Lonza Reports Strong Momentum with Organic Growth of 8% Sales and 11% CORE EBITDA in H1 2018

July 25,2018

•  Outperformance in Pharma & Biotech in H1 2018 in sales, with margins up 270 bps, was combined with strong positive momentum in the newly formed Consumer Health division

•  Legacy Capsugel businesses, now well integrated into Lonza, exceeded expectations for performance and synergistic potential in H1 2018

•  Growth drivers in Consumer & Resources Protection added to favorable momentum, but H1 2018 was negatively impacted by more mature, cyclical parts of the portfolio

•  Water business gained momentum in May and June with positive outlook from H2 2018 onward

•  Full-Year 2018 sales outlook was upgraded, and double-digit ROIC Mid-Term Guidance 2022 target was announced

Basel, Switzerland, 25 July 2018 – Lonza today reported a strong 8.2% organic (like-for-like) sales growth, double-digit organic CORE EBITDA and CORE EBIT growth and continued CORE EBITDA margin improvement during the first half of 2018. One year after the successful closing of the Capsugel acquisition, sales amounted to CHF 3.1 billion for the Half-Year 2018; and margins for Lonza further improved, resulting in a CORE EBITDA margin of 26% and a CORE EBIT margin of 20.3%. All figures are in reported currency and compared with the same period in 2017 (restated to reflect adoption of IFRS 15).

On a segment level, Lonza Pharma & Biotech contributed significantly to Lonza’s strong H1 2018 performance with 14.7% organic sales growth and a 33.1% CORE EBITDA margin. Pharma & Biotech’s Clinical Development & Manufacturing and Commercial Manufacturing services across all technologies and assets continued to build on buoyant demand for Lonza’s offerings along the entire value chain. Within Lonza’s Specialty Ingredients segment, the newly formed Consumer Health division performed extremely well, driven by robust momentum for nutritional ingredients and supplement delivery forms.

"The strong organic sales growth and margin improvements – particularly in our businesses along the healthcare continuum – helped us achieve a positive Half-Year 2018 result, which is why we are updating our outlook for the full year," said Richard Ridinger, CEO of Lonza. "We look back at a successful first year after acquiring Capsugel and see that integration is progressing better than planned, operational and commercial synergies are starting to materialize and healthcare continuum offerings are becoming even stronger."

He added, "An important part of the successful integration into the Lonza family has been the valuable contribution of Guido Driesen, Capsugel's former CEO, who helped bring together a strong organization. With integration progressing so well, he is winding down his activities. We are thankful that Guido is prepared to support us even further with his expertise in other projects globally as needed."

Based on the strong Half-Year 2018 results, Lonza today upgraded its sales outlook for Full-Year 2018 to mid- to high-single-digit growth on a comparable basis. CORE EBITDA margin for Full-Year 2018 is expected to be comparable to the CORE EBITDA margin of 26% for Half-Year 2018.

Financial Summary – Lonza Pro-Forma Results (including Capsugel in HY 2017)1

CHF million

HY 2018

HY 2017

(pro-forma)2

Change in % YoY

Sales

3,079

2,845

8.2

CORE EBITDA

802

723

10.9

 CORE EBITDA

 Margin

26.0

25.4

CORE EBIT

626

557

12.4

 CORE EBIT

 Margin

20.3

19.6

 

Financial Summary – Lonza Reported Results (excluding Capsugel in HY 2017)1

CHF million

HY 2018

HY 2017 (restated)3

Change in %

YoY

Sales

3,079

2,310

33.3

CORE EBITDA

802

570

40.7

 CORE EBITDA

 Margin

26.0

24.7

CORE EBIT

626

440

42.3

 CORE EBIT

 Margin

20.3

19.0

ROIC in %

7.9

NC4

CORE RONOA in %

31.5

31.2

1.0

Operational Free Cash Flow

351

302

16.2

Net Debt

3,715

1,5885

133.9

Net Debt/CORE EBITDA6

2.52

1.53

1 Actual exchange rates (AER) results were only marginally impacted by currency exchange effects. Further information about constant exchange rates (CER) is displayed in the Half-Year Results 2018 Report.

