005 and 2004, and the related percentage changes between the two periods were as follows:

Sales

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(million euros)

Cement

8,314

12.3

7,403

Aggregates & Concrete

5,392

13.3

4,761

Roofing

1,514

1.4

1,493

Gypsum

1,479

9.3

1,353

Other

25

(51.0)

51

Elimination of inter-Division sales

(755)

20.8

(625)

TOTAL

15,969

10.6

14,436


Contributions to our consolidated sales by Division (after elimination of inter-Division sales) for the years ended December 31, 2005 and 2004, and the related percentage changes between the two periods were as follows:

Sales

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Cement

7,595

47.6

11.5

6,810

47.2

Aggregates & Concrete

5,377

33.7

13.3

4,747

32.9

Roofing

1,514

9.5

1.4

1,493

10.3

Gypsum

1,462

9.2

9.1

1,340

9.3

Other

21

-

(54.3)

46

0.3

TOTAL

15,969

100.0

10.6

14,436

100.0




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At constant scope and exchange rates, the changes in sales by Division between the years ended December 31, 2005 and 2004, were as follows:

Changes in sales by Division (million euros)

2005

2004

Variation 2005/2004

Actual

Scope effect of acquisitions

On a comparable basis

Actual

Scope effect of disposals

At constant scope

Currency fluctuation effects

On a comparable basis

% Gross change Actual

% Change at constant scope and exchange rates

(a)

(b)

(c) = (a)+(b)

(d)

(e)

(f) = (d)+(e)

(g)

(h) = (f)+(g)

(i) = (a-d)/(d)

(j) = (c-h)/(h)

Cement

8,314

(89)

8,225

7,403

7

7,410

114

7,524

12.3

9.3

Aggregates & Concrete

5,392

(97)

5,295

4,761

(66)

4,695

103

4,798

13.3

10.4

Roofing

1,514

(27)

1,487

1,493

(1)

1,492

8

1,500

1.4

(0.8)

Gypsum

1,479

-

1,479

1,353

(11)

1,342

18

1,360

9.3

8.7

Other

25

-

25

51

(28)

23

1

24

(51.0)

4.2

Elimination of inter-Division sales

(755)

6

(749)

(625)

1

(624)

(17)

(641)

n.a.

n.a.

TOTAL

15,969

(207)

15,762

14,436

(98)

14,338

227

14,565

10.6

8.2


Current Operating Income

Current Operating Income grew by 7.1% to 2,357 million euros from 2,201 million euros in 2004. The appreciation of the Canadian dollar, the Brazilian real, the Romanian leu, the Polish zloty, the Chilean peso and the South Korean won against the euro had a positive impact of 45 million euros. Changes in the scope of consolidation accounted for a net increase of 24 million euros and are principally due to the acquisition of Cementos Selva Alegre in Ecuador. At constant scope and exchange rates, current operating income recorded an increase of 3.9%, with the Cement, Aggregates & Concrete and Gypsum Divisions benefiting from solid current operating income growth. The Roofing Division’s current operating income declined, as it was particularly affected by the difficult German construction environment. As a percentage of our sales, current operating income represented 14.8% in 2005, compared to 15.2% in 2004.

Group return on capital employed after tax(1) declined slightly to 8.5% in 2005 from 8.7% in 2004.

Contributions to our current operating income by Division for the years ended December 31, 2005 and 2004, and the related percentage changes between the periods were as follows:


Current operating income

2005

Variation 2005/2004

2004

(million euros)

(%)

(%)

(million euros)

(%)

Cement

1,770

75.1

10.8

1,597

72.6

Aggregates & Concrete

398

16.9

11.5

357

16.2

Roofing

98

4.2

(34.2)

149

6.8

Gypsum

151

6.4

14.4

132

6.0

Other

(60)

(2.6)

-

(34)

(1.6)

TOTAL

2,357

100.0

7.1

2,201

100.0



(1) See in Section 4.1 the reconciliation of our non-GAAP financial measures.




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At constant scope and exchange rates, the changes in consolidated current operating income by Division between the years ended December 31, 2005 and 2004 were as follows:

Changes in consolidated current operating income by Division(million euros)

2005

2004

% Variation 2005/2004

Actual

Scope effect of acquisitions

On a comparable basis

Actual

Scope effect of disposals

At constant scope

Currency fluctuation effects

On a comparable basis

% Gross change Actual

% Change at constant scope and exchange rates

(a)

(b)

(c) = (a)+(b)

 (d)

(e)

(f) = (d)+(e)

(g)

(h) = (f)+(g)

(i) = (a-d)/(d)

(j) = (c-h)/(h)

Cement

1,770

(16)

1,754

1,597

-

1,597

36

1,633

10.8

7.4

Aggregates & Concrete

398

(7)

391

357

-

357

5

362

11.5

7.9

Roofing

98

(2)

96

149

-

149

-

149

(34.2)

(35.7)

Gypsum

151

-

151

132

(1)

131

3

134

14.4

12.8

Other

(60)

-

(60)

(34)

-

(34)

1

(33)

-

-

TOTAL

2,357

(25)

2,332

2,201

(1)

2,200

45

2,245

7.1

3.9


Sales and Current Operating Income by Division

Methodology of presentation

Sales before elimination of inter-Division sales

Individual Division information is discussed below without elimination of inter-Division sales. For sales by each Division after elimination of inter-Divisional sales, see the table under “Consolidated Sales and Current Operating Income” above.

Geographic market information: by origin of sale, “domestic” and by destination

For the Cement Division and the Aggregates & Concrete Division, unless otherwise indicated, we analyze our sales for each region or country by origin of sale. “Domestic sales” and “domestic volumes” concern only sales and volumes both originating and made within the relevant geographic market, and thus exclude export sales and volumes. When not described as “domestic”, such information includes domestic sales or volumes plus exports to other geographic markets. Unless otherwise indicated, all “domestic” information is provided on the basis of constant scope and exchange rates.

Certain sales and volume information is also presented “by market of destination”. Such information represents domestic sales and volumes for the relevant market plus imports into this market.

For the Roofing and Gypsum Divisions, unless otherwise indicated, we analyze sales and volumes for each region or country “by market of destination”.

Cement

Sales and current operating income

2005

2004

Variation 2005/2004

Variation at constant scope and exchange rates

(million euros)

(million euros)

(%)

(%)

SALES

8,314

7,403

+12.3

+9.3

CURRENT OPERATING INCOME

1,770

1,597

+10.8

+7.4




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Sales

Contributions to our sales by geographic origin of sale for the years ended December 31, 2005 and 2004, and the related percentage changes between the two periods were as follows:

Sales

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Western Europe

2,532

30.5

4.5

2,422

32.7

North America

1,756

21.1

15.5

1,520

20.5

Central & Eastern Europe

584

7.0

25.1

467

6.3

Mediterranean Basin

534

6.4

24.2

430

5.8

Latin America

534

6.4

16.3

459

6.2

Sub-Saharan Africa

1,281

15.4

21.4

1,055

14.3

Asia

1,093

13.2

4.1

1,050

14.2

SUB-TOTAL BEFORE ELIMINATION OF INTER-DIVISION SALES

8,314

100.0

12.3

7,403

100.0


Sales of the Cement Division increased by 12.3% to 8,314 million euros, from 7,403 million euros in 2004. Currency fluctuations had a positive impact on sales of 1.7% and amounted to 114 million euros. Changes in the scope of consolidation had a net positive impact of 96 million euros, or 1.3%, including in particular the effect of the acquisition of Cementos Selva Alegre in Ecuador.

At constant scope and exchange rates our sales grew by 9.3% (2.1% in the first quarter 2005 compared to the first quarter 2004, 9.9% in the second quarter 2005, 10.8% in the third quarter 2005 and 13.3% in the fourth quarter 2005). This strong sales growth was driven primarily by generally upward pricing trends in the majority of our markets, with the noticeable exception of Brazil, South Korea and Malaysia, in a context of sharply rising energy costs. Volumes, which reached 123.2 million tones in 2005, increased by 3.2% compared to 2004. At constant scope, volume growth reached 2.2%.

Current Operating Income

Contributions to our current operating income by region for the years ended December 31, 2005 and 2004, and the related percentage changes between the periods were as follows:

Current operating income

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Western Europe

623

35.2

(1.0)

629

39.4

North America

321

18.2

18.9

270

16.9

Central & Eastern Europe

179

10.1

70.5

105

6.6

Mediterranean Basin

199

11.2

28.4

155

9.7

Latin America

126

7.1

(12.5)

144

9.0

Sub-Saharan Africa

254

14.4

29.6

196

12.3

Asia

68

3.8

(30.6)

98

6.1

TOTAL

1,770

100.0

10.8

1,597

100.0




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Current operating income grew by 10.8% to 1,770 million euros in 2005 compared to 1,597 million euros in 2004. Currency fluctuations had a positive impact of 2.4% or 36 million euros. Net changes in the scope of consolidation had a net positive impact of 16 million euros.

At constant scope and exchange rates, current operating income rose by 7.4%. As a percentage of the Division’s sales, current operating income represented 21.3% in 2005, compared to 21.6% in 2004. Current operating income generally improved under the impact of volume growth, although markets where local production capacity could not satisfy demand experienced a more limited growth in current operating income due to additional import of cement and clinker and transportation costs. Price increases, despite difficult pricing conditions in Brazil, South Korea and Malaysia, allowed us to compensate for most of our cost increases, and in particular, the sharp rise in energy prices which increased our production costs by 160 million euros. Improvements in fuel mix by using petcoke and other alternative fuels to replace higher cost fuels helped to limit the increase in energy costs.

Return on capital employed after tax(1) remained unchanged in 2005 compared to 2004, at 9.7%.

Western Europe

Sales

In Western Europe, sales totaled 2,532 million euros, an increase of 4.5% compared to 2004.

Domestic sales, at constant scope and exchange rates, increased by 4.3%. The volumes sold in Western Europe by destination, at 31.9 million tones, remained essentially unchanged compared with 2004. Domestic volumes, at constant scope, decreased by 1.8%.

·

In France, domestic sales were up by 6.1% as the result of volume growth in a context of a strong building sector throughout the year coupled with a favorable pricing environment.

·

In the United Kingdom, domestic sales grew by 2.7% driven by well oriented prices despite lower volumes due to the weakening of the market and some market share erosion with the new plant of one of our competitors, Tarmac, running now at full capacity.

·

Spain continued to record favorable trends in construction spending. Domestic sales growth at 7.6% benefited from good pricing conditions.

·

In Germany, the construction market weakened once again, but domestic sales recorded an 8% sustained growth fuelled by the steady recovery in prices more than offsetting the adverse volume trend.

·

In Greece, domestic volumes were down in line with the market decline after the completion of the 2004 Olympic Games and the reduction of public spending. Domestic sales were however slightly up as a result of improved pricing.

Current Operating Income

Current operating income in Western Europe decreased by 1.0% to 623 million euros compared to 629 million euros in 2004. Foreign exchange fluctuations and scope variation had a limited impact on the trend in current operating income.

At constant scope and exchange rates current operating income decreased by 1.0%. The evolution of current operating income was mixed across the region.

·

In France, the strong construction market led to robust growth in current operating income, with good pricing conditions more than offsetting higher energy expenses.

·

In Spain, current operating income improved as the result of price increases. The rise in energy costs was partly compensated by improved fuel mix.

·

In the United Kingdom, current operating income was down as the result of lower volumes. Successful price increases more than offset the sharp rise in energy costs which were partly mitigated by improved fuel mix.

·

In Germany, where losses were incurred in 2004, the steady improvement in prices enabled positive results in 2005, despite lower domestic volumes. Increased usage of alternative fuels partly offset the rise in energy prices.

·

In Greece, current operating income decreased as the result of a decline in volumes and price increases which were insufficient to fully cover cost increases. The increase in energy costs was partly limited, however, by improved fuel mix.

North America

Sales

In North America, we achieved sales of 1,756 million euros in 2005, an increase of 15.5% compared to 2004.Domestic sales, at constant scope and exchange rates, increased by 13.1%.

The volumes sold in North America by destination, at 21.2 million tonnes, grew by 1%. Domestic volumes, at constant scope, recorded a similar growth at 1.1%.



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Favorable economic conditions supported strong levels of demand across markets in the first half of 2005, offsetting the slight decline witnessed in the second half of the year. Results were mixed depending upon geography. Volume growth in our Western, River and Southeastern markets more than compensated for weaker Northeastern and Lakes markets. Pricing trends continued to be positive with successful price increases achieved in all markets in the first half of the year. In several U.S. markets a second price increase was implemented later in the year.

Current Operating Income

Current operating income in North America grew by 18.9% to 321 million euros compared to 270 million euros in 2004. Currency fluctuations had a positive impact of 12 million euros.

At constant scope and exchange rates, current operating income grew by 13.8%. The growth in results was essentially achieved through improved pricing which mitigated relatively high cost increases. Higher energy prices were exacerbated by hurricane Katrina’s impact on energy supply, freight costs increased due to sub-optimal shipping patterns to serve customers in a context of tight market conditions in early 2005, and high levels of demand in the growth markets led to increased imports of cement. In addition, our costs were also impacted by an increase in pension costs and costs associated with our ERP implementation project.

Growing markets

Sales

In growing markets, our sales increased by 16.3% to 4,026 million euros, with growing markets accounting for 48.4% of the Division’s sales in 2005, compared to 46.8% in 2004. Overall, domestic growing market sales increased by 10.8%, at constant scope and exchange rates. The volumes sold in growing markets by destination, at 70.1 million tonnes for 2005, grew by 5.6%.

At constant scope, domestic volumes in growing markets recorded a 6.5% growth. Strong domestic market growth was recorded in all regions except Latin America and Asia.

Our sales in Central and Eastern Europe rose by 25.1% in 2005 to 584 million euros. At constant scope and exchange rates, domestic sales increased by 19.3%. The volumes sold in Central and Eastern Europe by destination, at 11.2 million tonnes, grew by 10.9%. Domestic volumes, at constant scope, recorded a 12.8%, growth.

·

In Romania domestic sales were up by 11.1%, in a favorable environment in both residential and infrastructure sectors and despite a slight price decrease.

·

In Poland, domestic sales recorded a modest growth of 0.7%, with downward pricing pressure partly offsetting the benefit of improved domestic volumes.

·

In Russia, domestic sales recorded an excellent 59.6% growth fuelled by the positive price trend which started to materialize at the end of the first semester and continued throughout the rest of the year. Volumes also increased benefiting from unusually warm weather in the last quarter of the year and from additional production capacity in our Korkino plant in the Ural region.

·

In Serbia high domestic volumes growth and good prices resulted in a solid 32% domestic sales improvement.

In the Mediterranean Basin, our sales increased in 2005 by 24.2% to 534 million euros.

At constant scope and exchange rates, domestic sales increased by 26.0%. The volumes sold in the Mediterranean Basin by destination at 10.5 million tones, grew by 8.2%. Domestic volumes, at constant scope, recorded a 14.0%, growth.

·

In Jordan, Turkey and Egypt significant domestic volume growth was achieved in very active construction sectors. Strong price rises implemented to counteract the sharp increase in energy prices led to a very solid domestic sales growth in the three countries ranging from 31.3% in Egypt and Jordan to 42.3% in Turkey.

·

In Morocco, the domestic sales growth was relatively strong at 5.9%.

In the Sub-Saharan Africa region, our sales grew by 21.4% to 1,281 million euros.

At constant scope and exchange rates, domestic sales increased by 20.1%. The volumes sold in the Sub-Saharan Africa region by destination, at 12.8 million tonnes, grew by 3.2%. Domestic volumes, at constant scope, recorded a 6.4% growth.

·

In Nigeria, good pricing conditions and domestic volume increases, led to a 21% domestic sales growth.

·

In South Africa, a particularly active non-residential building sector, delivered strong 20.4% domestic sales growth, although activity slowed in the previously dynamic residential sector.

·

In Kenya and Uganda, with strong market conditions favored by an active residential sector, domestic sales increased by respectively 22.5% and 19.1%.

·

In Cameroon, domestic sales grew by 7.7% in a stable market environment.

·

In South East Africa, which covers Zambia, Malawi, Tanzania and Zimbabwe, domestic sales contributed solid growth with strong volume increase and good pricing conditions in all countries.



LAFARGE 20-F - Annual Report 2005 - 54


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In Latin America, our sales were up in 2005 by 16.3% to 534 million euros with scope changes resulting from the acquisition of Cementos Selva Alegre having a positive impact of 11%.

At constant scope and exchange rates, domestic sales decreased by 2.1%. The volumes sold in Latin America by destination, at 6.9 million tonnes, grew by 15%. Domestic volumes, at constant scope, recorded a 5%, growth.

·

In Brazil, domestic sales were down by 26.6%, suffering from a 32% decline in prices in a context of fierce competition.

·

In Venezuela, where high oil prices are fuelling economic recovery, cement demand has been strong. In such a context, domestic sales grew by 21.3%.

