Note 2 – Operating Segments Audited

2.1 General Information

According to the requirements of IFRS 8 “Operating Segments” Lonza identified the following two market-focused segments: Pharma&Biotech and Specialty Ingredients. These segments are described as follows:

Pharma&Biotech

In the Pharma&Biotech segment, Lonza is one of the world’s leading suppliers of active pharmaceutical ingredients (APIs) and biopharmaceuticals as well as research and testing products and services. Lonza manufactures products that are at the forefront of powerful new treatments for cancer, diabetes, immune system disorders, heart conditions, Alzheimer’s and Parkinson’s diseases, inflammation and many other medical diseases and conditions. Lonza’s customers cover a wide spectrum: from the world’s largest pharmaceutical and biotechnology companies to medical research and testing organizations, as well as small start-ups pioneering breakthrough medical treatments.

Specialty Ingredients

In the Specialty Ingredients segment, Lonza is an innovative supplier of solutions that promote health, wellness, beauty, nutrition, hygiene and materials protection. Lonza’s Consumer Care business is a global leader in several important chemical ingredient categories that provide health, wellness, beauty and protection claims for our fast-moving consumer goods customers. These ubiquitous materials include actives for antidandruff shampoos, cosmetic ingredients, vitamin B3 compounds (niacin and niacinamide), L-Carnitine and microbial control solutions such as disinfectants and sanitizers that help protect us from dangerous and unwanted microbes. Lonza’s Agro Ingredients business offers – in addition to active ingredients for mollusk control – custom agricultural manufacturing services designed to improve crop yields and food quality. Additional offers include preservatives and additives for crop protection formulations, as well as animal feed additives. Coatings and Composites globally offers a wide array of specialty solutions for the protection, enhanced performance and modification of the end-use characteristics of various materials including carbon, fibers, fabrics, leather, metals, plastics, stone and wood. The Water Treatment business is one of the world’s largest suppliers of sanitizers and other treatment chemicals for pools, spas and water parks, surface waters, as well as water for drinking, agriculture, irrigation, food processing and industrial applications.

Corporate

Corporate includes mainly corporate functions, such as finance and accounting, legal, communication, information technology and human resources.

2.2 Information about Reportable Segment Profit or Loss, Assets and Liabilities including Reconciliations

In the following table, revenues and profit or loss are disclosed by the two reportable segments and corporate, which includes the costs of the corporate functions, including eliminations, and adds up to the Group total. Lonza does not allocate financing costs, income and expenses from associates and joint ventures as well as taxes to the reportable segments. The information disclosed by the operating segments is the same as that reported monthly to the Group’s Executive Committee.

Year ended 31 December 2016
million CHF
Specialty Ingredients Pharma&
Biotech
Total operating segments Corporate/ eliminations Group total
           
Sales third-party 2,250 1,849 4,099 33 4,132
Intersegment sales 1 43 23 66 (66) 0
Total sales 2,293 1,872 4,165 (33) 4,132
Result from operating activities (EBIT) 273 325 598 (112) 486
– Percentage return on sales in % 12.1 17.6 14.6 n.a. 11.8
           
Financial income         2
Financial expenses         (114)
Net financing costs         (112)
Share of loss of associates / joint ventures         (1)
Profit before income taxes         373
Income taxes         (72)
Profit for the period         301
           

Included in result from operating activities (EBIT):

         
Other operating income 2 12 10 22 9 31
Other operating expenses 2 (18) (24) (42) (4) (46)
Research and development (49) (95) (144) 0 (144)
Depreciation and amortization (123) (140) (263) (44) (307)
Impairment, net of reversal of impairment (5) (50) (55) 0 (55)
Restructuring expenses (9) (16) (25) (2) (27)
Environmental expenses 0 0 0 (28) (28)
           
CORE result from operating activities (EBIT) 5 322 400 722 (71) 651
           
Total assets 4,041 3,638 7,679 (851) 6,828
Total liabilities 618 1,476 2,094 2,379 4,473
Total equity 3,423 2,162 5,585 (3,230) 2,355
Net financial liabilities (400) (71) (471) 3,142 2,671
Net capital invested 3 3,023 2,091 5,114 (88) 5,026
           
Return on net capital invested (RONOA) 4 in % 13.3 17.8 15.4 n.a. 12.7
           

Included in total assets:

         
Total property, plant and equipment 922 1,426 2,348 64 2,412
– Additions to property, plant and equipment 96 232 328 27 355
– Additions to property, plant and equipment from acquisitions 1 0 1 0 1
Total goodwill and intangible assets 1,712 512 2,224 31 2,255
– Additions to intangible assets 0 6 6 5 11
– Additions to goodwill and intangible assets from acquisitions 332 12 344 0 344
Investments in associates / joint ventures 7 3 10 8 18
           
Headcount 3,495 4,771 8,266 1,864 10,130
Average headcount 3,484 4,680 8,164 1,815 9,979

 

Year ended 31 December 2015
million CHF
Specialty Ingredients Pharma&
Biotech
Total operating segments Corporate/ eliminations Group total
           
Sales third-party 2,167 1,596 3,763 40 3,803
Intersegment sales 1 62 27 89 (89) 0
Total sales 2,229 1,623 3,852 (49) 3,803
Result from operating activities (EBIT) 271 216 487 (59) 428
– Percentage return on sales in % 12.5 13.5 12.9 n.a. 11.3
           
Financial income         4
Financial expenses         (89)
Net financing costs         (85)
Share of loss of associates / joint ventures         (2)
Profit before income taxes         341
Income taxes         (64)
Profit for the period         277
           

Included in result from operating activities (EBIT):

