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. The Capsugel business acquired in 2017 operated independently from the existing segments and was therefore managed and reported separately from its acquisition date through 31 December 2017. The three 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.

Capsugel1

 

In the Capsugel segment, which was acquired in July 2017, Lonza designs, develops and manufactures a wide range of innovative dosage forms for the biopharmaceutical and consumer health and nutrition industries. Lonza's unique combination of science, engineering, formulation and capsule expertise enables the broadest range of capsule polymers, sizes and designs in the industry, as well as the ability to offer integrated product design, development, clinical supply and commercial manufacturing services to customers around the world. The diversified customer base includes companies that make branded, generic and specialty pharmaceuticals, biotech products, over-the-counter medicines, vitamins and dietary supplements.

Corporate

 

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

Integration of Capsugel Business in 2018


In 2018, the Group anticipates integrating the Capsugel reporting segment into a revised structure, whereby the reporting segments will be reassessed.

As of 1 January 2018, the Pharma&Biotech segment is operating with a Chemical Division and a Biologics Division, as well as the existing Bioscience Solutions Business Unit and a new Capsule Delivery Solutions Business Unit. The latter business unit will cover the capsules business for pharma markets.  Capsugel’s dosage forms and development services have been integrated in the newly formed Dosage Forms and Delivery Systems (DFDS) Business Unit within the Chemical Division.

The former Consumer Health and Nutrition business of Capsugel has been integrated into the existing Consumer Health and Nutrition business of Lonza, and together with Lonza's Consumer Product Ingredients business, the new Consumer Health Division has been formed.

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 three 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 20171
million CHF
Specialty Ingredients Pharma&
Biotech
Capsugel Total operating segments Corporate/ Eliminations Group total
             
Sales third-party 2,400 2,124 543 5,067 38 5,105
Intersegment sales 1 20 5 0 25 (25) 0
Total sales 2,420 2,129 543 5,092 13 5,105
Result from operating activities (EBIT) 332 498 (5) 825 (102) 723
– Percentage return on third-party sales in % 13.8 23.4 (0.9) 16.3 n.a. 14.2
             
Financial income           17
Financial expenses           (159)
Net financing costs           (142)
Share of loss of associates / joint ventures           0
Profit before income taxes           581
Income taxes           147
Profit for the period           728
             

Included in result from operating activities (EBIT):

           
Other operating income 2 16 11 1 28 85 113
Other operating expenses 2 (31) (18) (3) (52) (50) (102)
Research and development (42) (110) (5) (157) 0 (157)
Depreciation and amortization (133) (139) (98) (370) (41) (411)
Impairment, net of reversal of impairment (2) (17) 0 (19) 0 (19)
Restructuring expenses 0 (4) 0 (4) 0 (4)
Environmental expenses 0 0 0 0 (31) (31)
             
Total assets 4,130 3,800 6,601 14,531 (741) 13,790
Total liabilities 621 1,497 2,722 4,840 2,697 7,537
Total equity 3,509 2,303 3,879 9,691 (3,438) 6,253
Net financial liabilities (447) (146) 2,399 1,806 3,409 5,215
Net capital invested 3 3,062 2,157 6,278 11,497 (29) 11,468
             
Return on net capital invested (RONOA) 4 in % 15.4 29.5 (0.3) 11.0 n.a. 9.7
             

Included in total assets:

           
Total property, plant and equipment 922 1,518 610 3,050 148 3,198
– Additions to property, plant and equipment 106 245 44 395 32 427
– Additions to property, plant and equipment from acquisitions 0 18 583 601 0 601
Total goodwill and intangible assets 1,672 554 5,444 7,670 33 7,703
– Additions to intangible assets 2 (3) 5 4 20 24
– Additions to goodwill and intangible assets from acquisitions (2) 106 5,120 5,224 0 5,224
Investments in associates / joint ventures 8 2 0 10 10 20
             
Headcount 3,729 5,332 3,639 12,700 1,918 14,618
Average headcount 3,612 5,054 1,819 10,485 1,888 12,373
Year ended 31 December 2016 1
million CHF
Specialty Ingredients Pharma&
Biotech
Total operating segments Corporate/ Eliminations Group total
           
Sales third-party 2,281 1,818 4,099 33 4,132
Intersegment sales  2 42 32 74 (74) 0
Total sales 2,323 1,850 4,173 (41) 4,132
Result from operating activities (EBIT) 284 314 598 (112) 486
– Percentage return on third-party sales in % 12.5 17.0 14.3 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 income3 12 10 22 9 31
Other operating expenses 3 (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)
           
Total assets 4,030 3,624 7,654 (826) 6,828
Total liabilities 616 1,478 2,094 2,379 4,473
Total equity 3,414 2,146 5,560 (3,205) 2,355
Net financial liabilities (376) (71) (477) 3,119 2,672
Net capital invested 4 3,038 2,076 5,114 (88) 5,026
           
Return on net capital invested (RONOA) 5 in % 13.8 17.3 15.4 n.a. 12.7
           

Included in total assets:

         
Total property, plant and equipment 929 1,419 2,348 64 2,412
– Additions to property, plant and equipment 103 225 328 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 2017
million CHF
Revenue from external
customers (sales)
Non-current assets
    Property, plant and equipment Intangible assets Goodwill Other non-current assets Total
             
Switzerland 486 911 55 53 46 1,065
Germany 211 3 28 68 0 99
Ireland 256 0 0 0 0 0
United Kingdom 165 91 72 9 2 174
France 169 99 158 10 0 267
Netherlands 22 7 3 33 0 43
Belgium 158 84 1,707 2,737 1 4,529
Sweden 174 0 0 0 0 0
Italy 23 0 0 11 0 11
Spain 20 126 0 0 0 126
Czech Republic 5 28 0 0 0 28
Denmark 31 3 0 11 0 14
Rest of Europe 65 2 0 0 0 2
Europe 1,785 1,354 2,023 2,932 49 6,358
             
United States 2,155 1,088 1,267 1,051 10 3,416
Canada 86 0 56 4 0 60
Mexico 17 8 26 0 0 34
Rest of North and Central America 12 2 0 0 0 2
North and Central America 2,270 1,098 1,349 1,055 10 3,512
             
Brazil 117 24 30 0 3 57
Rest of Latin America 29 0 0 0 0 0
Latin America 146 24 30 0 3 57
             
China 207 342 91 4 0 437
Singapore 178 275 47 0 3 325
Japan 163 41 48 0 0 89
India 64 23 32 2 0 57
Thailand 20 0 34 0 0 34
Indonesia 15 27 17 0 0 44
Rest of Asia 109 0 0 0 0 0
Asia 756 708 269 6 3 986
             
South Africa 75 7 3 0 0 10
             
Australia & New Zealand 73 7 27 9 2 45
             
Total 5,105 3,198 3,701 4,002 67 10,968

 

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

2.5 Information About Major Customers

 

In 2017 Lonza’s two largest customers accounted for 4.7% each and the third, fourth and fifth largest customers for 4.4%, 4.3% and 3.0% in relation to total Group sales, respectively. No other customer accounted for more than 2.9% of Lonza’s total sales. The two largest customers related to the Pharma&Biotech segment and the Specialty Ingredients segment, while the third, fourth and fifth largest customers related to the Pharma&Biotech segment.

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.