·

In Chile, domestic sales increased by 4.4% despite limited volume growth as a consequence of a relatively slow first semester affected by unfavorable weather conditions.

·

In Honduras, sales grew by 39%, with prices recovering from a difficult situation in 2004.

In Asia, our operations recorded sales growth of 4.1% in 2005 to 1,093 million euros. The net positive scope effect resulting from the new Lafarge Shui On Joint Venture had no material impact on our sales, since consolidation started in November 2005.

At constant scope and exchange rates, domestic sales remained essentially unchanged compared with 2004. The volumes sold in Asia by destination, at 28.7 million tonnes, grew by 1.8%. Domestic volumes, at constant scope, recorded a 2% growth.

·

In the Philippines, domestic sales were up 5.3% as the result of price increases while volumes were down in a context of depressed demand with, in particular, low levels of government spending.

·

In Malaysia domestic sales growth was limited to 4.8%, despite higher domestic volumes, as a result of severe price competition during the first semester of the year. Prices started to recover in June and have since moved to a level which was higher than 2004 and the highest since the Asian financial crisis in 1998.

·

In South Korea, domestic sales declined by 15.1% with lower sales volumes and declining prices in a difficult market. Government initiatives to dampen property price inflation have led to tough competition between domestic producers and importers. Although not yet back to a satisfactory level, prices remained stable in the second half of 2005 after a continued decline in the first part of the year.

·

In India, markets were well oriented and domestic sales increased by 6.5%.

·

In Indonesia, despite an active market, our volumes were down as a consequence of the destruction of our plant by the tsunami at year-end 2004 and the time needed to install import logistics in early 2005. Our domestic sales were however up by 6.3% as the result of improved pricing.

·

In China our domestic sales grew by 21.7% benefiting from strong demand in most of our markets and from additional production capacity in the Chongqing area.

Current Operating Income

Current operating income in emerging markets rose by 18.3% in 2005 to 826 million euros compared to 698 million euros in 2004, representing 46.7% of the Cement Division’s current operating income, compared to 43.7% in 2004. Currency fluctuations had a positive impact on current operating income of 25 million euros. Changes in the scope of consolidation had a positive impact of 13 million euros arising mainly from the acquisition of Cementos Selva Alegre in Ecuador.

Current operating income at constant scope and exchange rates grew by 12.1%.

In Central and Eastern Europe current operating income increased by 70.5% to 179 million euros compared to 105 million euros in 2004.

Current operating income at constant scope and exchange rates improved by 54.3% with all countries in the region showing improved results.

·

In Romania current operating income increase was driven by the additional volumes contribution partly offset by cost inflation which could not be passed on to customers.

·

In Poland the negative impact of energy price increases was mitigated by an increase usage of alternative fuel and petcoke.

·

In Russia, current operating income increased substantially, despite relatively high cost inflation, under the impact of additional volumes and strong price rises.

·

In Serbia, the strong sales improvement and the benefits of the new cement production dry line delivered robust growth in current operating income.

In the Mediterranean Basin, current operating income in 2005 increased by 28.4% to 199 million euros compared to 155 million euros in 2004.

Current operating income at constant scope and exchange rates grew by 27.2% with strong growth in Jordan, Turkey and Egypt, on well oriented markets offering good pricing conditions in a context of a sharp rise in energy costs.



LAFARGE 20-F - Annual Report 2005 - 55


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In Morocco current operating income benefited from a favorable volume effect while price increases did not fully cover cost increases.

In Latin America current operating income declined by 12.5% from 144 million euros in 2004 to 126 million euros in 2005, despite the benefit of the positive scope change of 16 million euros resulting mainly from the acquisition of Cementos Selva Alegre in Ecuador.

At constant scope and exchange rates, current operating income was down 29.2%.

·

In Brazil, the collapse in selling prices combined with the sharp rise in energy cost led to a severe fall in current operating income.

·

In Venezuela current operating income was improved under the impact of increased volumes.

·

In Chile current operating income was largely unchanged compared with 2004.

·

Honduras recorded a solid current operating income growth mainly as the result of improved pricing. The increase in production cost was mitigated by better fuel mix.

In Sub-Saharan Africa, current operating income increased by 29.6% to 254 million euros in 2005 from 196 million euros in 2004.

At constant scope and exchange rates, current operating income grew by 29.3% with strong growth in Nigeria, South Africa and Kenya, our major markets in the region.

·

In Nigeria favorable pricing trends more than offset cost inflation.

·

In South Africa, for the third consecutive year, the strong construction market continued to drive current operating income growth.

·

Current operating income in Kenya rose sharply benefiting from the contribution of higher volumes.

·

In Uganda, Cameroon and Tanzania, higher cement and clinker imports led to a slight decrease in current operating income.

In Asia, current operating income declined by 30.6% to 68 million euros down from 98 million euros in 2004.

At constant scope and exchange rates, current operating income declined by 29.6% as the result of the sharp fall in current operating income in South Korea and Malaysia.

·

In South Korea margins collapsed in the context of severe price competition despite action plans implemented to reduce fixed costs.

·

In Malaysia, the drop in current operating income arose from a price decline in the first part of the year in a context of higher production costs affected by the increase in coal prices.

·

The recovery in prices in the Philippines continued to contribute strongly to the improvement in current operating income. This improvement was achieved despite lower volumes and high energy costs.

·

In India while solid sales growth was recorded, current operating income was slightly down due to higher energy costs.

·

In Indonesia, current operating income remained almost unchanged compared with 2004 as the result of insurance proceeds to cover business interruption due to the tsunami at year-end 2004.

·

In China, despite strong volume growth, soaring energy prices were only partially passed on to customers, leading to limited growth in current operating income.

Aggregates & Concrete

Sales and current operating income

2005

2004

Variation 2005/2004

Variation at constant scope and exchange rates

 

(million euros)

(million euros)

(%)

(%)

Sales

5,392

4,761

+ 13.3

+ 10.3

Current operating income

398

357

+ 11.5

+ 7.9




LAFARGE 20-F - Annual Report 2005 - 56


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Sales

Contributions to our sales by activity and by geographic origin of sale for the years ended December 31, 2005 and 2004, and the related percentage changes between the two periods were as follows:

Sales

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

AGGREGATES & RELATED PRODUCTS

2,831

 

13.1

2,503

 

Of which pure Aggregates:

     

Western Europe

937

45.6

8.6

863

46.5

North America

941

45.8

10.6

851

45.9

Other regions

176

8.6

25.7

140

7.6

TOTAL PURE AGGREGATES

2,054

100.0

10.8

1,854

100.0

      

READY MIX CONCRETE & CONCRETE PRODUCTS

2,932

 

13.4

2,586

 

Of which ready mix:

     

Western Europe

1,227

44.2

11.0

1,105

45.2

North America

968

34.8

9.5

884

36.2

Other regions

584

21.0

28.6

454

18.6

TOTAL READY MIX CONCRETE

2,779

100.0

13.8

2,443

100

      

Eliminations of intra Aggregates & Concrete sales

(371)

  

(328)

 

TOTAL AGGREGATES & CONCRETE BEFORE ELIMINATION OF INTER-DIVISION SALES

5,392

 

13.3

4,761

 


Sales of the Aggregates & Concrete Division increased by 13.3% to 5,392 million euros in 2005 from 4,761 million euros in 2004. Currency fluctuations had a positive impact of 2.4% and amounted to 103 million euros.

Positive scope changes amounted to 97 million euros, reflecting the full year effects of the acquisition of The Concrete Company (TCC), in Alabama, in the United States and of Hupfer Holdings with operations in France and Switzerland, together with the effects of small sized developments in Ukraine, Greece and the United Kingdom. Negative scope effects amounted to 66 million euros primarily reflecting the impact of various divestments in North America. Overall changes in the scope of consolidation increased sales by 0.5%.

At constant scope and exchange rates, sales grew by 10.3% (4.5% in the first quarter 2005 compared to the first quarter 2004, 13.6% in the second quarter 2005, 10.2% in the third quarter 2005 and 11.2% in the fourth quarter 2005). Growth was driven principally by solid pricing gains in a context of rising costs while volume trends were also positive across most markets, particularly in emerging markets and to a lesser extent in Europe in the concrete activity and in several North American markets.

Sales of our aggregates operations, including sales to our ready-mix activities, were up by 13.1% between 2004 and 2005, to 2,831 million euros. Currency fluctuations and scope changes had a positive impact of 3.7%. At constant scope and exchange rates, sales grew by 9.4%. Sales volumes of aggregates rose by 2.4% to 239.9 million tonnes in 2005. At constant scope, they increased by 0.3%.

Sales of our concrete operations were up by 13.4% to 2,932 million euros from 2,586 million euros in 2004. Currency fluctuations and scope changes had a net positive impact of 2.2%. At constant scope and exchange rates, sales grew by 11.2%. Sales volumes of concrete increased by 5.4% to 39 million cubic meters. At constant scope, sales volumes grew by 4.8%.



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Current Operating Income

Contributions to our current operating income by activity and by region for the years ended December 31, 2005 and 2004, and the related percentage changes between the periods were as follows:

Current operating income

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Aggregates

272

68.3

14.8

237

66.4

Concrete

126

31.7

5.0

120

33.6

TOTAL BY ACTIVITY

398

100.0

11.5

357

100.0

Western Europe

179

45.0

14.7

156

43.7

North America

162

40.7

4.5

155

43.4

Other regions

57

14.3

23.9

46

12.9

TOTAL BY REGION

398

100.0

11.5

357

100.0


Current operating income of the Aggregates & Concrete Division increased by 11.5% to 398 million euros in 2005 from 357 million euros in 2004. Currency fluctuations had a positive impact of 1.7% or 5 million euros. Changes in the scope of consolidation had a net positive impact of 7 million euros arising from the small sized acquisitions in Ukraine, Greece and the United Kingdom and from the full year effect of the Hupfer acquisition in France and Switzerland.

At constant scope and exchange rates, current operating income grew by 7.9%. As a percentage of the Division’s sales, current operating income represented 7.4% in 2005, compared to 7.5% in 2004.

Current operating income for aggregates in 2005 totaled 272 million euros, an increase of 14.8% from 237 million euros in 2004. Current operating income for concrete in 2005 totaled 126 million euros, an increase of 5.0% from 120 million euros in 2004. The increase in the current operating income of the Division as a whole was resulted from successive and solid price increases to mitigate the effects of cost increases, particularly for energy. It also reflected significantly improved asphalt and paving performance, solid growth in concrete volumes in most markets, and further development in our special products in concrete

Return on capital employed after tax(1) slightly decreased to 8.1% from 8.2%.

Western Europe

Sales

Our pure aggregates sales in Western Europe grew by 8.6% in 2005 to 937 million euros, benefiting from the positive scope effect of the Hupfer Holdings acquisition.

At constant scope and exchange rates pure aggregates sales growth reached 4.5% as the result of the price increases implemented to face rising costs, while volumes were slightly down in all main markets as a consequence of lower spending in infrastructure projects.

Our asphalt and paving sales in the United Kingdom delivered solid growth reflecting the success of our efforts to develop sales and increase prices despite continuing low infrastructure spending.

Our ready-mix sales increased by a strong 11% to 1,227 million euros in 2005. At constant scope and exchange rates concrete sales recorded 9.7% growth, reflecting strong volumes in France and improved pricing in all main markets coupled with favorable product mix.

Current Operating Income

In Western Europe current operating income grew by 14.7% to 179 million euros in 2005. The net positive effect of changes in the scope of consolidation amounted to 8 million euros.

At constant scope the improvement in current operating income was driven by the recovery of the asphalt activities in the United Kingdom, and by the increase in the concrete activities benefiting from both strong volumes overall and good pricing. In the pure aggregates activity, current operating income was, at constant scope, essentially unchanged compared with 2004, with improved pricing offsetting the impact of the slight volume decline encountered in most Western European markets.

North America

Sales

In North America, pure aggregates sales rose by 10.6% to 941 million euros in 2005. At constant scope and exchange rates, pure aggregates sales growth reached 8.7% driven by successful price increases across all markets and a moderate volume increase. Market conditions were contrasted with steady growth in Western Canada, Western and Southeast U.S. regions and a softening of demand in Eastern Canada and the Great Lakes region.


(1) See in Section 4.1 the reconciliation of our non-GAAP financial measures.




LAFARGE 20-F - Annual Report 2005 - 58


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Asphalt and paving sales delivered solid growth under the combined effect of relatively strong economic conditions and improved asphalt prices.

Ready mix sales increased by 9.5% to 968 million euros in 2005.

At constant scope and exchange rates, ready mix sales delivered 6.9% growth reflecting solid price increases achieved to recover cost inflation in all markets. Volumes have declined in most regions and more specifically in our Eastern Canadian markets and in Louisiana due to hurricane Katrina, while other markets in the southeast part of the United States benefited from good volume growth.

Current Operating Income

In North America, operating income grew by 4.5% to 162 million euros in 2005. The strengthening of the Canadian dollar against the euro had a positive impact of 4 million euros. Changes in the scope of consolidation had a net negative impact of 2 million euros.

At constant scope and exchange rates, current operating income remained essentially unchanged compared with 2004. The combined effects of significantly higher energy and raw material costs, higher pension and other post-retirement costs, ERP deployment costs and increased subcontracting to meet strong demand in few aggregates markets offset the positive contribution from higher prices in all product lines.

Elsewhere in the world

Sales

In the rest of the world, pure aggregates and ready-mix sales increased by 25.7% and 28.6%, respectively. In the aggregates activity we recorded noticeable growth in Turkey, Poland, Ukraine and South Africa. In the concrete activity, we benefited from excellent activity levels in most emerging markets.

Current Operating Income

Current operating income experienced another year of strong growth reaching 57 million euros in 2005 compared to 46 million euros in 2004. Continued significant progress in the current operating income in South Africa where we have the strongest aggregates and concrete position in emerging markets, and a noticeable improvement in Poland were the key drivers of the increase.

Roofing

Sales and current operating income

2005

2004

Variation 2005/2004

Variation at constant scope and exchange rates

 

(million euros)

(million euros)

(%)

(%)

Sales

1,514

1,493

+1.4

(0.8)

Current operating income

98

149

(34.2)

(35.7)


Sales

Contributions to our sales by destination for the years ended December 31, 2005 and 2004 and the related percentage changes between the two periods were as follows:

Sales

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Western Europe

1,085

71.7

(2.0)

1,107

74.1

Germany

329

21.7

(14.5)

385

25.8

Other countries in Western Europe

756

49.9

4.7

722

48.3

Other regions

429

28.3

11.1

386

25.9

TOTAL BEFORE ELIMINATION OF INTER-DIVISION SALES

1,514

100.0

1.4

1,493

100.0




LAFARGE 20-F - Annual Report 2005 - 59


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The Roofing Division sales increased by 1.4% to 1,514 million euros in 2005 from 1,493 million euros in 2004. Currency fluctuations had a positive impact on sales of 0.5% and amounted to 8 million euros. Changes in the scope of consolidation had a net positive impact of 26 million euros, or 1.7%, resulting mainly from the acquisition of the RiteVent chimneys business in the United Kingdom.

At constant scope and exchange rates, sales dropped by 0.8% (down 9.1% in the first quarter 2005 compared to the first quarter 2004, down 3.8% in the second quarter 2005, up 0.8% in the third quarter 2005 and up 7.1% in the fourth quarter 2005). This decline in sales resulted essentially from renewed weakness in the German construction market.

Sales of concrete tiles decreased 1.9% to 727 million euros in 2005, while sales of clay tiles increased by 2.5% to 268 million euros. Chimney sales increased by 14.1% to 216 million euros. Roofing system components sales and other sales at 303 million euros were stable year on year.

Current Operating Income

Contributions to our current operating income by main market, for the years ended December 31, 2005 and 2004, and the related percentage changes between the periods were as follows:

Current operating income

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Western Europe

61

62.2

(46.0)

113

75.8

Germany

(1)

(1.1)

-

39

26.1

Other countries in Western Europe

62

63.3

(16.2)

74

49.7

Other regions

37

37.8

2.8

36

24.2

TOTAL

98

100.0

(34.2)

149

100.0


The Division’s current operating income was down 34.2% to 98 million euros in 2005 from 149 million euros in 2004. Changes in the scope of consolidation had a net positive impact of 2 million euros. As a percentage of the Division’s sales, current operating income represented 6.5% in 2005, compared to 10.0% in 2004. The renewed decline in the German construction market, with a loss now being recorded in the German roofing operations, was the main cause of the sharp fall in the Division’s current operating income.

Return on capital employed after tax(1) decreased to 3.6% from 5.5%.

Western Europe

Sales

In Western Europe, sales were down by 2.0% to 1,085 million euros, with declines in both concrete and clay tiles.

·

In Germany, sales decreased by 14.5% in a context of weak construction demand and fierce competition. The first and second quarter of 2005 were particularly difficult, suffering from bad weather conditions in the beginning of the year and from a relatively high comparison basis, since high demand was generated in the first half of 2004 following the announcement of the end of public subsidies to private house builders. In such an environment, volumes were down both in concrete and clay activities, prices remained under pressure and chimneys sales declined.