         
Other operating income 2 23 16 39 14 53
Other operating expenses 2 (23) (16) (39) (26) (65)
Research and development (51) (134) (185) 0 (185)
Depreciation and amortization (113) (143) (256) (44) (300)
Impairment, net of reversal of impairment (3) (47) (50) (2) (52)
Restructuring (expenses) / income (2) (9) (11) (1) (12)
Environmental (expenses) / income (1) 0 (1) (30) (31)
           
CORE result from operating activities (EBIT) 5 298 284 582 (58) 524
           
Total assets 3,554 3,596 7,150 (902) 6,248
Total liabilities 462 1,340 1,802 2,311 4,113
Total equity 3,092 2,256 5,348 (3,213) 2,135
Net financial liabilities (362) (11) (373) 3,097 2,724
Net capital invested 3 2,730 2,245 4,975 (116) 4,859
           
Return on net capital invested (RONOA) 4 in % 13.1 10.9 12.0 n.a. 10.8
           

Included in total assets:

         
Total property, plant and equipment 936 1,406 2,342 24 2,366
– Additions to property, plant and equipment 86 145 231 25 256
– Additions to property, plant and equipment from acquisitions 2 0 2 1 3
Total goodwill and intangible assets 1,375 546 1,921 30 1,951
– Additions to intangible assets 3 0 3 5 8
– Additions to goodwill and intangible assets from acquisitions 27 0 27 0 27
Investments in associates / joint ventures 2 2 4 9 13
           
Headcount 3,474 4,590 8,064 1,765 9,829
Average headcount 3,349 4,710 8,059 1,759 9,818

 

2.3 Measurement of Operating Segment Profit or Loss

The accounting principles applied to the operating segments are based on the same accounting principles used for the consolidated financial statements. Lonza evaluates the performance of its operating segments on the basis of the result from operating activities (EBIT) as well as the CORE result from operating activities. Intersegment sales and transfers are based on prevailing market prices.

Year ended 31 December 2016
million CHF
Revenue from external
customers (sales)
Non-current assets
    Property, plant and equipment Intangible assets Goodwill Other non-current assets Total
             
Switzerland 332 910 11 15 10 946
Germany 197 4 27 62 0 93
Ireland 146 1 0 0 0 1
United Kingdom 173 68 57 8 0 133
France 110 1 4 9 0 14
Netherlands 48 0 0 0 0 0
Belgium 19 9 0 54 0 63
Sweden 101 0 0 0 0 0
Italy 37 0 0 10 0 10
Spain 20 117 0 0 0 117
Czech Republic 7 26 0 0 0 26
Rest of Europe 106 3 0 11 0 14
Europe 1,296 1,139 99 169 10 1,417
             
United States 1,915 745 765 1,099 9 2,618
Canada 67 0 8 4 0 12
Rest of North and Central America 21 0 0 0 0 0
North and Central America 2,003 745 773 1,103 9 2,630
             
Brazil 104 15 10 0 4 29
Rest of Latin America 25 0 0 0 0 0
Latin America 129 15 10 0 4 29
             
China 143 216 10 4 0 230
Singapore 139 280 51 0 3 334
Japan 104 0 2 0 0 2
India 67 4 0 2 0 6
Rest of Asia 112 1 0 0 0 1
Asia 565 501 63 6 3 573
             
South Africa 57 7 4 0 0 11
             
New Zealand 41 4 14 8 0 26
             
Other countries 41 1 5 1 0 7
             
Total 4,132 2,412 968 1,287 26 4,693

 

Year ended 31 December 2015
million CHF
Revenue from external
customers (sales)
Non-current assets
    Property, plant and equipment Intangible assets Goodwill Other non-current assets Total
             
Switzerland 344 938 27 15 2 982
Germany 223 4 30 63 0 97
Ireland 170 1 0 0 0 1
United Kingdom 155 88 65 10 0 163
France 109 2 4 10 0 16
Netherlands 65 0 0 0 0 0
Belgium 51 61 0 85 0 146
Sweden 46 0 0 0 0 0
Italy 32 0 0 10 0 10
Spain 18 119 0 0 0 119
Czech Republic 6 26 0 0 0 26
Rest of Europe 124 2 0 9 0 11
Europe 1,343 1,241 126 202 2 1,571
             
United States 1,581 579 601 897 9 2,086
Canada 78 0 8 4 0 12
Rest of North and Central America 27 0 0 0 0 0
North and Central America 1,686 579 609 901 9 2,098
             
Brazil 96 8 9 0 3 20
Rest of Latin America 34 0 0 0 0 0
Latin America 130 8 9 0 3 20
             
China 149 246 11 4 0 261
Singapore 102 278 52 0 3 333
Japan 99 1 2 0 0 3
India 61 4 0 2 0 6
Rest of Asia 109 0 0 0 1 1
Asia 520 529 65 6 4 604
             
South Africa 55 4 3 0 0 7
             
New Zealand 30 4 15 7 0 26
             
Other countries 39 1 6 2 1 10
             
Total 3,803 2,366 833 1,118 19 4,336

2.5 Information About Major Customers

In 2016 Lonza’s largest customer accounted for 5.3% and the second, third, fourth and fifth largest customers for 5.2%, 4.9%, 4.7% and 3.3% in relation to total Group sales, respectively. No other customer accounted for 3.2% or more of Lonza’s total sales. Out of the five largest customers, the second-largest customer relates to the Specialty Ingredients segment, whereas the other largest customers related to the Pharma&Biotech segment.

In 2015 Lonza’s largest customer accounted for 5.5% and the second, third, fourth and fifth largest customers for 4.2%, 4.1%, 4.0% and 3.5% in relation to total Group sales, respectively. No other customer accounted for 2.8% or more of Lonza’s total sales. The largest customer related to the Specialty Ingredients segment, while the second, third, fourth and fifth largest customers related to the Pharma&Biotech segment.