2 Reported Lonza Half-Year 2017 financial results (restated for IFRS 15) include Capsugel Half-Year 2017 financial results. This explanation applies to the terms “pro-forma,” “like-for-like” and “organic,” which are used as synonyms throughout this release.

3 On 1 January 2018, the new comprehensive revenue recognition standard, IFRS 15 "Revenue from Contracts with Customers," took effect. Lonza is applying the full retrospective methodology to adopt IFRS 15 and enhance comparability. On 9 July 2018, Lonza published a news release regarding the impact from the IFRS 15 restatement on comparable information for 2017.

4 Not calculated, as ROIC for the first six months 2018 is not comparable with the 2017 comparative period, due to the Capsugel acquisition (see Half-Year Results 2018 Report with details on the ROIC calculation for the full financial year 2017).

5 Net debt at 30 June 2017 excluded the cash resulting from the capital increase of CHF 3,061 million.

6 Net debt/CORE EBITDA is calculated based on the CORE EBITDA of the last twelve months.

Pharma & Biotech Segment

Lonza Pharma & Biotech continued to outperform with 14.7% organic sales growth (50.6% sales growth on a reported basis), and an outstanding 33.1% CORE EBITDA margin driven by its Clinical Development & Manufacturing and Commercial Manufacturing services.

This segment delivered CHF 1.6 billion sales for H1 2018; and CORE EBITDA amounted to CHF 517 million, a pro-forma increase of 24.9% (60.1% CORE EBITDA growth on a reported basis). Excellent organic CORE EBIT growth of 29.6% (62.2% on a reported basis) resulted in a record CORE EBIT of CHF 425 million.

The Commercial Mammalian and Microbial Manufacturing business continues to benefit from a robust customer base and strong demand, enabling the business to secure additional contracts in the mid- and long-term. The Portsmouth, NH (USA) mid-scale capacity expansion, which was announced with the Q1 Qualitative Business Update, is receiving positive customer interest as expected; the IBEX® Solutions program in Visp (CH) and the operationalization of the Singapore (SG) single-use bioreactor facility are developing as planned.

Lonza is extending its clinical development and manufacturing services in Slough (UK) with new hires; and the transfer of new and existing customers to Lonza’s Hayward, CA (USA) site is progressing well. The opening of the world’s largest dedicated cell-and-gene-therapy manufacturing facility in Pearland, Greater Houston, TX (USA) in April was well received; the transfer of existing and new customers into the facility is making good progress.

Lonza Pharma & Biotech's small-molecule businesses reported continued operational and commercial improvements. Also firm demand continued for Lonza’s offerings in active pharmaceutical ingredients (API) development and manufacturing for clinical and commercial, as well as in dosage forms and delivery solutions and services to enhance bioavailability and efficacy of drugs. The hard-capsules business had a robust performance in H1 2018 and is expanding in different regions, with new product offerings and increased customer interest in specialty polymer solutions.

Lonza's Bioscience product businesses continue to improve in production availability, and output and offerings have increased to meet demand of existing and new customers.

Specialty Ingredients Segment

Specialty Ingredients delivered strong results for the businesses along the healthcare continuum but was negatively impacted by the soft performance in more mature, cyclical parts of the portfolio like basic materials and intermediates. The segment reported CHF 1.5 billion sales for the Half-Year 2018 (increase of 2.5% pro-forma, 19.7% sales growth on a reported basis), with a 21.1% CORE EBITDA margin. CORE EBITDA amounted to CHF 316 million (pro-forma -3.7%; 18.8% growth on a reported basis). CORE EBIT was CHF 254 million (pro-forma -5.2%; 17.1% growth on a reported basis).

As of 1 January 2018, the Specialty Ingredients segment began operating in three distinct units: a Consumer Health division (including the former Capsugel consumer health and nutrition business), a Consumer & Resources Protection division and a Water Care business unit.