·

In the Benelux (Belgium-Netherlands-Luxembourg) region, sales were slightly up, with a decline in concrete tiles being offset by increased sales in clay tiles.

·

In the United Kingdom, sales were slightly adversely affected by the negative impact of currency fluctuations but benefited from the entry into the scope of consolidation of the RiteVent chimney business. Weak market trends and tough competition affected negatively our volumes both in concrete and clay tiles. This unfavorable volume effect was however mitigated by improved pricing and improved chimney sales.

·

In France, 2005 sales were in line with 2004 sales, lower volumes being offset by better mix and pricing.

·

In Italy, a sales increase in 2005, was mainly driven by better pricing in the concrete tile business and satisfactory development of chimney sales, while concrete tiles volumes were slightly down.


(1) See in Section 4.1 the reconciliation of our non-GAAP financial measures.




LAFARGE 20-F - Annual Report 2005 - 60


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·

Scandinavia delivered a solid growth in all its markets with strong volumes benefiting from a longer season due to favorable weather conditions.

Current Operating Income

Current operating income in Western Europe dropped by 46% to 61 million euros in 2005.

·

In Germany, the weakness in the construction market led to volume decrease and severe price competition. Despite the extensive restructuring of the operations, the extent of the renewed decline led to a sharp drop in utilization of production capacity. As a result, an operating loss of 1 million euros was recorded in 2005.

·

In other Western European countries current operating income decreased to 62 million euros from 74 million euros in 2004. In the United Kingdom, current operating income was below last year as the result of weak market conditions. In France, we experienced production difficulties which led to delivery problems as products were not available in sufficient quantity to respond to demand. Scandinavia, on the other hand, recorded a strong current operating income improvement.

North America and other regions

Sales

In the United States, sales increased by 21% in 2005, driven primarily by price increases and to a lesser extent by volume growth. In other regions sales were up by 7% overall. Good growth was recorded in South Africa, Brazil and Turkey. In Poland, Malaysia and Japan sales declined due to difficult market conditions.

Current Operating Income

Current operating income improved to 37 million euros in 2005 from 36 million euros in 2004. The United States continued to record strong current operating income growth. This growth was partly offset by lower results in Central Europe, Malaysia and Japan.

Gypsum

Sales and current operating income

2005

2004

Variation 2005/2004

Variation at constant scope and exchange rates

 

(million euros)

(million euros)

(%)

(%)

Sales

1,479

1,353

+9.3

+8.7

Current operating income

151

132

+14.4

+12.8


Sales

Contributions to our sales by destination for the years ended December 31, 2005 and 2004 and the related percentage changes between the two periods were as follows:

Sales

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Western Europe

766

51.8

4.1

736

54.4

North America

331

22.4

25.9

263

19.4

Other regions

382

25.8

7.9

354

26.2

TOTAL BEFORE ELIMINATION OF INTER-DIVISION SALES

1,479

100.0

9.3

1,353

100.0


Sales of the Gypsum Division increased by 9.3% to 1,479 million euros in 2005 from 1,353 million euros in 2004. Changes in the scope of consolidation had a negative impact of 0.9% and currency fluctuations increased sales by 1.5%.

At constant scope and exchange rates, sales increased by 8.7% (4.5% in the first quarter 2005 compared to the first quarter 2004, 9.7% in the second quarter 2005, 7.6% in the third quarter 2005 and 12.4% in the fourth quarter 2005).



LAFARGE 20-F - Annual Report 2005 - 61


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The increase in sales was largely driven by favorable market conditions in North America, with higher prices and good volume growth.

Sales volumes of wallboard grew by 2.8% in 2005 to 694 million square meters. At constant scope volume growth was 3.7%.

Current Operating Income

Contributions to our current operating income by region, for the years ended December 31, 2005 and 2004, and the related percentage changes between the periods were as follows:

Current operating income

2005

Variation 2005/2004

2004

 

(million euros)

(%)

(%)

(million euros)

(%)

Western Europe

77

51.0

4.1

74

56.1

North America

45

29.8

125.0

20

15.2

Other regions

29

19.2

(23.7)

38

28.7

TOTAL

151

100.0

14.4

132

100.0


Current operating income grew by 14.4% to 151 million in 2005 from 132 million in 2004. Currency fluctuations had a positive impact of 3 million euros.

At constant scope and exchange rates, current operating income increased by 12.8%. As a percentage of the Division’s sales, current operating income increased to 10.2% in 2005, from 9.8% in 2004. The overall impact of selling price increases more than matched the unfavorable variances of input costs represented mainly by higher energy prices (21 million euros), transportation delivery costs and raw materials prices. However, although prices were generally able to offset cost increases, such offsetting was not possible when market conditions were adverse or weakened in countries like South Korea, Poland or France.

Return on capital employed after tax(1) increased to 10.2% from 9.3%.

Western Europe

Sales

In Western Europe, sales grew by 4.1% to 766 million euros in 2005 up 736 million euros in 2004 with favorable volumes in the United Kingdom and Ireland, France and Italy. In Germany, volumes were down in a persistently weak market. Pricing conditions were overall favorable except in France where prices remained under pressure and could not be increased to a more satisfactory level.

Current Operating Income

In Western Europe current operating income improved by 4.1% to 77 million euros from 74 million euros in 2004. This increase was largely driven by the U.K., which recorded strong growth after a weaker 2004 which was adversely affected by higher sourcing costs. In France, current operating income was slightly down despite higher volumes, as the increase in selling prices did not fully offset the sharp rise in input costs.Current operating income was slightly up in Germany due to improved pricing and in Italy due to improved market conditions.

North America

Sales

In North America, sales in 2005 grew by 25.9% to 331 million euros from 263 million euros in 2004. A strong housing market kept demand for wallboard high. In addition, tight overall industry supply coupled with these good market conditions have led to a very favorable pricing environment. Five price increases were implemented in 2005.

Current Operating Income

In North America, current operating income improved by 125% to 45 million euros in 2005 from 20 million euros in 2004. Higher selling prices and continued strong demand drove the increase in profitability, more than offsetting increases in natural gas and raw material costs. For the second consecutive year, our two high-speed plants at Silver Grove and Palatka performed well at high levels of output.

Other Regions

Sales

In other regions our sales rose overall by 7.9% to 382 million euros in 2005 from 354 million euros in 2004. Good levels of activity were recorded in Turkey, Latin America, South Africa and Thailand. South Korea continued to face a depressed market while Australia was affected by a downturn in overall demand. Poland suffered from weaker market conditions, worsened by excess manufacturing capacity.



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Current Operating Income

In other regions, current operating income declined by 23.7% to 29 million euros in 2005, compared to 38 million euros in 2004, essentially caused by lower income in South Korea, Australia and Poland.

Other (including holdings)

Sales

Sales of our other operations fell by 51%, to 25 million euros in 2005 from 51 million euros in 2004, following further divestments made in the lime and road marking activities.

Current Operating Income (Loss)

Current operating loss of our other operations, which includes central unallocated costs, rose to 60 million euros in 2005 compared to a loss of 34 million euros in 2004 partly due to accounting charges amounting to 13 million related to stock options and to an employee share purchase plan launched in April 2005 and to extra costs arising from the management of the internal control certification process under French and U.S. regulations, respectively the Loi de sécurité financière and the Sarbanes-Oxley Act (Section 404).

4.3 Operating income and net income

The table below shows the evolution of our operating income and net income for the years ended December 31, 2005 and 2004:

 

2005

Variation 2005/2004

2004

(million euros)

(%)

(million euros)

CURRENT OPERATING INCOME

2,357

7.1

2,201

Gains on disposals, net

37

(59.3)

91

Other operating income (expenses)

(157)

(28.0)

(218)

OPERATING INCOME

2,237

7.9

2,074

Finance (costs) income

(427)

(21.9)

(547)

Income from associates

38

(48.6)

74

INCOME BEFORE INCOME TAX

1,848

15.4

1,601

Income tax

(424)

58.8

(267)

NET INCOME

1,424

6.7

1,334

Out of which: Group share

1,096

4.8

1,046

Minority interests

328

13.9

288


Gains on disposals, net, represented a net gain of 37 million euros in 2005, compared to 91 million euros in 2004. In 2005, the net gain was generated by several transactions including the merger of our operations in China with Shui On operations to form the new Lafarge Shui On Joint Venture.

Other operating income (expenses), represented a net expense of 157 million euros in 2005, compared to a net expense of 218 million euros in 2004. In 2005, other expenses included essentially 85 million euros of exceptional asset amortization and depreciation, 53 million euros of restructuring costs, and 27 million euros of litigation expense. The main exceptional asset amortization and depreciation was a goodwill impairment amounting to 65 million euros, arising from our annual impairment test process and impacting, in particular, our cement reporting unit in the Philippines. The most significant restructuring costs were incurred in Germany in the roofing operations and in South Korea in the cement operations. Litigation expenses include in particular a 10 million euros fine paid to the Romanian Competition Council by our subsidiary Lafarge Romcim. Other income in 2005 included a 42 million euro gain as the result of the partial refund of a penalty paid in 1999 to the Greek State by Heracles, under a European Union judgment related to excessive state aid received in the mid 1980’s.



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Operating income increased by 7.9% to 2,237 million euros, from 2,074 million euros in 2004.

Finance (costs) income, decreased by 21.9% to 427 million euros from 547 million euros in 2004.  Financial expenses, net, are comprised of financial expenses on net debt and other financial income and expenses. Financial expenses on net debt decreased by 5.8% to 419 million euros from 445 million euros in 2004, as the result of the decrease of the average level of our net debt. The average interest rate on our debt, including the swap effects, was 5.5% on December 31, 2005, unchanged as compared to December 31, 2004. Other financial income and expenses amounted to a net loss in 2005 of 8 million euros compared to a net loss of 102 million euros in 2004. This evolution is mainly explained by foreign exchange losses which amounted to 3 million euros in 2005 compared to 40 million euros in 2004 and by the changes in fair value of derivative instruments which generated a 1 million euros gain in 2005 compared to a 34 million euros loss in 2004.

Income from associates decreased by 48.6% to 38 million euros in 2005, from 74 million euros in 2004 as the result of the disposal in 2004 of our stake in Molins and in Carmeuse North America BV.

Income tax increased by 58.8% to 424 million euros in 2005 from 267 million euros in 2004. The effective tax rate for 2005 was 22.9% compared to the effective tax rate for 2004 of 16.7%. In 2005, our tax charge was negatively affected by a 57 million euros non-recurring charge arising from the repatriation by Lafarge North America Inc. of 1.1 billion U.S. dollars from Canada to the United States. This tax charge was, however, more than offset by the favorable impact of tax efficient restructurings amounting to 155 million euros and by the 50 million euro tax benefit from asset re-evaluations in Greece. The combined effect of these non-recurring items reduced our effective tax rate in 2005 by 8%. In 2004, our income tax benefited from 193 million euros of non-recurring savings which represented a decrease of our effective tax rate of approximately 13%.

Net income Group Share increased by 4.8% to 1,096 million euros in 2005 from 1,046 million euros in 2004. Net income Group Share represented 6.9% of sales in 2005, compared to 7.2% in 2004.

Minority interests increased by 13.9% to 328 million euros from 288 million euros in 2004. Minority interests increased as the result of improved net results in Greece, Nigeria, Serbia and Jordan and despite Lafarge North America Inc.’s weaker results in 2005 as a result of the one-off tax charge already mentioned.

Basic earnings per share was up 2.2% for 2005 at 6.39 euros compared to 6.26 euros in 2004. The basic average number of outstanding shares, excluding treasury shares outstanding during the year was 171.5 million (174.2 million shares at December 31, 2005), compared to 167.2 million in 2004 (169.1 million at December 31, 2004). Between December 31, 2004 and December 31, 2005 the increase in the number of shares arose essentially from the 4.0 million shares issued to shareholders opting to reinvest dividends distributed in June 2005 and from the employee share ownership scheme. Diluted earnings per share was up 3.4% to 6.34 euros compared to 6.13 euros in 2004.

Discussion of differences in Operating income under IFRS and U.S. GAAP

We prepare our financial statements in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. The individual differences are discussed in Note 36 to the consolidated financial statements. The impact of these U.S. GAAP reclassifications and adjustments are included in the condensed U.S. GAAP financial statements presented in Note 37 to the consolidated financial statements.

2005

After taking into account the adjustments noted below, our operating income under U.S. GAAP totaled 2,052 million euros (185 million euros lower than under IFRS) for the year ended December 31, 2005.

Proportionately consolidated entities. We account for various entities as proportionately consolidated for purposes of IFRS and as equity method investees for U.S. GAAP. In 2005, this change in consolidation method decreased our revenue and our operating income under U.S. GAAP compared to IFRS by 865 million euros and by 166 million euros, respectively.

Adjustments between IFRS and U.S. GAAP. Operating income was 19 million euros less under U.S. GAAP than under IFRS, apart from the effect of the proportionately consolidated entities discussed above. This decrease is primarily due to the following:



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·

net reduction in impairment losses for U.S. GAAP purposes of 53 million euros;

·

increase in pension costs of 85 million euros;

·

decrease in stock-based compensation of 14 million euros;

·

increase in expense from other adjustments of 1 million euros.

2004

After taking into account the adjustments noted below, our operating income under U.S. GAAP totaled 1,811 million euros (263 million euros lower than under IFRS) for the year ended December 31, 2004.

Proportionately consolidated entities. We account for various entities as proportionately consolidated for purposes of IFRS and as equity method investees for U.S. GAAP. In 2004, this change in consolidation method decreased our revenue and our operating income under U.S. GAAP compared to IFRS by 1,065 million euros and by 171 million euros, respectively.

Adjustments between IFRS and U.S. GAAP. Operating income was 92 million euros less under U.S. GAAP than under IFRS, apart from the effect of the proportionately consolidated entities discussed above. The decrease is primarily due to the following:

·

net increase in impairment losses for U.S. GAAP purposes of 7 million euros;

·

increase in pension costs of 83 million euros;

·

decrease in stock-based compensation of 13 million euros;

·

increase in expense from other adjustments of 15 million euros.

4.4 Liquidity and capital resources

During the two-year period ended December 31, 2005, our main sources of liquidity have been:

·

cash provided by operating activities;

·

cash provided by the divestment of non-strategic assets;

·

cash provided by the issuance of debt and of our share capital.

These funds have been mainly used to finance a significant investment program (capital expenditures and acquisitions).

Components of the cash flow(million euros)

2005

2004

CASH FLOW FROM OPERATIONS

2,238

2,148

Changes in operating working capital items excluding financial expenses and income taxes

(352)

(271)

NET CASH PROVIDED BY OPERATING ACTIVITIES

1,886

1,877

Net cash (used in) investing activities

(1,684)

(972)

Net cash (used in) financing activities

(185)

(854)

INCREASE IN CASH AND CASH EQUIVALENTS

17

51


We believe, based on our current financial projections, that we have sufficient resources for our ongoing operations in both the near term and the long term.

Net cash provided by operating activities

Net cash provided by operating activities totaled 1,886 million euros in 2005, essentially unchanged compared to 2004. Cash flow from operations grew by 90 million euros to 2,238 million euros. The increase in operating working capital needs at 352 million euros resulted in particular from higher inventories and trade receivables at year end due to the strong level of activity in the last quarter. Trade receivables, measured by a Days Sales Outstanding ratio, recorded a slight improvement in 2005 compared to 2004.

Net cash (used in) investing activities

Funds used in investing activities amounted to 1,684 million euros in 2005 compared to 972 million euros in 2004. Investing activities are comprised of capital expenditures, investment subsidies received, investment in consolidated companies, investment in associates and in available-for-sale securities, disposals, and the changes in long-term receivables.

Capital expenditures totaled 1,454 million euros in 2005 compared to 1,133 million euros in 2004. Of this amount 57% were for the Cement Division, 25% were for Aggregates & Concrete, 9% were for Roofing, 7% were for Gypsum and 2% were for holdings and other activities.



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Our capital expenditures for the ongoing upgrading and modernization of our existing facilities totaled 941 million euros in 2005, compared to 783 million euros in 2004. In 2005, 55% of these capital expenditures were in the Cement Division, 28% were for Aggregates & Concrete, 8% were for Roofing, 6% were for Gypsum, with the rest for holding companies and other activities.

In 2005, we also invested 513 million euros in capital expenditures for additional production capacity, including major projects such as:

·

the new cement plant in Tula, Mexico, for 62 million euros;

·

the new cement plant in Bangladesh, for 33 million euros;

·

the doubling of the Bouskoura cement plant capacity in Morocco for 26 million euros;

·

the second cement line in Dujiangyan for 14 million euros;

·

the construction of a cement grinding station in Vietnam for 13 million euros;

·

the modernization of the Buchanan, New York Gypsum drywall plant for 26 million euros;

·

the construction of a new clay tiles plant in Limoux, southern France for 22 million euros;

·

and a variety of smaller projects which amounted to 158 million euros in Cement, 92 million euros in Aggregates & Concrete, 42 million euros in Roofing, 20 million euros in Gypsum and 3 million euros in other activities.

