Jan. 23 - The revised growth strategies for Bioscience, Nutrition Ingredients and Microbial Control are designed to deliver enhanced returns.
Lonza continues to successfully achieve critical milestones in its long-term strategic plan and extends its mid-term guidance to 2013. The Board of Directors is proposing a dividend of CHF 1.75 per share.
Overview
The full-year performance was characterized by Lonza’s portfolio changes and solid developments in all businesses, with Biopharmaceuticals experiencing particularly strong growth. The successfully integrated Bioscience division performed according to expectations. As a result, EBITDA for the group rose by 40.9% based on continuing operations from CHF 484 million in 2006 to CHF 682 million in 2007, increasing margins by 2.6 percentage points to 23.8% of sales. Along with proactive measures that helped lower the tax rate to 16.5%, the improved financial result led to a proportionately greater increase in net income of 51.3% to CHF 301 million. As a consequence, gearing declined from 92% at the end of the first quarter to 72% at year-end. RONOA continued to improve from 12.2% in 2006 to 14.1%. Full-year sales in 2007 amounted to CHF 2870 million.
Strategy
The projects designed to deliver sustainable, above-average, profitable growth continue to be on or ahead of plan. The transformation of the portfolio progressed in 2007, with the sale of the purified isophthalic acid facility in Singapore at an attractive price, as well as the announced divestiture of the majority of the remaining stake in Polynt S.p.A. The disposal proceeds will be redeployed in growth-enhancing opportunities. Over 90% of Lonza sales now relate directly to the life sciences, with an extensive range of technologies and reactor scales having been built up in order to meet customer needs. The successful integration of the newly acquired assets (Bioscience, Porriño (ES), Hopkinton, MA (USA)) strengthens Lonza’s ability to serve pharmaceutical and biotechnology customers. In addition, Lonza Bioscience provides a new technology and business platform, extending the range of offerings to include more steps in the customers’ process, from the research laboratory to production and subsequent quality control.
Strategy reviews were completed for the Microbial unit within the Biopharmaceuticals business, the Bioscience division and the newly named Life Science Ingredients (formerly Organic Fine & Performance Chemicals) business. Increased up-front investment in R&D, regulatory filings, new regions and new products will lead to better mid- to long-term growth prospects. In addition to incremental R&D investments in most of the businesses, an organization to deliver long-term technology breakthroughs and new business platforms across all divisions has been created. It will be funded in the low double-digit CHF million range.Life Science Ingredients posted a solid performance in 2007. Sales increased by 5.6% to CHF 1135 million. Excluding the impact of currencies, sales grew by 7.2%, two-thirds of this improvement due to volume increases. The business again preserved both margins and RONOA despite negative economic conditions and market uncertainty caused by cost increases in raw materials, unfavorable currency exchange rates, a weak construction market in the USA, and the seasonal shut-down of the cracker in Visp (CH). For the full year, EBIT increased by 7.7% to CHF 140 million. Market shares in strategic business niches were sustained at the desired high levels and capacity utilization remained high.
Exclusive Synthesis & Biopharmaceuticals continued to be the principal growth driver for Lonza in 2007, increasing sales by 29.4% to CHF 1388 million. The significant improvement in EBITDA, which rose by 32.5% to CHF 391 million from CHF 295 million a year ago, was driven by the Biopharmaceuticals business. Profits were impacted by the operational performance and subsequent restructuring measures initiated in the Baltimore, MD (USA), Riverside, PA (USA) and Braine-l’Alleud (BE) facilities.
Biopharmaceuticals increased sales by 68% from CHF 468 million in 2006 to CHF 788 million, due to strong customer demand for both existing and recently aquired assets. Capacity utilization was above 90% throughout the year, and batch success rates remained significantly above the industry average. The outlook for the successful Microbial and Mammalian manu-facturing businesses is supported by a pipeline of over 135 projects, resulting in strong demand for Lonza’s Microbial and Mammalian Services.
Exclusive Synthesis generated sales of CHF 600 million in 2007, operating at over 90% capacity utilization. After a disappointing first half, operational performance improved, on track towards the delivery of expected growth. Overall, constraints from the high levels of capacity utilization and changes in the product mix limited sales growth for the full year. The turnaround project at the small-molecule plant in Riverside, PA (USA) showed the first promising results, and the production ramp-up at the Braine-l’Alleud (BE) peptide facility is able to fully meet customer needs, but has not yet achieved the optimal operational performance. As a result, margins for the full year remained below expectations. The further strengthening of the development pipeline supported the expansion of new technology platforms in Visp (CH). Strong customer demand required an acceleration of the build-out of the large-scale API plant in Nansha (CN).
Bioscience, Lonza’s new division, is fully on track with its business plan, delivering a strong margin performance when short-term integration costs are excluded. On sales amounting to CHF 189 million, EBIT of CHF 28 million translates into a margin of 14.8%, including integration costs. This good performance was driven principally by healthy growth in the Rapid Testing business and a solid operational performance in production. This financial strength will enable increased investment in R&D and capital expenditures resulting in mid-term upside potential, without dilution of short-term profit-ability. Integration activities are progressing ahead of schedule, while the first global sourcing synergies and the first cross-selling opportunities have been realized.
Lonza Group summary
The improved results in non-core activities were driven primarily by the strong performance of the purified isophthalic acid facility in Singapore and the book gain of CHF 29 million relative to its disposal.
As planned, capital expenditure (excluding customer financing) was substantially higher than in 2006 to support growth (2007: CHF 533 million, 2006: CHF 278 million).
Net working capital (NWC) in relation to sales declined further, from 26.4% in 2006 to 21.5%, showing the continuing impact of the NWC improvement program.
Net cash provided by operating activities increased by 51.5% from CHF 425 million in 2006 to CHF 644 million.
Net debt amounted to CHF 1 309 million by the end of 2007, with the ratio of debt to equity having declined from 92% in the first quarter to 72% by year-end, on strong cash flow generation.
In order to finance the acquisition of the Microbial Biopharmaceuticals and Research Bioproducts businesses from Cambrex, Lonza signed a syndicated loan of CHF 500 million with a consortium of banks in December 2006. The syndicated loan, which has a five-year term and is based on floating rates, was drawn in February 2007. Lonza hedged the interest rate for the whole period of five years by means of an interest rate swap.
Lonza added 1565 employees to its workforce compared with the beginning of 2007, 1074 of them through acquisitions. Excluding these, the number of employees increased by 8.0%, in line with the long-term Human Resources strategy.
Senior management changes
Effective 1 January 2007, Uwe H. Böhlke joined Lonza as a Management Committee member and Head of the Exclusive Synthesis business. Effective 1 August 2007, Marcela Čechová, previously Head of Lonza Exclusive Synthesis Biochemicals and of the Kouřim (CZ) site, took over as the new Head of Global Human Resources and replaced Jeanne Thoma as a new member of the Management Committee (MC). Jeanne Thoma moved into the role of Head of the Microbial Control business unit as of 1 June 2007.
Outlook
All strategic projects are on track. With sound execution of its long-term plan, Lonza continues to drive aggressive growth initiatives in the form of strategic investments and organic growth projects. Based on visibility of contracts, projects and economic conditions, Lonza expects:
– EBIT growth in the mid to high teens up to 2013
– Project pipeline fully aligned to support growth expectations – 80% of capacity expansion committed today.