The newly formed Consumer Health division performed extremely well and organically grew 7.6% in sales to CHF 536 million for the Half-Year 2018 (86.1% growth on a reported basis). CORE EBITDA amounted to CHF 153 million, a 24.4% increase like-for-like (150.8% growth on a reported basis) with an outstanding 28.5% CORE EBITDA margin, an improvement of 380 bps on a like-for-like basis. In particular, the consumer health and nutrition businesses reported outstanding sales momentum as expected through strengthened global reach of the combined sales force; and they continued to build a robust launch pipeline of synergistic offerings. First combined concepts have reached the markets. Solutions for institutional and household hygiene applications supported the strong performance in this division and are expected to remain a growth pillar, too.

Strong demand for composite materials in Consumer & Resources Protection from the aerospace and electronics industries continues, and momentum for microbial control solutions in industrial applications is ongoing. This division delivered CHF 678 million sales for the Half-Year 2018 (1.3% growth on a reported basis). CORE EBITDA amounted to CHF 130 million (-19.3% on a reported basis) with a CORE EBITDA margin of 19.2%. A downward cycle for basic feed ingredients and raw-material price increases had an impact on this division. Also the weather-related delayed construction season in North America was reflected in the results of the wood businesses, for instance. Operational and commercial excellence initiatives are ongoing.

The Water Care business only gained good momentum in May and June as the recreational pool season in North America had an extremely delayed start due to weather. This business unit delivered CHF 283 million sales for Half-Year 2018, a slight decrease compared with Half-Year 2017. However, the outlook for the remainder of the year is positive, and strong results are expected from H2 2018 onward. Significant investments in innovative new offerings and a related complete brand restaging are strengthening this outlook for coming seasons, supported by sales initiatives and expected new business. The evaluation of strategic options for the Water Care business unit continues as planned.

Outlook 2018

Based on the strong performance in Half-Year 2018 – of the overall company and particularly of the businesses along the healthcare continuum – Lonza is upgrading its Full-Year 2018 sales outlook to mid- to high-single-digit growth on a comparable basis. The CORE EBITDA margin for Full-Year 2018 is expected to be comparable to the CORE EBITDA margin of 26% for Half-Year 2018.

All major investments that have already been announced are progressing as planned, including expansions in single-use bioreactors in Singapore, in hybrid mid-scale technologies in Portsmouth, in cell and gene therapy in Portsmouth and in Houston, TX (USA), in biological manufacturing in IBEX® Solutions in Visp, in dosage form and ingredient production in Greenwood, SC (USA) and in encapsulation capabilities in Tampa, FL (USA).

At the upcoming Capital Markets Day from 24-26 September in Zurich (CH), Lonza will provide further granularity on its growth trajectory toward Mid-Term Guidance 2022 and its ongoing portfolio and business composition review, as well as explore initiatives to grow beyond 2022.

Mid-Term Guidance 2022

As previously communicated on 4 May 2018 with the publication of the Q1 Qualitative Business Update 2018, CORE RONOA (return on net operating assets) will be complemented by ROIC (return on invested capital) as a KPI (key performance indicator). Therefore, Lonza is now updating its Mid-Term Guidance 2022 by including an attractive ROIC target:

  • Sales CHF 7.5 billion
  • CORE EBITDA margin 30%
  • CORE RONOA 35%
  • Double-digit ROIC

ROIC is defined as NOPAT (net operating profit after tax) divided by year-to-date average invested capital. NOPAT measures the after-tax operating profit from Lonza’s core operations, including operating lease adjustments, results from investments in joint ventures and amortization of intangible assets from acquisitions. Invested capital represents the full capital deployed in Lonza’s core operations, including capitalized operating leases, investments in joint ventures, and goodwill and intangible assets from acquisitions.

The Outlook 2018 and Mid-Term Guidance 2022 are based on the present business composition, macro-economic environment, current visibility and constant exchange rates.

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