Investment subsidies received amounted to 2 million euros in 2005.

In 2005, investment in consolidated companies amounted to 384 million euros, including cash acquired. The most significant acquisitions included (amounts are converted using the average yearly exchange rates):

·

the purchase of the minority interests held by State of Wisconsin Investment Board (“SWIB”) in our cement activities in South Korea, India and Japan for 107 million euros;

·

the Lafarge North America Inc. common stock repurchase for 80 million euros;

·

the acquisition of the assets of Ritchie Corporation in Kansas, United States, for 47 million euros with operations in the aggregates and ready mix activities;

·

the acquisition of Cementos Esfera, a grinding station in Spain, for 30 million euros;

·

the increase in ownership from 50% to 100% of Betecna shares, a Portuguese aggregates and concrete producer, for 30 million euros as a consequence of the termination of the aggregates and concrete joint venture between Lafarge and Cemex in Spain and Portugal.

Investment in associates and in available-for-sale securities amounted to 20 million euros in 2005, and included several small size acquisitions.

Disposals in 2005 amounted to 154 million euros and also included several small size transactions.

Long-term receivables, which include, in particular, loans to our equity affiliates and to proportionately consolidated companies decreased by 18 million euros.

Net cash (used in) financing activities

In general, we meet our long-term financing needs through bond issuances and the use of long-term instruments such as our Euro Medium-Term Notes program and bank loans. We currently have a Euro Medium-Term Notes program with a maximum available amount of 7,000 million euros, with approximately 3,512 million euros outstanding at December 31, 2005. We issued the following debt securities in 2005 and 2004 under this program:

·

on November 23, 2005, 500 million euros of bonds bearing a fixed interest rate of 4.25% with a 10-year and 4 months maturity;

·

on March 23, 2005, 500 million euros of bonds bearing a fixed interest rate of 4.75% with a 15-year maturity;

·

on July 16, 2004, 612 million euros of bonds in partial exchange for outstanding bonds with 2008 maturity. The new bonds bear a fixed interest rate of 5% with a 10-year maturity.

In 2005, two bond issues totaling 327 million euros were reimbursed at maturity (respectively 77 million euros in February 2005 and 250 million euros in March 2005). A 50 million euros of EMTN (private placement issued in 2000) was also reimbursed at maturity in October 2005.

In addition, in 2005 we repurchased 6,772,429 OCEANEs (Obligations Convertibles en Actions Nouvelles ou Échangeables) bearing a fix interest rate of 1.5% and representing a total face value of 860 million euros out of the 1,300 million euros issued in June 2001. In addition, 590 OCEANEs were converted into 619 shares. Therefore, 3,463,202 OCEANEs were outstanding as at December 31, 2005, representing a face value amount of 440 million euros. All remaining OCEANES were repaid on January 2, 2006, using short-term financings.



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Short-term needs are mainly met through the issuance of domestic commercial paper as well as the use of credit lines.

We currently have two commercial paper programs:

·

a euro denominated Commercial Paper program, with a maximum available amount of 3,000 million euros. At December 31, 2005, 524 million euros of commercial paper were outstanding under this program;

·

a U.S. dollar denominated Commercial Paper program, set up by our subsidiary Lafarge North America Inc., for a maximum amount of 300 million dollars (254 million euros). At December 31, 2005, there was no commercial paper issued under this program.

We also maintain committed long-and-medium-term credit lines with various banks at the parent and subsidiary level to ensure the availability of funding on an as-needed basis. At December 31, 2005, these committed credit lines amounted to 3,740 million euros (compared to approximately 3,802 million euros at December 31, 2004). Of this amount, 3,467 million euros were available at December 31, 2005 (compared to approximately 3,682 million at December 31, 2004). The average maturity of these credit facilities was approximately 4.1 years at the end of 2005 versus 3.5 years at the end of 2004. The extension in the maturity of our credit facilities reflects a July 2005 amendment, which extended our 1,850 million euros syndicated facility by 9 months and the renegotiation and signing during 2005 of four credit facilities totaling 425 million euros, having maturities ranging from 2009 to 2012.

We have also increased our common stock over the last two years by 518 million euros, through the issuance of 8,767,490 shares as a result of:

·

the exercise by shareholders of their option to receive their dividends in shares rather than in cash;

·

the 2005 employees stock purchase plan; and

·

the exercise of options granted to employees.

Because we use external sources to finance a significant portion of our capital requirements, our access to global sources of financing is important. The cost and availability of unsecured financings are generally dependent on our short-term and long-term credit rating. Factors that are significant in the determination of our credit ratings or that otherwise could affect our ability to raise short-term and long-term financing include: our level and volatility of earnings, our relative positions in the markets in which we operate, our global and product diversification, our risk management policies and our financial ratios such as net debt to total equity and cash flow from operations to net debt. We expect credit rating agencies will focus, in particular, on our ability to generate sufficient operating cash flows to provide for the repayment of our debt. A deterioration in any of the previously mentioned factors or combination of these factors may lead rating agencies to downgrade our credit ratings, thereby increasing our cost of obtaining unsecured financing. Conversely, an improvement of these factors may lead rating agencies to upgrade our credit ratings.

As of the date of filing of this Report, the credit ratings for our short and long-term debt were as follows:

 

Short-term

Long-term

Standard & Poor’s

A-2

BBB (stable)

Moody’s

NR

Baa2 (stable)


These ratings have been put on review on February 6, 2006 by Standard & Poor’s and Moody’s following the announcement of our offer to buy out Lafarge North America Inc.’s minorities.

Level of debt and financial ratios at December 31, 2005

See Note 25 to our consolidated financial statements for more information on debt.

Group funding policies

Our senior management establishes our overall funding policies. The intent of these policies is to ensure our ability to meet our obligations by maintaining a strong financial structure. This policy takes into consideration our expectations on the required level of leverage, coverage ratios, the average maturity of debt, interest rate exposure and the level of credit facilities. These targets are monitored on a regular basis. As a consequence of this policy, a significant portion of our debt is issued on a long-term basis. Most of this debt has been raised at fixed rates or has been converted into fixed rates using interest rate derivatives. We constantly maintain a significant amount of unused long-term committed credit lines.



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We are subject to limited foreign exchange risks as a result of our subsidiaries’ transactions in currencies other than their operating currencies. Our general policy is for subsidiaries to borrow and invest excess cash in the same currency as their functional currency. We, however, promote the investment of excess cash balances in U.S. dollars or euros in emerging markets. Typically, a portion of our subsidiaries’ debt funding is borrowed in euros at the parent company level then converted into foreign currencies through currency swaps.

Total debt, cash and cash equivalents

At December 31, 2005, our total debt amounted to 8,742 million euros (compared to 8,346 million euros in 2004). At the end of 2005, we reclassified 1,040 million euros of short-term debt (600 million euros at the end of 2004) into long-term debt, on the basis of our ability to refinance this obligation using the available funding provided by medium and long-term committed credit lines.

Long-term debt (excluding current portion) totaled 6,856 million euros compared with 6,959 million euros at year-end 2004. Approximately 52% of the 2005 long-term debt (excluding current portion) will mature after 2010. Long-term debt is largely comprised of fixed rate debt (after taking into account interest rate swaps). Most of this debt is denominated in euros, partially converted into foreign currencies through currency swaps.

At December 31, 2005, our short-term debt (including the current portion of long-term debt) amounted to 1,886 million euros. We are subject to fluctuations in our short-term debt due to the significant seasonality of our operations. We usually experience a slowdown in building activity during the winter season in our principal markets in Western Europe and North America, while working capital requirements tend to increase during the first semester.

At December 31, 2005, the average interest rate on our total debt was 5.5%, unchanged from December 31, 2004.

Our cash and cash equivalents amounted to 1,735 million euros at year-end and are denominated in euros, U.S. dollars and a number of other currencies.

See Section 4.6 (Market risks) and the Notes 25 and 26 to our consolidated financial statements for more information on our debt and financial instruments.

Net debt and net debt ratios

Our net debt, which includes put options on shares of subsidiaries and financial instruments totaled 7,221 million euros at December 31, 2005 (6,958 million euros at December 31, 2004).

Our net-debt-to-equity ratio stood at 59% at December 31, 2005 (compared to 70% at December 31, 2004).

Our cash flow from operations to net debt ratio was 31% at December 31, 2005 (unchanged from December 31, 2004).

See Section 4.1 (Overview - Reconciliation of our non-GAAP financial measures) for more details on these ratios.

Loan agreements

Some of our loan agreements contain restrictions on the ability of subsidiaries to transfer funds to the parent company in certain specific situations. The nature of these restrictions can be either regulatory, when the transfers of funds are subject to approval of local authorities, or contractual, when the loan agreements include restrictive provisions such as negative covenants on the payment of dividends. However, we do not believe that any of these covenants or restrictions will have any material impact on our ability to meet our obligations.

See Section 2,11 (Transfer of income and dividends from our subsidiaries).

As of December 31, 2005, certain of our subsidiaries had financing contracts with provisions requiring on-going compliance with financial covenants. These subsidiaries are located in Bangladesh, Brazil, Chile, China, India, Malaysia, Philippines, Great Britain and the United States. The debt associated with such covenants represented approximately 9% of the Group’s total debt. Given the dispersion of these contracts among various subsidiaries and the quality of the Group’s liquidity protection through its access to committed credit facilities, we believe that such covenants will not have a material impact on the Group financial situation.

See Note 25(e) to our consolidated financial statements.

Cash surpluses

In order to ensure that cash surpluses are used efficiently we have adopted, in a number of cases, cash pooling structures on a country-by-country basis. With the introduction of the euro, we have established a centralized cash management process for most of the euro-zone countries and we also have extended the centralization of cash management to significant European non-euro countries (such as the United Kingdom and Switzerland). Local cash pools have also been set-up in other parts of the Group.

Due to legal or regulatory constraints or national regulations, we do not operate a full worldwide centralized cash management program. However, the policies set by senior management tend to maximize cash recycling within the Group. When cash cannot be internally recycled, cash surpluses are to be invested in liquid, short-term instruments with at least two-thirds of any cash surplus being invested in instruments with a maturity of less than 3 months.



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Effect of currency fluctuations on our results and balance sheet

The assets, liabilities, income and expenses of our operating entities are denominated in various currencies. Our consolidated financial statements are presented in euros. Thus, assets, liabilities, income and expenses denominated in currencies other than the euro must be translated into euros at the applicable exchange rate to be included in our consolidated financial statements.

If the euro increases in value against a currency, the value in euros of assets, liabilities, income and expenses originally recorded in that other currency will decrease. Conversely, if the euro decreases in value against a currency, the value in euros of assets, liabilities, income and expenses originally recorded in that other currency will increase. Thus, increases and decreases in the value of the euro can have an impact on the value in euros of our non-euro assets, liabilities, income and expenses, even if the value of these items has not changed in their original currency.

In 2005 we earned approximately 70% of our revenues in currencies other than the euro, with approximately 30% denominated in U.S. dollars or Canadian dollars.

Approximately 15% of our net income Group share was contributed by subsidiaries which prepare their financial statements in U.S. dollars or Canadian dollars. As a result, a 10% change in the U.S. dollar euro exchange rate and in the Canadian dollar/euro exchange rate would have an impact on our net income Group share of approximately 16 million euros, all other things being equal.

In addition, at the end of 2005, approximately 73% of our capital employed were located outside the member states of the European Monetary Union, with approximately 24% denominated in U.S. dollars or Canadian dollars.

4.5 Contractual and contingent commitments

The following table sets forth an estimate of our exposure to significant contractual obligations with respect to repayment of debt, payments under finance lease obligations and operating leases, exercisable purchase obligations held by third party shareholders and other purchase obligations and payments under other commitments.

The estimate of our exposure to significant contractual obligations is as follows:

 

  (million euros)

Payment due per period

At December 31,

Less than 1 year

1-5 years

More than 5 years

2005

2004

DEBT (1)

1,886

3,281

3,575

8,742

8,346

Of which finance lease obligations

5

14

16

35

34

Scheduled interest payments (2)

404

997

859

2,260

1,928

Net scheduled obligations on interest rate swaps (3)

(3)

(45)

(44)

(92)

(114)

Operating leases

207

405

251

863

724

Capital expenditures and other purchase obligations

1,037

571

294

1,902

978

Other commitments

75

56

46

177

219

TOTAL

3,606

5,265

4,981

13,852

12,081

(1)  See Note 25(b) to our consolidated financial statements.

(2)  Scheduled interest payments associated with variable rates of interest are computed on the basis of the rates in effect at December 31.

(3)  Scheduled interest payments of the variable leg of the swaps are computed on the rates in effect at December 31.


We expect to have the ability to refinance our debt obligations as they come due. Our short-term debt commitments due in 2006 amounted to 1,886 million euros at December 31, 2005 (including the current portion of long-term debt).

Future expected funding requirements of benefit payments related to our pension and postretirement benefit plans are not included in the above table, because future long term cash flows in this area are uncertain.

See Note 23 to our consolidated financial statements for further information on the amount reported under the “current portion” of pension and other employee benefits provisions in the balance sheet.



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Put options on shares of associates and joint ventures (not included in the above schedule):

As part of the acquisition process of certain entities, we have granted third party shareholders the option to require us to purchase their shares at a predetermined price, according to fair market value. These shareholders are either international institutions, such as the European Bank for Reconstruction and Development, or private investors, which are essentially financial or industrial investors or the former shareholders of the relevant companies. In the event these shareholders exercise these options, our percentage ownership interest in the relevant company would increase. Assuming that all of these options were exercised, the purchase price to be paid by the Group, including net debt acquired, would amount to 305 million euros as of December 31, 2005. Based upon the terms of these agreements, a portion of the total amount could be exercised in 2006 and 2007 for 205 million euros and 38 million euros, respectively. The residual 62 million euros can be exercised starting in 2008.

We do not expect all of these options to be exercised as soon as they become exercisable. Some of these options have expiry dates. It is likely that those options will be exercised by such dates.

At December 31, 2005, we had outstanding collateral and other guarantees amounting to 751 million euros, comprised of 5 million euros of securities and pledged assets, 475 million euros of property collateralizing debt and 271 million euros of guarantees given.

Finally, the Group has granted indemnification commitments in relation to disposals of assets. Its exposure under these commitments is considered remote. The total amount of capped indemnification commitments still in force at December 31, 2005 was 412 million euros.

4.6 Market risks

We are exposed to foreign currency risk and interest rate risk. Other market risk exposures are generated by our equity investments, commodity prices changes, in particular on energy commodities, and counterparty risk.

We have defined strict policies and procedures to measure, manage and monitor our market risk exposures. Our policies do not permit any speculative market position. We have instituted management rules based on a segregation of operations, financial and administrative control and risk measurement. We have also instituted, for all operations managed at corporate level, an integrated system that permits real time monitoring of hedging strategies.

Our policy is to use derivative instruments to hedge against our exposure to exchange rate and interest rate risks. However, to manage our exposure to commodity risks we enter into long-term contracts and, from time to time, we also use derivative instruments. With the prior authorization of our senior management, we have occasionally entered into agreements to limit our or another party’s exposure to equity risk.

We are subject to commodity risk with respect to price changes principally in the electricity, fuel, diesel and freight markets. We attempt to limit our exposure to changes in commodity prices by entering into long-term contracts and increasing our use of alternative fuels. From time to time, we use forward contracts to manage our exposure to these commodity risks.

At December 31, 2005, our commitments were mostly limited to forward purchase contracts and swaps, and were not significant.

See Note 26(e) to our consolidated financial statements for more information on financial instruments.

We are subject to equity risk with respect to our minority holdings in certain public companies. We occasionally enter into transactions with respect to our equity investments with financial institutions. We account for such instruments by taking the fair value at period end in accordance with applicable valuation rules. For the year ended December 31, 2005, the variation was positive in the amount of 14 million euros with respect to contracts limiting our exposure to equity risk. We believe we had no additional material exposure to such contracts. In addition, in regard to certain joint ventures and other acquisitions, we have entered into shareholders agreements, which have written call and put options with respect to our and our partners’ interests.

See Section 4.5 (Contractual Obligations and Contingent Commitments), as well as Notes 26(g) and 27 to our consolidated financial statements for more information on equity risk and on our exposure to these options.

In order to reduce our exposure to the risks of currency and interest rate fluctuations, we manage our exposure both on a central basis through our treasury department and in conjunction with some of our subsidiaries. We use various standard derivative financial instruments, such as forward exchange contracts, interest rate and currency swaps and forward rate agreements to hedge currency and interest rate fluctuations on assets, liabilities and future commitments, in accordance with guidelines established by our senior management.



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We use financial instruments only to hedge existing or anticipated financial and commercial exposures. We undertake this hedging in the over-the-counter market with a limited number of highly rated counterparties. Our positions in derivative financial instruments are monitored using various techniques, including the fair value approach.

Foreign Currency Risk

Translation Risk

See Section 4.4 (Liquidity and Capital Resources—Effect of currency fluctuations on our results and balance sheet).

Transaction Risk

We are subject to foreign exchange risks as a result of our subsidiaries purchase and sale transactions in currencies other than their operating currencies.

With regard to transactional foreign currency exposures, our policy is to hedge all material foreign currency exposures through derivative instruments at the later of when a firm commitment is entered into or known. These derivative instruments are generally limited to forward contracts and standard foreign currency options, with terms generally less than one year. We also, from time to time, hedge future cash flows in foreign currencies when such flows are highly probable. We do not enter into foreign currency exchange contracts for other than hedging purposes.

Each subsidiary is responsible for managing the foreign exchange positions arising as a result of commercial and financial transactions performed in currencies other than its domestic currency. Exposures are hedged with banks using foreign currency forward contracts and occasionally foreign currency options. However, our corporate treasury department attempts, when possible, to act as a direct counterparty of the Group subsidiaries and immediately return its position in the market. It also attempts to reduce our overall exposure by netting purchases and sales in each currency on a global basis when feasible.

As far as financing is concerned, our general policy is for subsidiaries to borrow and invest excess cash in the same currency as their functional currency, except  for subsidiaries operating in growing markets, where cash surpluses are invested, whenever it is possible, in U.S. dollars or in euros. A significant portion of our financing is in U.S. dollars, British pounds and U.S. dollars related currencies, reflecting our significant operations in these countries. Part of this debt was initially borrowed in euros at the parent company level then converted into foreign currencies through currency swaps. At December 31, 2005, before these currency swaps, 10% of our total debt was denominated in U.S. dollars and 16% was denominated in British pounds. After taking into account the swaps, our U.S. dollar denominated debt amounted to 25% of our total debt, while our British pound denominated debt represented 19%.

See Notes 25 and 26 to our consolidated financial statements for more information on debt and financial instruments.

Interest Rate Risk

We are exposed to interest rate risk through our debt and cash. Our interest rate exposure can be sub-divided into the following risks:

·

price risk for fixed-rate financial assets and liabilities.

By contracting a fixed-rate liability, for example, we are exposed to an opportunity cost in the event of a fall in interest rates. Changes in interest rates impact the market value of fixed-rate assets and liabilities, leaving the associated financial income or expense unchanged.

·

cash-flow risk for floating rate assets and liabilities.

Changes in interest rates have little impact on the market value of floating-rate assets and liabilities, but directly influence the future income or expense flows of the Company.

In accordance with the general policy established by our senior management we seek to manage these two types of risks, including the use of interest rate swaps and forward rate agreements. Our corporate treasury department manages our financing and hedges interest rate risk exposure in accordance with rules defined by our senior management in order to keep a balance between fixed rate and floating rate exposure.

Before taking into account the interest rate swaps, at December 31, 2005, 74% of our total debt was fixed rate. After taking into account these swaps, the portion of fixed debt in our total debt amounted to 66%.

See Notes 25 and 26 to our consolidated financial statements for more information on our debt and financial instruments.

Interest Rate Sensitivity

The table below provides information about our interest rate swaps and debt obligations that are sensitive to changes in interest rates.



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For debt obligations, the table presents principal cash flows by expected maturity dates and related weighted average interest rates before swaps.

For interest rate swaps, the table presents notional amounts by contractual maturity dates and related weighted average interest rates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average floating rates are based on effective rates at year-end.

Maturities of notional contract values  (million euros)

At December 31, 2005

Average rate (%)

2006

2007

2008

2009

2010

 > 5 years

Total

Fair value

LIABILITIES

         

Long-term debt*

5.2

1,554

1,005

891

89

1,296

3,575

8,410

8,673

Fixed rate portion

5.6

1,123

780

745

64

330

3,416

6,458

6,718

Floating rate portion

3.7

431

225

146

25

966

159

1,952

1,955

Short-term bank borrowings

5.7

332

-

-

-

-

-

332

332

INTEREST RATE DERIVATIVES

         

Interest Rate swaps

         

Pay Fixed

         

Euro

6.1

100

151

70

-

-

-

321

(10)

Other currencies

4.8

5

4

-

9

-

-

18

0

Pay Floating

         

Euro

2.1

-

-

-

-

-

600

600

41

Other currencies

5.5

-

-

-

-

292

170

462

(5)

* Including the current portion of long-term debt.


Exchange Rate Sensitivity

The table below provides information about our debt and foreign exchange derivative financial instruments that are sensitive to exchange rates. For debt obligations, the table presents principal cash flows in foreign currencies by expected maturity dates. For foreign exchange forward agreements, the table presents the notional amounts by contractual maturity dates. These notional amounts are generally used to calculate the contractual payments to be exchanged under the contract.



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Maturities of notional contract values

At December 31, 2005

(million euros)

2006

2007

2008

2009

2010

> 5 years

Total

Fair value

DEBT IN FOREIGN CURRENCIES

        

U.S. dollar

93

46

203

31

267

245

885

905

British pound

40

9

9

8

300

1,043

1,409

1,500

Other currencies

470

104

66

34

293

61

1,028

1,035

TOTAL

603

159

278

73

860

1,349

3,322

3,440

FOREIGN EXCHANGE DERIVATIVES :FORWARD CONTRACT PURCHASES AND CURRENCY SWAPS

        

U.S. dollar

460

-

-

-

-

-

460

2

British pound

491

-

-

-

-

-

491

(6)

Other currencies

164

-

-

-

-

-

164

0

TOTAL

1,115

-

-

-

-

-

1,115

(4)

FORWARD CONTRACT SALES AND CURRENCY SWAPS

        

U.S. dollar

1,716

-

-

-

-

-

1,716

(30)

British pound

726

3

-

-

-

-

729

3

Other currencies

288

-

-

-

-

-

288

(2)

TOTAL

2,730

3

-

-

-

-

2,733

(29)


Assumptions related to the sensitivity schedules above

Debt

The fair values of long-term debt were determined by estimating future cash flows on a borrowing-by-borrowing basis, and discounting these future cash flows using an interest rate which takes into consideration the Company’s incremental borrowing rate at year-end for similar types of debt arrangements. Market price is used to determine the fair value of publicly traded instruments.

Financial instruments

The fair values of forward exchange contracts and interest and currency swaps have been calculated using market prices that the Company would pay or receive to settle the related agreements.

Counterparty risk

We are exposed to credit risk in the event of a counterparty’s default. We attempt to limit our exposure to counterparty risk by rigorously selecting the counterparties with which we trade, by regularly monitoring the ratings assigned by credit rating agencies and by taking into account the nature and maturity of our exposed transactions. We establish counterparty limits which are regularly reviewed. We believe we have no material concentration of risk with any counterparty. We do not anticipate any third party default that might have a significant impact on our financial condition and results of operations.

4.7 Research and development

2005 was a particularly productive year for our research center, Lafarge Centre de Recherche (LCR), in terms of research and product development. Three prototypes of new innovative products are among some of LCR’s achievements that were positively tested on English, French and American markets in the Concrete and Aggregates portfolio, and positive results were registered in research done for the Gypsum and Cement Divisions. The dynamism generated by these recent years of success have made it possible to radically redirect the research portfolios towards the needs of our customers in the Divisions and the business units. The projects being developed for innovative products represent close to two-thirds of LCR’s overall portfolio compared to one-third ten years ago.

The number of patents filed during the same period increased in 2005. This is proof that we are more inventive and more aware of protecting and adding value to our intellectual property.



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In the long term, LCR is decidedly committed to pursuing this dynamism by continuing to follow promising and reassuring directions. Prospective research topics are greatly influenced by sustainable construction requirements focusing particularly on reducing the level of CO2 emissions, developing less expensive energy solutions, offering more comfort to the users, and at the same time saving natural resources.

The aim to reduce the level of CO2 emissions in cement by 20% has channeled research towards cement substitution products (the “Cementitious” materials). These have been pursued and have given good results in terms of available raw material characterization and optimization of mixes made with these materials and cement.

The matrix organization by projects and “Competency Poles” has now proved to be completely effective. Project management has drawn research scientists closer to their customers in the Divisions and in the business units. It is now easier to better identify the most pertinent topics and significantly reduce the industrialization delays for the research results. On another hand, our organization in “Competency Poles” reinforces the depth of our scientific knowledge and ensures optimum capitalization.

Our Research Center employs approximately 220 people (December 31, 2005), 70 of which are PhD-engineers from ten different countries. About 15 application and development laboratories in the Divisions and subsidiaries throughout the world work very closely with the LCR teams. Total expenses for the Group’s research and development budget was 55 million euros in 2005 compared to 54 million euros in 2004.

LCR has developed more partnerships with the best universities and world-renowned research centers. Among these are MIT (Massachusetts Institute of Technology) and Princeton University in the USA, the Laval and Sherbrooke Universities in Canada, as well as the École Polytechnique and the CNRS (Centre national de la Recherche Scientifique) in France.

The results obtained in 2005 are described below:

·

Cement Division: research was pursued to find solutions for reduction of CO2 emissions as a means of ensuring long life to our activity, and to better use our various sources of cementitious materials, particularly pozzolans. Emphasis was made to develop potential market added value from differentiated products meeting our customers’ requirements (“functionalized cements”), and a tool capable of forecasting the behavior of our cement in ready mix concrete applications;

·

Aggregates & Concrete Division: three promising prototypes were validated after undergoing tests on various worksites: innovative concrete accelerating systems, producing slabs in large dimensions without joints and optimizing the use of sand from quarries in concrete applications. The range of self-placing Agilia® concretes was pursued with the assistance of our research teams;

·

Gypsum Division: innovative products aimed at improving the usage properties of the boards in such fields as aesthetics, durability in wet atmospheres and acoustic performance. Efforts in research have been focused also on making jointing compounds which accelerate worksite implementation. A second area of research pertains to improving the industrial performances of our plants in terms of reducing energy requirements for the drying process and fundamental understanding of the calcium sulfate. There is a permanent emphasis put on the quality of the products made;

·

Roofing Division: Research has focused its efforts on developing a tile made with a concrete base which provides high levels of performance in terms of durability. This requires perfectly controlling the phenomena leading to surface degradations and developing new facings with better performance.

4.8 Trend information

Overall, based on recent trends, markets are expected to remain favorable in 2006.

·

In Cement, price increases are expected to be above cost inflation. Overall we anticipate strong demand and solid price increases, with a few exceptions.

·

For Aggregates & Concrete, we expect overall modest growth in 2006 in the Aggregates business, with, however, solid growth in growing markets. Concrete markets should remain favorable on the whole.

·

In Roofing, we expect Western European markets to improve, with the exception of Germany where pricing will remain under pressure.

·

In Gypsum, 2006 should be favorable. Price increases should continue, though at a lower pace in North America compared to 2005.

As far as costs are concerned, after the record increases of the last two years, we expect energy and logistics costs to further increase in 2006. As in previous years, risk management policies and performance programs should help to mitigate the impact of these increases.



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This trend information contains forward-looking statements regarding, among other matters, our expectations for future volume and pricing trends, demand for our products, energy costs and other market developments. These forward-looking statements reflect management’s estimates and beliefs based on currently available information and historical trends. However, actual results may differ significantly from the expectations expressed. Our business and financial results are exposed to cyclical activity of the construction sector, the effects of the weather and other climatic conditions, competition, developments in growing markets and other risks and uncertainties described under Chapter 2 (Risk factors).



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5
Directors,
Senior Management
and Employees



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5.1 BOARD OF DIRECTORS

78

Information on Directors

78

Independent Directors

80

Director’s Charter

81

5.2 EXECUTIVE OFFICERS

82

5.3 COMPENSATION

84

Directors’ fees

84

Compensation paid to senior management

85

Total compensation paid to Executive Officers in 2005

86

Severance arrangements benefiting our Chief Executive Officer and Chief Operating Officer

86

Pensions and other retirement benefits

86

5.4 BOARD AND COMMITTEES RULES AND PRACTICES

86

Missions and responsabilities of the Board Committees

87

Board and Committees practices

89

Board and Committees self-evaluation

91

Powers of our Chief Executive Officer

91

Code of ethics

92

5.5 MANAGEMENT SHARE OWNERSHIP AND OPTIONS

92

Senior Management stock options

92

Executive officers share ownership

94

5.6 EMPLOYEES

94

5.7 EMPLOYEE SHARE OWNERSHIP

96

Employee Share Offerings

96

Stock options plans

96

Stock options outstanding in 2005

97


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5.1 Board of Directors

Presently, the Board of Directors consists of fifteen members with complementary profiles and experiences.

A number of Board members have held positions within our Group and therefore know our activities well. Others are not as close to our business and bring other experiences, a global understanding of business matters and the ability to benchmark our activities against practices and standards in other industries.

In accordance with the Directors’ internal charter, each Board member must carry out his duties with full independence of mind. Proposals for the election of new Directors are made by the Nominations Committee.

Information on Directors

Bertrand Collomb: Chairman of the Board of Directors of Lafarge, 61, rue des Belles-Feuilles, 75116 Paris, France.

Mr. Collomb was appointed to the Board of Directors in 1987 and served as Chairman and Chief Executive Officer from 1989 to 2003. Prior to his appointment as Chairman and Chief Executive Officer, he held various executive positions within the Group, namely in North America, from 1975 to 1989 and in the French Ministry of Industry and governmental cabinets from 1966 to 1975. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He is also Chairman of Lafarge North America Inc. and a company officer of several group subsidiaries. He is a Director of Total, Atco, and Vice Chairman of Unilever. He is a trustee of the International Accounting Standards Foundation (IASF). He is a member of the French Institute of International relations (Academy of moral and political sciences) and the Chairman of the French Association of Private Companies (‘‘AFEP’’). Mr. Collomb holds 57,598 Lafarge shares. He is 63 years old.

Bruno Lafont: Director and Group Chief Executive Officer, 61, rue des Belles-Feuilles, 75116 Paris, France.

Bruno Lafont was appointed as a Member of the Group’s Board of Directors on May 25, 2005. He is a graduate of the Hautes Études Commerciales business school (HEC 1977, Paris) and the École Nationale d’Administration (ENA 1982, Paris). He started his career at Lafarge in 1983 as an internal auditor in the Finance Department. In 1984, he joined the Sanitaryware Division (no longer part of the Group) as Chief Financial Officer in Germany. He was then successively in charge of the Division’s Finance Department (1986-1988) and the International Development Department, based in Germany (1988-1989). In 1990, he was appointed Vice-President for Lafarge Cement and Aggregates & Concrete operations in Turkey and the Eastern Mediterranean zone. In 1995, Mr. Lafont was appointed Group Executive Vice-President, Finance, then Executive Vice-President of the Gypsum Division in 1998. In May 2003, Mr. Lafont joined the Group’s General Management as Chief Operating Officer and was appointed Group Chief Executive Officer effective January 1, 2006. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. Mr. Lafont holds 5,117 Lafarge shares. He is 49 years old.

Bernard Kasriel: Vice-Chairman of the Board, 61, rue des Belles-Feuilles, 75116 Paris, France.

Mr. Kasriel was appointed to the Board of Directors in 1989 and is Vice-Chairman of the Board since 1995.  Bernard Kasriel was Chief Executive Officer of Lafarge from 2003 to 2005. Prior to his current position, he was Vice-Chairman Chief Operating Officer from 1995 to 2003 and Chief Operating Officer between 1989 and 1995. He served as Senior Executive Vice-President from 1982 to 1989, President and Chief Operating Officer of National Gypsum in Dallas, Texas, from 1987 to 1989 and held various executive positions within the Group since he joined Lafarge in 1977. From 1975 to 1977, he served as Senior Executive Vice-President of the Société Phocéenne de Métallurgie, and from 1972 to 1974 he served as Chief Executive Officer of Braud. Mr. Kasriel began his career in 1970 at the Institut du Développement Industriel. He is Vice-Chairman of Lafarge North America Inc. and holds various executive positions in the subsidiaries of Lafarge. His term of office expires at the General Meeting approving financial statements for the financial year ended 2005. Mr. Kasriel is a Director of L’Oréal (France) and Sonoco Products Company. Mr. Kasriel holds 18, 124 Lafarge shares. He is 59 years old.

Jacques Lefèvre: Vice-Chairman of the Board, 61, rue des Belles-Feuilles, 75116 Paris, France.

Jacques Lefèvre was appointed to the Lafarge Board of Directors in 1989 and has been Vice-President since 1995. He served as Vice-President and Chief Operating Officer from 1995 to 2000. Prior to this position, he served as Chief Operating Officer from 1989 to 2000, Group Chief Operating Officer from 1987 to 1989, Executive Vice-President, Finance from 1980 to 1987 as well as various management positions in the Group since 1974. His term of office expires at the General Meeting approving financial statements for the financial year ended 2005. He holds various executive positions in the subsidiaries of Lafarge. He is Chairman of the Supervisory Board of the Compagnie de Fives Lille (France), Director of Société Nationale d’Investissement (Morocco), Cimentos de Portugal and of Petrokazakhstan Inc. (Canada). Mr. Lefèvre holds 14,971 Lafarge shares. He is 67 years old.



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Michael Blakenham: Director, 1 St. Leonard’s Studios, Smith Street, London SW3 4EN, United Kingdom.

Michael Blakenham was appointed to the Lafarge Board of Directors in 1997. He is trustee of The Blakenham Trust (UK). He was previously President of the British Trust for Ornithology from 2001 to 2005. He was previously a partner of Lazard Partners from 1984 to 1997, Chairman of Pearson Plc. (UK) from 1983 to 1997, of the Financial Times (UK) from 1984 to 1993 and of the Royal Botanic Gardens Kew from 1997 to 2003 as well as a member of the Committees of the House of Lords on Sustainable Development and science and technology. His term of office expires at the General Meeting approving financial statements for the financial year ended 2006. He is a Director of Sotheby’s Holdings Inc. (US) and chaired a commission on the governance of the National Trust (UK). Lord Blakenham holds 1,806 Lafarge shares. He is 68 years old.

Jean-Pierre Boisivon: Director, 6, rue Clément-Marot, 75008 Paris, France.

Jean-Pierre Boisivon was appointed to the Lafarge Board of Directors in 2005. He held responsibilities both in education and in businesses. He was a university professor from 1980 to 2000, at the University of Paris II Panthéon Assas, then headed the Department of evaluation and trends of the French Ministry of Education from 1987 to 1990, as well as the Essec group from 1990 to 1997. He also served as Deputy Chief Operating Officer of the Caisse d’Épargne de Paris from 1978 to 1985 and General Secretary of the Union des Banques à Paris from 1978 to 1985. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He is Chairman of the Board of Directors of the Centre National d’Enseignement à Distance (CNED), Deputy general manager of the Institut de l’Entreprise and Chairman of the organizing committee of the labour exposition “Un des meilleurs ouvriers de France”. Mr. Boisivon holds 1,150 Lafarge shares. He is 65 years old.

Michel Bon: Director, 12, rue Léon Jost, 75017 Paris, France.

Michel Bon was appointed to the Lafarge Board of Directors in 1993. He is President of the Institut Pasteur and Chairman of the Supervisory Board of Éditions du Cerf. He previously served as Chairman and Chief Executive Officer of France Telecom from 1995 to 2002, and Chief Operating Officer, then Chief Executive Officer of Carrefour from 1985 to 1992. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He is a Director of Sonepar (France) and the Banque Transatlantique (France) and senior adviser of the consultancy firm Dôme Close Brothers and Permira. Mr. Bon holds 3,716 Lafarge shares. He is 62 years old.

Philippe Charrier: Director, 96, avenue Charles De Gaulle, 92200 Neuilly-sur-Seine, France.

Philippe Charrier was appointed to the Lafarge Board of Directors in 2005. He has been Chairman and Chief Executive Officer of Procter & Gamble France since 1999. He joined Procter & Gamble in 1978 and held various financial positions before serving as Chief Financial Officer from 1988 to 1994, Marketing Director in France from 1994 to 1996 and Chief Operating Officer of Procter & Gamble Morocco from 1996 to 1998. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He is Chairman of the Board of Directors of Alphident and Dental Emco S.A., a Director of Éco Emballages, the Fondation HEC, AFISE (French association of detergents, maintenance and industrial hygiene), the Community of European Management Schools and of the Institut de Liaisons et d’Études des Industries Économiques (France). He is also Vice Chairman of Entreprise et Progrès. Mr. Charrier holds 1,451 Lafarge shares. He is 51 years old.

Oscar Fanjul: Director, Paseo de la Castellana, 28-5, ES-28046 Madrid, Spain.

Oscar Fanjul was appointed to the Lafarge Board of Directors in 2005. He hold a PhD in economy and was professor at the Universidad Autonoma de Madrid, as well as invited professor at Harvard University and at the Massachussets Institute of Technology. He began his career in 1972 working for the industrial holding I.N.I. (Spain), was then Technical General Secretary and Under-Secretary at the Spanish Ministry of Energy from 1983 to 1984 and President and Founder of Repsol YPF (Spain) from its creation in 1988 to 1996. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He is Honorary Chairman of Repsol YPF, Vice Chairman Chief Executive Officer of Omega Capital, S.L., a Director of Unilever, Marsh & Mc Lennan Company, the London Stock Exchange, Acerinox (Spain), Technicas Reunidas (Spain) and a member of the Supervisory Board of the Carlyle Group in Europe and of Sviluppo Italia. He is also International adviser with Goldman Sachs. Mr. Fanjul holds 1,143 Lafarge shares. He is 56 years old.



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Guilherme Frering: Director, 12 Stanhope Gate, London W1K 1AW, United Kingdom.

Guilherme Frering was appointed to the Lafarge Board of Directors in 1997. He is Managing Director of  Tellus (UK) Limited (UK). He is President of the Instituto Desiderata (Brazil) and served as President of Caemi Mineraçao e Metalurgia S.A. (Brazil) from 1990 to 1997. He is President of Cimento Maua, a Group subsidiary. His term of office expires at the General Meeting approving financial statements for the financial year ended 2006. Mr. Frering holds 2,394 Lafarge shares. He is 47 years old.

Juan Gallardo: Director, Monte Caucaso 915–4 piso, Col. Lomas de Chapultepec C.P., MX 11000 Mexico.

Juan Gallardo was appointed to the Lafarge Board of Directors in 2003. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He has been Chairman of Grupo Embotelladoras Unidas S.A. de C.V. (Mexico) since 1985. He is President of the Fondo Mexico and Vice-President of Home Mart Mexico. He is a Director of Nacional Drogas (Mexico), Grupo Mexico and Caterpillar Inc. (U.S.), member of the International Advisory Council of Textron Inc. and of the Mexican Business Roundtable. Mr. Gallardo holds 1,500 Lafarge shares. He is 58 years old.

Alain Joly: Director, 75, quai d’Orsay, 75007 Paris, France.

Alain Joly was appointed to the Lafarge Board of Directors in 1993. He is Chairman of the Supervisory Board of Air Liquide (France) and holds various executive positions in the subsidiaries of this company. He was previously Chairman and Chief Executive Officer of Air Liquide from 1995 to 2001 and Chief Operating Officer from 1985 to 1995. His term of office expires at the General Meeting approving financial statements for the financial year ended 2008. He is a Director of BNP-Paribas. Mr. Joly holds 2,628 Lafarge shares. He is 67 years old.

Raphaël de Lafarge: Director, 28, quai Claude-Bernard, 69007 Lyon, France.

Raphaël de Lafarge was appointed to the Lafarge Board of Directors in 1982. He was Director of Borgey from 1994 to 2003. His term of office expires at the General Meeting approving financial statements for the financial year ended 2006. Mr. de Lafarge holds 44,779 Lafarge shares. He is 63 years old.

Michel Pébereau: Director, 3, rue d’Antin, 75002 Paris, France.

Michel Pébereau was appointed to the Lafarge Board of Directors in 1991. Michel Pébereau is Chairman of BNP-Paribas (France) and holds various executive positions in the subsidiaries of this company. He was previously Chairman and Chief Executive Officer of BNP-Paribas from 1993 to 2003, Chief Operating Officer and subsequently Chairman and Chief Executive of the Crédit Commercial de France from 1982 to 1993. His term of office expires at the General Meeting approving financial statements for the financial year ended 2006. He is a Director of Total and Saint-Gobain (France), member of the Supervisory Board of Axa, President of the Institut de l’Entreprise and non-voting Director of Galeries Lafayette (France). Mr. Pébereau holds 2,108 Lafarge shares. He is 64 years old.

Hélène Ploix: Director, 162, rue du Faubourg-Saint-Honoré, 75008 Paris, France.

Hélène Ploix was appointed to the Lafarge Board of Directors in 1999. Mrs. Ploix is Chairman of Pechel Industries Partenaires. She previously served as Special Counsel for the single currency at KPMG Peat Marwick from 1995 to 1996. She was previously Deputy Chief Operating Officer of the Caisse des Dépôts et Consignations (France) and Chairman and Chief Executive Officer of CDC Participations from 1989 to 1995, Chairman of the Caisse Autonome de refinancement, Chairman of the Supervisory Board of CDC Gestion and Chairman of CDC Participations. Her term of office expires at the General Meeting approving financial statements for the financial year ended 2008. She is a Director of Publicis Groupe (France), BNP-Paribas (France), Ferring S.A., (Switzerland) and the Boots Group Plc. (UK) and as a result of her position at Pechel Industries, a Director of non-listed companies. Mrs. Ploix holds 1,971 Lafarge shares. She is 61 years old.

There are no conflicts of interest of the Directors between any duties owed to us and their private interests.

To our knowledge, no Director was, during the previous five years, convicted of fraudulent offenses, associated with a bankruptcy, receivership or liquidation, subject to official public incrimination and/or sanctions, or disqualified by a court from acting as a Director or in the management or conduct of the affairs of any issuer.

See Section 5.5 (Management share overship and options) for more information on options granted to our Directors.

Independent Directors

Our Board of Directors is comprised of nine independent Directors: Mrs. Hélène Ploix and Messrs. Michael Blakenham, Jean-Pierre Boisivon, Michel Bon, Philippe Charrier, Oscar Fanjul, Juan Gallardo, Raphaël de Lafarge and Alain Joly.



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The Board of Directors has followed the recommendations of the Report of the working group set up by the French employers’ associations, the MEDEF and AFEP-AGREF, which was chaired by Daniel Bouton (Chairman and CEO of Société Générale), and entitled “Promoting Better Corporate Governance In Listed Companies”, in its assessment of independent Directors, but without applying the recommended 12-year limitation on length of service as a Director. The Board considers that in a long-term business such as ours, where management is stable, serving as Director for a long period of time can bring more experience and authority and can increase Director independence. Messrs. Michel Bon, Raphaël de Lafarge and Alain Joly have been serving as Directors of Lafarge for over 12 years.

Although the criteria for the determination of Director independence under the Bouton report differ from those found in the rules and regulations of the U.S. Securities and Exchange Committee (the “SEC”) and the NYSE, a majority of the members of our Board of Directors may be deemed independent under the SEC and NYSE criteria. As prescribed by our Board’s internal regulations, all of the members of our Audit Committee are “independent” Directors under the criteria set by the Board of Directors and all meet the standards for Director independence of the SEC and the NYSE. Two thirds of the members of our Nominations Committee and Remunerations Committee qualify as “independent” Directors in accordance with our Board’s internal regulations, which provides that a majority of its members must qualify as “independent”, whereas NYSE rules establish for U.S. domestic issuers that all the members of Nominating and Compensation Committees should be independent. We do not have a separate corporate governance committee composed exclusively of independent Directors, as provided for under the NYSE rules for U.S. domestic issuers, this function being performed collectively by the Board of Directors and its Committees, as described in Section 5.4 (Board and Committees rules and practices) below.

Furthermore, the Board of Directors, after having reviewed the composition of its Audit Committee, has determined that Mrs. Hélène Ploix qualifies as the Committee’s financial expert in accordance with the Audit Committee financial expert requirements set by the SEC.

See Section 5.4 (Board and Committees rules and practices - Board and Committees practices) for the list of Committees members.

Director’s Charter

The full text of the Lafarge Director’s Charter, in the form approved by our Board of Directors at its meetings held May 20, 2003 and December 10, 2003 is set out below:

Preamble

In accordance with the principles of corporate governance, a Director carries out his duties in good faith, in such a manner as, in his opinion, best advances the interests of the Company and applying the care and attention expected of the normally careful person in the exercise of such office.

1. Competence

Before accepting office, a Director must satisfy himself that he has become acquainted with the general and special obligations applying to him. He must, in particular, acquaint himself with the legal and statutory requirements, the Company by-laws (statuts), the current internal rules and any supplementary information that may be provided to him by the Board.

2. Defending the corporate interest

A Director must be an individual shareholder and hold such number of shares of the Company required by the articles of association (statuts), i.e., a number as representing in the aggregate a nominal value of at least 4,572 euros which amounts to 1,143 shares, registered in the share register in nominal form; where he does not so hold any shares at the time of taking office, he must take steps to acquire them within three months.

Every Director represents the body of shareholders and must in all circumstances act in their interest and that of the Company.

3. Conflicts of interest

A Director is under the obligation to inform the Board of any situation involving a conflict of interests, even of a potential kind, and must refrain from taking part in any vote on any resolution of the Board where he finds himself in any such a conflict of interests situation.

4. Diligence

A Director must dedicate the necessary time and attention to his office, whilst respecting the legal requirements governing the accumulation of several company office appointments. He must be diligent and take part, unless impeded from doing so for any serious reason, in all meetings of the Board and, where necessary, of any Committee (as defined under article 2 above) to which he may be belong.

5. Information - Confidentiality

A Director is bound by the obligation to keep himself informed for the purposes of being able to contribute in a useful manner on the matters for discussion on the Board agenda.



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With regard to information which is not within the public domain and which he has acquired whilst in office, a Director must consider himself bound by a duty of professional secrecy which goes beyond the simple obligation to maintain discretion as provided for by law.

6. Training

Every Director may, in particular at the time of his election to the Board and where he deems it necessary so to do, take advantage of training on the specificities of the Company and the Group, its professions, sector of activity, organisation and particular financial circumstances.

7. Loyalty

A Director is bound by an obligation of loyalty. He must not, under any circumstances, do anything capable of causing damage to the Company or any of the other companies in the Group. He may not personally take on any responsibilities, within any undertakings or businesses having any activity competing with those of Lafarge without first notifying the Board of Directors thereof.

8. Privileged information – Shares transactions

A Director must not carry out any transactions involving Company shares except within the framework of the rules determined by the Company. He must make a statement to Lafarge concerning any transactions involving Lafarge shares carried out by him within five days of any such transaction.

9. Independence

A Director undertakes in all circumstances to maintain his independence of thought, judgment, decision and action and will resist all pressure, of whatsoever kind or from whatsoever origin.

A Director will undertake to forebear from seeking or accepting from the Company, or any other company linked to it, either directly or indirectly, any personal benefits likely to be deemed to be of such a nature as might compromise his freedom of judgment.

10. Agreements in which Directors have an interest

The Directors are obliged to inform the Chairman promptly of any relations capable of existing between the companies in which they have a direct interest and the Company. The Directors must also, in particular, notify the Chairman of any agreement covered by article L. 225-38 et seq. of the French Commercial Code which either they themselves, or any company of which they are Directors or in which they either directly or indirectly hold a significant number of shares, have entered into with the Company or any of its subsidiaries. These provisions do not apply to agreements in the ordinary course.

11. Information on Directors

The Chairman oversees that the Directors receive from the Chief Executive Officer, in sufficient time, the information and documents needed for fully performing their duties. Similarly, the Chairman of each of the said Committees oversees that every member of his Committee has the information needed for performing his duties.

Prior to every meeting of the Board (or of every Committee), the Directors must thus receive in sufficient time, a file setting out all the items on the agenda. Any Director who was unable to vote because not fully apprised of the issue is under a duty to inform the Board and to insist on receiving the indispensable information. Generally, every Director receives all the information necessary for performing his duties and may arrange to have delivered to him by the Chairman all the useful documents. Similarly, the Committee Chairmen must supply the members of the Board, in sufficient time, with the reports they have prepared within the scope of their duties.

The Chairman oversees that members of the Board are apprised of any principal relevant items of information, including any criticism, concerning the Company, in particular, any press articles or financial analysis reports.

Meetings, during which any Director may make presentations and discuss with the Directors in his sector of activity, are organised on a regular basis by the Chairman of the Board of Directors, during or outside Board meetings.

Every Director is entitled to request from the Chairman the possibility of having a special meeting with the Group management, without the presence of the Chief Executive Officer or the Chief Operating Officers, in the fields that interest them.

5.2 Executive officers

Since January 1, 2006, our Executive Committee headed by Mr. Bruno Lafont, Group Chief Executive Officer is comprised of the following other members:

Michel Rose: Group Chief Operating Officer Cement, 61, rue des Belles-Feuilles, 75116 Paris, France.

Michel Rose (born in 1943) is an engineering graduate of “École des Mines de Nancy” (1965) and holds a MBA of the IMI in Geneva (1977). He joined the Group as a plant engineer in 1970 and subsequently became a department manager in the Group’s Research Center in 1975, and then Director of Internal Communications for the Group in 1978. After heading Group activities in Brazil from 1980 to 1983, he was appointed Executive Vice-President of Human Resources and Corporate Communications in 1984 and then CEO of the Biotechnology Unit in 1986. In 1989, he was appointed Senior Executive Vice-President. Michel Rose was Chairman and Chief Executive Officer of Large North America from 1992 to 1996. On his return, he oversaw Lafarge’s operations in the growing markets through 2000. He chairs the Executive Committee of the Cement Division since September 12, 2000.



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Ulrich Glaunach: Group Executive Vice-President Cement, 61, rue des Belles-Feuilles, 75116 Paris, France.

Dr. Ulrich Glaunach (born in 1956) holds a doctorate in economic sciences from the university of Vienna (1980) and an MBA from INSEAD in Fontainebleau (1982). Prior to his career with Lafarge, Ulrich Glaunach has held marketing and general management positions with Unilever, Braun, Tempo and Moulinex. Ulrich Glaunach joined Lafarge in 1995 as President of Lafarge Perlmooser, Austria, and became Chief Operating Officer of the newly created Roofing Division in 1998. Since 2000, Ulrich Glaunach has been Executive Vice-President of the Roofing Division and member of the Executive Committee. Ulrich Glaunach is Group Executive Vice-President Cement since January 1, 2006.

Guillaume Roux: Group Executive Vice-President, Cement, 61, rue des Belles-Feuilles, 75116 Paris, France.

A graduate from the Institut d’Études Politiques in Paris, Guillaume Roux (born in 1959) joined the Lafarge Group in 1980 as an internal auditor for Lafarge Cement, France. He was appointed Chief Financial Officer of the Biochemicals Unit in the United States from 1989 to 1992, before returning to Lafarge headquarters to head a mission for the Finance Department. In 1996, he was sent back to the United States as Vice-President of Marketing for Lafarge North America Inc. In 1999, he was appointed Chief Executive Officer of Lafarge operations in Turkey and then in 2002, Executive Vice-President of the Cement Division’s operations in Southeast Asia. Guillaume Roux has been Group Executive Vice-President Cement since January 1, 2006.

Jean-Charles Blatz: Group Executive Vice-President Aggregates & Concrete, 61, rue des Belles-Feuilles, 75116 Paris, France.

A graduate of the Institut d’Études Politiques in Paris with a Masters in civil law, Jean-Charles Blatz (born in 1944) has devoted his entire career to Lafarge. He joined the Lafarge Group in 1970 as head of Organization and Methods for Lafarge Cements, France. In 1973, he was appointed Vice-President of Administration and Finance for Allia, a subsidiary of the Sanitaryware Division, and then Financial Director of Lafarge-Coppée. From 1989 to 1993, he was Vice-President of Cementia and managed the Group’s development in Central Europe. From 1993 to 1994, he was Vice-President of Performance Aggregates & Concrete. Jean-Charles Blatz was then named Executive Vice-President of the Mediterranean Region and Trading for the Cement Division. Since 2004, he has been Group Executive Vice-President Aggregates & Concrete and a member of the Executive Committee.

Jean-Christophe Barbant: Group Executive Vice-President Roofing, Frankfurter Landstrasse 2-4, DE 61437 Oberursel, Germany.

Jean-Christophe Barbant (born in 1963) graduated from École Polytechnique (1982) and the ENSM engineering school in Paris. He began his career at the French Ministry of Industry in 1988, and then moved to the Ministry of Transport and Infrastructure in 1993. He joined Lafarge Gypsum as Vice-President in 1995 with responsibility for purchasing and strategy. In 1997, he was appointed Senior Vice-President of Northern Europe for the Gypsum Division. In 2000, he became Vice-President for Corporate e-business. In May 2003, he was named Deputy Executive Vice-President of the Roofing Division, which is based in Germany. Jean-Christophe Barbant is Group Executive Vice-President Roofing since January 1, 2006.

Isidoro Miranda: Group Executive Vice-President Gypsum, 61, rue des Belles-Feuilles, 75116 Paris, France.

With a Doctorate (PhD) in engineering from Navarre University (Spain), Senior Visiting Scholar at Stanford (U.S.A.) and a MBA from Insead, Isidoro Miranda (born in 1959) began his career in a strategic consulting firm in London and Paris. He joined the Lafarge Group in 1995 as the Director of Group Strategic Research, before being named the Chief Executive Officer of Lafarge Asland, the Cement subsidiary in Spain. In 2001, he was named Executive Vice-President of the Cement Division and a member of the Executive Committee. Since May 2003, he has been Group Executive Vice-President Gypsum.

Jean-Jacques Gauthier: Group Executive Vice-President Finance, 61, rue des Belles-Feuilles, 75116 Paris, France.

Jean-Jacques Gauthier (born in 1959) joined the Group in February 2001. After graduating in law and economics, he began his career with Arthur Young. Between 1986 and 2001, he held several positions in the Matra Group in France and the United States. In 1996, he was named Chief Financial Officer of the Franco-British venture Matra Marconi Space, and between 2000 and 2001, he served as CFO of Astrium. After joining the Lafarge Group in 2001, Jean-Jacques Gauthier has been Group Executive Vice-President Finance and a member of the Executive Committee.



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Christian Herrault: Group Executive Vice-President Organization and Human Resources, 61, rue des Belles-Feuilles, 75116 Paris, France.

A graduate of École Polytechnique (1982) and the ENSM engineering school of Paris, Christian Herrault (born in 1951) joined the Group in 1985, taking responsibility for strategy and development in the Bioactivities Unit. Between 1987 and 1992, he was Chief Operating Officer for the Seeds Unit, first in the United States, then in France, and then managed the Glutamates business from 1992 to 1994. In 1995, he was named Chief Executive Officer of the Aluminates & Admixtures Unit (no longer part of the Group). In 1998, he was named Group Executive Vice-President Organization and Human Resources and joined the Executive Committee.

There are no conflicts of interest of the members of the Executive Committee between any duties owed to us and their private interests.

To our knowledge, during the previous five years, no member of the Executive Committee was convicted for fraudulent offenses, associated with a bankruptcy, receivership or liquidation, subject to official public incrimination and/or sanctions or disqualified by a court from acting as a Director or from acting in the management or conduct of the affairs of any issuer.

5.3 Compensation

Directors’ fees

The General Meeting of May 28, 2001 established the maximum aggregate amount of Directors’ fees to be paid in 2001 and in each subsequent year at 609,796 euros.

Each of our Directors is currently entitled to receive a fixed fee of 15,245 euros per year (increased by 25% for the Chairmen of our Committees). A Director who is appointed or whose office terminates during the course of the year is entitled to 50% of the fixed fee.

In 2005, an additional fee of 1,666 euros was payable to each Director for each meeting attended of our Board of Directors or of one of its Committees.

The total amount of Director’s fees paid in 2006 (with respect to the 2005 fiscal year) was 457,402 euros, which is the same level of fees as paid for each of the 2004 and 2003 fiscal years.


DIRECTORS

DIRECTORS’ FEES FOR 2005 PAID IN 2006

 

(EUROS)

Bertrand Collomb

25,241

Bernard Kasriel

26,907

Jacques Lefèvre

31,905

Michael Blakenham

30,239

Jean-Pierre Boisivon*

17,619

Michel Bon

36,903

Philippe Charrier*

17,619

Oscar Fanjul*

15,953

Juan Gallardo

31,905

Guilherme Frering

26,907

Alain Joly

40,715

Raphaël de Lafarge

31,905

Bruno Lafont*

12,621

Michel Pébereau

35,717

Hélène Ploix

35,717

Patrice le Hodey**

14,287

Jean Keller**

12,621

Robert W. Murdoch**

12,621

TOTAL

457,402

* New Directors elected in May 2005.

** Members that resigned in May 2005.




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Compensation paid to senior management

Our Remuneration Committee is responsible for recommending to our Board of Directors a remuneration policy for our Chairman, Chief Executive Officer and Chief Operating Officers (our “senior management”). The Remuneration Committee, in establishing the remuneration policy, seeks guidance from outside consultants on the market practices of comparable companies.

In 2005, our senior management was composed of Bertrand Collomb (Chairman), Bernard Kasriel (Chief Executive Officer), Michel Rose and Bruno Lafont (Chief Operating Officers). Their remuneration was composed of a fixed portion and a performance-based portion, which may be up to 80% of the fixed remuneration for our Chairman, 160% of the fixed remuneration of our Chief Executive Officer and 120% of the fixed remuneration for our Chief Operating Officers. All remuneration received by members of senior management with respect to the various offices they hold within our consolidated subsidiaries is imputed with respect to the fixed portion.

Approximately two-thirds of the performance-related pay of the Chairman and three-fourths of the performance-related pay of the Chief Executive Officer and Chief

Operating Officers is based on the financial results of the Group in comparison to the objectives established at the beginning of the year, and approximately one third of the performance related pay of the Chairman and one fourth of the performance related pay of the Chief Executive Officer and Chief Operating Officers is based on their individual performance over the course of the year.

For 2005, the financial criteria used to determine the performance related pay were the increase in economic value added, which reflects the return on capital employed, the increase of the net income per share and the relative return on investment of Lafarge assets as compared to its competitors. The portion based on individual performance is determined in part by reference to the personal targets set at the beginning of the year with respect to the major tasks to be undertaken.

In 2005, the outcome in relation to the increase in economic value added was average. The performance of senior management was weak with respect to the increase of the net income per share, and average as regards the relative return on investment of Lafarge assets as compared to its competitors.

The compensation we paid to our Chairman, Chief Executive Officer and Chief Operating Officers for 2005, 2004 and 2003 was the following:

(THOUSANDS EUROS)

B. COLLOMB

B. KASRIEL

M. ROSE

B. LAFONT

Fixed remuneration paid in 2005*

875

825

510

490

Including benefits in kind

5.2

3.5

5.0

4.8

2005 Variable remuneration (paid in 2006)

433

734

340

327

2005 Lafarge S.A. Directors’ fees (paid in 2006)

25.2

26.9

N/A

12.6

TOTAL FOR 2005

1,333

1,586

850

830

Fixed remuneration paid in 2004*

875

750

460

440

Including benefits in kind

5.2

3.5

5.1

4.8

2004 Variable remuneration (paid in 2005)

553

997

413

395

2004 Lafarge S.A. Directors’ fees (paid in 2005)

24.5

24.5

N/A

N/A

TOTAL FOR 2004

1,453

1,772

873

835

Fixed remuneration paid in 2003*

875

662

437

370

Including benefits in kind

3.2

2.8

3.2

3.1

2003 Variable remuneration (paid in 2004)

733

700

361

262

2003 Lafarge S.A. Directors’ fees (paid in 2004)

24.6

24.6

N/A

N/A

TOTAL FOR 2003

1,633

1,387

798

632

* Including Directors’ fees for directorships in our subsidiaries (but excluding Directors’ fees for Lafarge S.A.).




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Total compensation paid to Executive Officers in 2005

The aggregate amount of compensation paid to our Chairman and other Executive Officers in 2005, including variable remuneration was 10.0 million euros. This aggregate amount was 9.0 million euros in 2004 and 9.1 million euros in 2003. This amount:

·

includes the fixed portion of Executive Officers’ salaries in 2005 as well as the bonuses paid in 2005 in respect of 2004;

·

includes a long-term bonus relating to the 2003 and 2004 financial results benefiting our Executive Officers excluding our senior management;

·

concerns all those who were Executive Officers in 2005, for the time during that year during which they were Executive Officers;

·

does not include the Directors’ fees paid by Lafarge S.A. to Messrs. Bertrand Collomb, Bernard Kasriel and Bruno Lafont.

In addition, this amount relates to those who were Executive Officers during 2005 i.e., a total of 13 individuals (versus 14 individuals in 2004, one of whom left and one of whom was appointed, and 14 individuals in 2003). Beginning January 1, 2006, our Executive Officers are those individuals comprising the Executive Committee, i.e. a total of 9 persons, including our Chief Executive Officer.

Severance arrangements benefiting our Chief Executive Officer and Chief Operating Officer

The employment contract of Mr. Bruno Lafont was suspended effective January 1, 2006, the date upon which he became Chief Executive Officer, in accordance with French law. To the extent his employment contract is reinstated following the termination of his appointment as Chief Executive Officer, he would have the benefit of a severance pay in case of termination of his employment other than for gross negligence or willful misconduct. The cancellation of his current position or the reduction of his level of responsibility would amount to termination under these provisions. The amount of this severance pay would be equal to (i) his statutory severance entitlement plus the equivalent of 6 months pay (based on his most recent fixed and variable remuneration) or (ii) his statutory severance entitlement plus the equivalent of 18 months pay (based on his most recent fixed and variable remuneration) in case of termination of his employment within 24 months of a change of control of Lafarge. The employment contract defines a change of control as the acquisition of a significant portion of the share capital of Lafarge which is followed by the replacement of more than half of the members of the Board of Directors or by the appointment of a new Chief Executive Officer or a new Chairman. The employment contract of Mr. Michel Rose, our Chief Operating Officer, contains the same terms.

Pensions and other retirement benefits

Each member of senior management and of the Executive Committee is a beneficiary of a supplemental retirement plan the terms of which vary depending on his position and age as at December 10, 2003, which is the date on which the Board of Directors set the terms of the current plan.

Members of senior management over 55 years of age at December 10, 2003 who have the benefit of the supplemental collective retirement plan that still applies to managers of the French cement activity with a certain seniority (Messrs. Bertrand Collomb, Bernard Kasriel and Michel Rose) benefit from a guaranteed retirement pension amount equal to 60% of their total remuneration (fixed and variable, with a variable remuneration capped at 100% of the fixed remuneration) with an overall floor and cap set, respectively, at 1 and 1.2 times their average fixed remunerations in 2001, 2002 and 2003.

Members of senior management below 55 years of age at December 10, 2003 (currently Mr. Bruno Lafont) have the benefit of a supplementary plan with defined contributions set up for our Executive Officers. This plan provides for a pension amount equal to 1.3% of their reference salary (last fixed remuneration plus the average variable remuneration over the last 3 years) in excess of 16 times the annual French social security cap, multiplied by the number of years of office, limited to 10 years.

The aggregate amount set aside or accrued to provide pension, retirement or similar benefits for persons who were Executive Officers at December 31, 2005 (13 persons) and former Executive Officers (9 persons), was 66.5 million euros at December 31, 2005.

5.4 Board and Committees rules and practices

The Board of Directors determines the Strategic Direction of the Company’s activity and ensures its implementation, subject to the powers expressly granted by law to shareholders meetings and within the scope of the Company’s corporate purpose.

Our Board’s internal regulations define the respective roles and duties of the Chairman of the Board of Directors and our Chief Executive Officer, the restrictions on the powers of the Chief Executive Officer, the composition of our Board of Directors and its Committees, the evaluation of senior management and of our Board as well as the responsibilities of the different Committees of the Board. These internal regulations were amended at the beginning of 2006 to reflect the separation of the former Nominations and Remunerations Committee into two distinct Committees: the Nominations Committee and the Remunerations Committee.



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Missions and responsabilities of the Board Committees

The Board of Directors has defined in its internal regulations the missions and responsabilities of its different permanent Committees which are:

·

the Audit Committee;

·

the Nominations Committee;

·

the Remunerations Committee; and

·

the Strategy and Investment Committee.

The Committees meet on the initiative of their Chairmen or at the request of the Chairman of the Board, convocation being possible by any means, including orally. The Committees may meet anywhere and using whatever means, including by videoconference or teleconference. A quorum consists of one-half at least of their members being present. At least two meetings per year are held.

The agenda for the Committee meetings is drawn up by its Chairman. Minutes of the Committee meetings are drafted after each meeting.

For the purposes of carrying out their work, the Committees may hear members of the management of the Group or any other Group management member. The Committees may also entrust any mission to any expert and hear his Report.

The Committees Report on their work to the next meeting of the Board, by way of verbal statement, opinion, proposals, recommendations or written reports.

The Committees may not handle on their own initiative any question exceeding their terms of reference as defined below. They have no power to decide, but only to make recommendations to the Board of Directors.

Missions of the Audit Committee

The Audit Committee has the following missions:

Financial statements

·

to ensure that the statutory auditors assess the relevance and permanence of the accounting methods adopted for the preparation of the consolidated or statutory accounts as well as adequate treatment of the major transactions at Group level;

·

at the time of preparation of the financial statements, to carry out a preliminary examination and give an opinion on the draft statutory and consolidated financial statements, both semi-annual and annual prepared by the management, before being presented to the Board; for those purposes, the draft accounts and all other useful documents and information must be provided to the Audit Committee at least three days before the examination of the financial statements by the Board. In addition, the examination of the financial statements by the Audit Committee must be accompanied by (i) a note from the statutory auditors highlighting the essential points of the results and the accounting options retained; and (ii) a note from the Financial Director describing the risks exposure and the major off-balance sheet commitments of the Company. The Audit Committee hears the statutory auditors, the general management and the financial management, in particular on depreciation, reserves, treatment of the overvalues and principles of consolidation;

·

to examine the draft projects of interim financial statements, the draft half-year report and the draft report on results of operations report before publication, together with all the accounts prepared for specific transactions (asset purchases, mergers, market operations, prepayments on dividends, etc.);

·

to review, where necessary, the reasons advanced by senior management not to include certain companies within the perimeter of the consolidated companies;

·

to review the risks and the major off-balance sheet commitments.

Accounting controls and internal audit

·

to be informed by senior management of the definition of internal procedures for the collection and scrutiny of information ensuring the reliability of such information; to examine the Group internal audit plan and the engagement terms of the statutory auditors;

·

to hear the persons in charge for the internal audit for the purposes of taking note of their programs of work and to receive the internal audit reports of the Company and the Group or an outline of those reports; on prior request to the Chairman of the Board, these hearings can take place on, if necessary, without the presence of the Chief Executive Officer.

Statutory auditors

·

to regularly hear the statutory auditors’ reports on their methods for carrying out their work;

·

to propose to the Board, where necessary, a decision on the points of disagreement between the statutory auditors and senior management, likely to arise at the time of carrying out the work in question, or from its contents;



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·

to assist the Board in overseeing that the rules, principles and recommendations ensuring the independence of the statutory auditors are followed; for such purposes, the members of the Committee have, by way of delegation by the Board of Directors, the task of:

-

supervising the procedure for the selection or renewal (by invitation to tender) of the statutory auditors whilst taking care to select the “best bidder” as opposed to the “lowest bidder”, formulating an opinion on the amount of the fees sought for carrying out the statutory auditing missions, formulating an opinion stating reasons on the choice of the statutory auditors and notifying the Board of its recommendation in this respect,

-

supervising the questions concerning the independence of the statutory auditors according to the methods and in conformity with the procedures described in Section 10.2 (auditors’ fees and services).

Financial policy

·

to be informed by senior management of the financial standing of the Group, the methods and techniques used to lay down financial policy; to be regularly informed of financial strategy guidelines for the Group in particular having regard to the debt and hedging of currency risks;

·

to be informed of the contents of the official financial statements before their release;

·

to be informed as a preliminary of the conditions of the financial transactions of the Group; if a meeting of the Committee cannot be held for reasons of emergency, the Audit Committee is informed of those conditions;

·

to examine any financial or accountancy question kind submitted to it by the Chairman, the Board, the Chief Executive Officer or the statutory auditors; and

·

to be informed by senior management of all third party complaints and of any internal information criticizing accounting documents or the Company’s internal control procedures, as well as of procedures put in place for this purpose, and of the remedies for such complaints and criticism.

To enable the Committee of the accounts to carry out its missions fully, the internal rules of procedure of the Board provide that all useful documents and information must be provided to it by senior management in sufficient time.

Missions of the Nominations Committee

The Nominations Committee is responsible for preparing the evolution of the composition of the Company’s management bodies.

It has particular responsibility for examining the succession of senior management members, and the selection of the new Directors. It also makes recommendations to the Board for the appointment of the Chairmen of the other Standing Committees.

The choice made by the Nominations Committee on the appointments of the candidates to the office of Director is guided by the interests of Company and of all its shareholders. It takes into account the desirable balance of the composition of the Board, in accordance with the rules on composition laid down in its internal regulations. It oversees that each Director possesses the necessary qualities and availability and that the Directors represent a range of experience and competence thereby permitting the Board to effectively fulfil its missions, having the necessary objectivity and independence with regard to senior management and any shareholder or any particular group of shareholders.

The Nominations Committee is also responsible, together with the Chairman of the Board, for proposing the corporate governance rules to be applied by the Company, and in particular to prepare the evaluation of the works of the Board.

Missions of the Remunerations Committee

The Remunerations Committee is responsible for examining the compensation and benefits of Directors and senior management members and providing the Board with elements of comparison and benchmarking with market practices, in particular:

·

to review and make proposals in relation to the remuneration of senior management members, both with regard to the fixed portion and the variable portion of the said remuneration, and all benefits in kind, stock subscription and purchase options granted by any company of the Group, provisions relating to their retirements, and all other benefits of whatever kind;

·

to define and implement the rules for the fixing of the variable portion of their remuneration whilst taking care to ensure these rules are compatible with the annual evaluation of the performances of the Company officers and with the medium-term strategy of the Company and the Group;

·

to deliver to the Board an opinion on the general policy of allocation of stock subscription and/or purchase options and on the stock options plans set-up by senior management of the Group and to propose allocations of stock subscription or purchase options to the Board;



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·

to be informed of the remuneration policy concerning the main management personnel (aside from senior management) of the Company and other companies of the Group and to examine the coherence of this policy;

·

to make proposals to the Board on the total amount of Directors’ fees for proposal to the shareholders’ meeting of the Company;

·

to make proposals to the Board on the rules for the allocation of Directors’ fees and the individual payment amounts to be made to the Directors under this head, taking into account the diligence of the Directors on the Board and on the Committees;

·

to examine every question submitted to it by the Chairman, relating to the above questions, as well as plans for increases in the numbers of shares outstanding due to the implementation of employee stock ownership;

·

to approve the information given to the shareholders in the Annual Report on the remuneration of senior management members and on the principles and methods which guide the fixing of the remuneration of said persons, as well as on the allocation and exercise of stock subscription or purchase options by senior management.

Missions of the Strategy and Investment Committee

The Strategy and Investment Committee is responsible for advising the Board on the main strategic orientations of the Company and the Group and on the investment policy, and any other important strategic question put before the Board.

It also has the role of studying in detail and formulating its opinion to the Board on the questions submitted to it relating to major investments, the creation and up-grading of equipment, external growth, or divestments and asset or share sales.

Board and Committees practices

The following table shows the number of Board and Committee meetings during the 2005 fiscal year as well as Directors’ membership and attendance at these different meetings:

 

BOARD OF DIRECTORS

AUDIT COMMITTEE

NOMINATIONS AND REMUNERATIONS COMMITTEE *

STRATEGY AND INVESTMENT COMMITTEE

NUMBER OF MEETINGS IN 2005

7

4

3

3

Bertrand Collomb

7

   

Bernard Kasriel

7

   

Jacques Lefèvre

7

  

3

Michael Blackenham

7

 

3

 

Jean-Pierre Boisivon**

4

2

  

Michel Bon

7

4

 

3

Philippe Charrier**

4

  

2

Oscar Fanjul**

4

2

 

3

Guilherme Frering

4

   

Juan Gallardo

7

4

  

Alain Joly

7

 

3

3

Raphaël de Lafarge

7

  

3

Bruno Lafont**

4

   

Michel Pébereau

5

 

2

3

Hélène Ploix

6

4

  

* * This Committee was separated into two distinct Committees effective February 2006.

** Directors elected on May 25, 2005.




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Our Audit Committee is chaired by Mrs. Hélène Ploix, our Nominations Committee by Mr. Alain Joly, our Remunerations Committee by Mr. Alain Joly and our Strategy and Investment Committee by Mr. Michel Pébereau.

Board of Directors

Approximately one week prior to each Board meeting, Directors each receive a file containing the agenda for the meeting, the minutes of the prior meeting as well as documentation relating to each topic on the agenda.

In accordance with the Board’s internal regulations, certain topics are first discussed within the relevant Committees, depending on their nature, before being submitted to the Board for approval. These topics relate namely to the review of the financial statements, internal control procedures, auditors’ assignments and financial transactions as regards the Audit Committee, the election of new Directors and appointment of senior managers as regards the Nominations Committee, the compensation of Directors and senior managers as regards the Remunerations Committee and general strategic orientations of the Company and the Group as regards the Strategy and Investment Committee. The Committees carry out their assignments under the responsibility of the Board of Directors.

In 2005, in addition to the approval of the half-year and annual financial statements, the preparation of the General Meeting, the setting of the compensation of senior managers and other decisions in the ordinary course, the Board worked primarily on:

·

a share capital increase reserved for Group employees that took place between May and July 2005;

·

the repurchase of a portion of bonds convertible and/or exchangeable into Lafarge shares issued by the Company in 2001 and maturing on January 1, 2006;

·

the new organization of Group management effective January 1, 2006;

·

the appointment of Mr. Bruno Lafont as Chief Executive Officer effective on that same date; and

·

the implementation of a new management contract with Lafarge North America Inc. regarding the management of the current business and assets of Blue Circle North America.

In addition the Board organized in 2005 a discussion on its practices as described more fully under “Board and Committees evaluation” below.

In carrying out its work, the Board was supported by the preparation work of its different Committees and in particular of the Nominations and Remunerations Committee (which was as a single Committee in 2005) as regards the compensation of senior managers and the new Group organization put in place effective January 1, 2006, and of the Audit Committee prior to approving the financial statements.

Audit Committee

In 2005, the Audit Committee reviewed, on a preliminary basis, our statutory and consolidated 2004 annual financial statements, our statutory and consolidated 2005 half-year financial statements as well as our internal controls procedures, as it relates to the implementation of Section 404 of the Sarbanes-Oxley Act, and our policy on fraud in financial reporting and internal controls. The Audit Committee also proposed to the Board the terms of engagement of auditors and their budget for 2005, in accordance with U.S. regulations and supervised the proposal process that was organized by the Company in 2005 related to the appointment of new statutory auditors at the next General Meeting.

In terms of its preliminary review of the statutory and consolidated 2005 financial statements, the Audit Committee reviewed the main items of the closing with special attention given to other operating income and expense, finance costs, tax as well as to goodwill impairment tests. It also reviewed management’s assessment of internal control over financial reporting for 2005, as more fully described in Management’s Report on internal control over financial reporting (see Section 9.2 (Management’s Annual Report on internal control over financial reporting)) as well as auditors’ diligence on the fairness of our financial statements and on our internal control over financial reporting. During this meeting, the Audit Committee interviewed the two firms selected to become our statutory auditors and, following certain verifications, recommended to the Board that their appointment be submitted at the next General Meeting. Finally, the Audit Committee reviewed the draft dividend distribution plan for 2005 and issued recommendations to the Board.

Nominations Committee and Remunerations Committee (these two Committees constituted one single Committee until February 22, 2006)

During 2005, the Nominations and Remunerations Committee made recommendations on the remuneration of senior management, the renewal and election of several Directors to be proposed at the May 25, 2005 General Meeting, the new organization of Group management, the amendment to the stock option plan increasing to 50% the portion of options granted to the Chairman and Executive Officers subject to the performance of our share price and on the allocation of stock options to some employees and to senior managers. The Committee also made recommendation regarding the allotment of Director’s compensation for 2005.

See Section 5.5 below (Management share ownership and options).



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On February 22, 2006, the Nominations and Remunerations Committee made proposals to the Board of Directors for the setting of senior management’s performance-based remuneration for 2005 as well as their fixed remuneration for 2006. These items are described in Section 5.3 (Compensation). It also proposed to the Board to renew Directors, which upon further proposal by the Board are to be submitted at the next shareholders’ meeting.

Strategy and Investment Committee

Since 2004, the Strategy and Investment Committee is open to all Directors wishing to attend its meetings. In 2005, the Strategy and Investment Committee discussed the Group’s strategic vision on the medium term and related objectives as well as certain specific issues around the Group’s development by activity and by geography. In particular, the Committee discussed the Group’s development in China.

Board and Committees self-evaluation

The Board’s internal regulations provide that the Board is to organize at least once a year a discussion on its practices with a view to assess and improve their efficiency. A formal assessment covering namely the way it operates and the effective participation of each Director is to take place every three years using a questionnaire approved by the Board.

In 2005, the Board organized a discussion on its practices and addressed in particular certain measures that would improve the way Directors are informed about the Group’s and its environment, namely regular face-to-face meetings with managers from operations and more detailed presentations on results on a cost center basis.

Finally, the Audit Committee carried out end of 2005 and beginning of 2006 an assessment of its practices, which led to practical initiatives so as to improve the flow of information communicated to the Committee by Group management.

Powers of our Chief Executive Officer

The Chief Executive Officer has full executive authority to manage the affairs of our Company and has broad powers to act on behalf of our Company and to represent Lafarge in dealings with third parties, subject only to the powers expressly reserved to its Board of Directors or its shareholders by law, by our statuts, by decision of the Board of Directors or by decision of the shareholders.

The Company’s strategic orientations are submitted to the Board of Directors and are annually discussed at the level of the Board. Specific strategic presentations may be submitted to the Board of Directors as often as necessary. The Company’s strategic orientations are approved by the Board of Directors.

Limitations to our Chief Executive Officer’s powers are contained in our Board’s internal regulations and concern investment and divestment decisions as well as certain financial transactions.

Investments and divestments

Our Board’s internal regulations provide that investment and divestment decisions must be submitted to the Board of Directors as follows:

·

as regards transactions in line with our strategies as previously approved by the Board:

-

submission for information purposes following the close of the transaction: for transactions below 200 million euros,

-

submission for approval of the principle of the transaction, either during a Board meeting or through a written communication enabling Directors to tproposed transaction or ask for a Board decision: for transactions between 200 and 600 million euros,

-

submission for prior approval of the transaction and its terms: for transactions in excess of 600 million euros.

·

as regards transactions that do not fall within the Company’s strategy as previously defined by the Board: submission for prior approval of transactions exceeding 100 million euros.

The above amounts refer to the total commitment of the Company including assumed debt and defered commitments.

Financial transactions

Our Board’s internal regulations provide that transactions relating to the incurrence of debt and financings that can be decided by the Chief Executive Officer by law or pursuant to a delegation by the Board of Directors and the General Meeting are subject to the following rules:

·

Financing transactions carried out through bilateral or syndicated credit facilities for an amount below 2 billion euros are submitted to the Board of Directors for information purposes following the closing the transaction. Those transactions exceeding 2 billion euros are submitted to the Board for prior approval.



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·

Bond issues, which may be decided by the Chief Executive Officer pursuant to a Board delegation, must be submitted to the Board as follows:

-

for information purposes following the closing of the issue: for bond issues below 300 million euros,

-

for information purposes prior to the launch of the issue: for bond issues between 300 million and 1 billion euros, the Chief Executive Officer being in charge of defining the terms and conditions of the issue,

-

for prior approval of the issue and its terms: for bond issues above 1 billion euros,

-

for prior approval of the issue and its terms in case of bond issues convertible or exchangeable into shares.

Code of ethics

We adopted, at the beginning of 2004, a code of business conduct that applies to all of our officers and employees. This code promotes:

·

compliance with applicable laws and regulations;

·

the prevention of conflicts of interests;

·

the fact that proper attention be given to people and the environment;

·

the protection of the Group’s assets;

·

fairness in financial reporting; and

·

internal controls.

Training sessions are organized in relation to the principles set out in the code throughout the Group. The full text of the code is available on our website at www.lafarge.com. Amendments to, or waivers from one or more provisions of, the code will be disclosed on our website.

5.5 Management share ownership and options

Senior Management stock options

The tables below set forth the following information related to our senior management (Messrs. Collomb, Kasriel, Rose and Lafont):

·

options granted by all of our consolidated subsidiaries;

·

options exercised by senior management in 2005;

·

options granted by us and our consolidated subsidiaries, outstanding as of December 31, 2005.

OPTIONS GRANTED IN 2005

TOTAL NUMBER OF SHARES COVERED

EXERCISE PRICE

OPTION PERIOD LAPSES

PLAN NO.

B. COLLOMB

    

Lafarge

20,000

€72.63

12/16/2015

1401813

 

20,000*

€72.63

12/16/2015

1401813

Lafarge North America Inc.

30,000

$54.50

2/3/2015

 

B. KASRIEL

    

Lafarge

30,000

€72.63

12/16/2015

1401813

 

30,000*

€72.63

12/16/2015

1401813

Lafarge North America Inc.

25,000

$54.50

2/3/2015

 

M. ROSE

    

Lafarge

15,000

€72.63

12/16/2015

1401813

 

15,000*

€72.63

12/16/2015

1401813

Lafarge North America Inc.

1,000

$54.50

2/3/2015

 

B. LAFONT

    

Lafarge

30,000

€72.63

12/16/2015

1401813

 

30,000*

€72.63

12/16/2015

1401813

Lafarge North America Inc.

1,000

$54.50

2/3/2015

 

* The exercise of these options is subject to the performance of our share price. See the subsection below entitled «Executive officers share ownership».




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OPTIONS EXERCISED IN 2005

TOTAL NUMBER OF SHARES EXERCISED

EXERCISE PRICE

OPTION PERIOD LAPSES

PLAN NO.

B. COLLOMB

    

Lafarge

32,489

€43.10

12/13/2005

141520

Lafarge North America Inc.

15,000

$18.88

2/9/2006

 

B. KASRIEL

    

Lafarge

6,5833,416

€43.10€50.19

12/13/200512/17/2007

141520

141501

Lafarge North America Inc.

10,000

$33.19

2/10/2008

 

M. ROSE

    

Lafarge

-

-

-

-

Lafarge North America Inc.

3,000

$40.35

2/4/20142/4/20122/8/2009

 

B. LAFONT

    

Lafarge

2,323

€42.57

12/18/2006

1401499

Lafarge North America Inc.

-

-

-

 



OPTIONS GRANTED BY US AND OUR CONSOLIDATED SUBSIDIARIES OUTSTANDING AS OF DECEMBER 31, 2005.

OPTIONS EXERCISABLE AS OF DECEMBER 31, 2005

OPTIONS NOT EXERCISABLE AS OF DECEMBER 31, 2005

TOTAL