Letter to Stakeholders

Dear Stakeholders

2019 proved to be another successful year for Lonza Group, from a commercial and financial perspective. At the same time we have strategically reconfigured the business to ensure that it is set up for long-term growth and profitability. We have focused our attention on delivering structural improvements to align our business more closely to our markets. We have also considered growth investments to deliver sustained performance in the long term.

Financial Performance1

Our people and business have delivered a strong full-year 2019 result; we reported CHF 5.9 billion in sales, CHF 1.6 billion in CORE EBITDA and CHF 1.2 billion in CORE EBIT for the full-year 2019. We delivered on our guidance with 6.8% sales growth, resulting in a CORE EBITDA margin of 27.4% in an important investment year.

1 All figures relate to Lonza’s continuing operations, excluding the Water Care business unit, in reported currency and are compared with the same period in 2018 on a like-for-like basis to reflect the realignment of our segments in 2019

These strong results reflect the continued positive momentum of our pharma-related businesses. In numbers, our Pharma Biotech & Nutrition (LPBN) segment achieved 11.0% sales growth, above guidance, despite a contraction in the nutritional hard capsules business. LPBN reported a CORE EBITDA margin of 32.9%, even after an elevated level of operational expenditure (OPEX) behind growth initiatives.

Our Specialty Ingredients (LSI) segment businesses showed soft full-year performance against headwinds, and overall softness in global end-markets. However, productivity gains, cost control measures and price increases resulted in a CORE EBITDA margin of 17.8%, as margins began to show improvement.

The Carve-out of Specialty Ingredients

Our decision in 2019 to commence the carve-out of our Specialty Ingredients (LSI) segment represents an inflection point for our wider business. It reflects an internal acknowledgment of the challenges we have faced in satisfying all our stakeholders, while operating concurrently across two distinct industries. With the decision to carve-out the LSI segment and allow it to operate autonomously, we provided the segment with a chance to grow closer to its own markets and deliver increased leadership in the microbial control space. It also provided an opportunity to explore operational improvements and increased efficiencies. At the same time, the carve-out process allows the wider business to make a firm and lasting commitment to the pharma and biotech segment, which has a leading position in an attractive industry, with future growth potential.

Strategic Growth Investments in Pharma Biotech & Nutrition

The long-term commitment of our business to the pharma and biotech industry is reflected in the number and scale of growth investments in the LPBN segment over the course of 2019.

Our major investments include capacity expansions and new technologies supporting the full life cycle of molecules. In 2019, almost  CHF 800 million in capital expenditures (CAPEX) – more than 13% of sales – was spent financing several important growth projects across our global network. This provided for expansions: in Visp (CH) for clinical and commercial biologics, highly potent active pharmaceutical ingredients (HPAPI) and bioconjugates (including Antibody Drug Conjugates); in Portsmouth, NH (USA) for mid-scale mammalian; in Guangzhou (CN) for clinical mammalian; in Houston, TX (USA), Geleen (NL), Singapore (SG) and Portsmouth, NH (USA) for cell and gene technology; and in the Basel area (CH) for drug product services. We have also invested in new therapeutic areas and innovation by entering the microbiome space. In 2019, we formed a partnership with Chr. Hansen to establish BacThera, a joint venture to support the manufacture of live biotherapeutic products.

All of our capital expenditure projects are calculated to deliver attractive returns. However, these returns take time to realize, even after new facilities become operational. This reflects the scale and specificity of the facilities, as well as the highly regulated and complex nature of the products we manufacture.

The length and complexity of the “investment journey” can be easily underestimated. As an example, the initial build phase for an overall CHF 400 million biologics facility construction project can take up to three years before we are able to commence operations. This is followed by a further two-to-three year “ramp-up” phase when the facility is productive but not operating at full capacity; in this phase new products are introduced, production processes are refined and employees continue to upskill.

Our planned projects are largely expected to contribute to continued growth in Pharma Biotech & Nutrition beyond the Mid-Term Guidance 2022. We need to make the investments now to fully harvest opportunities in an attractive, ever-changing environment. As pharmaceutical companies look to become more profitable and efficient by focusing on their core business, we believe the relevance and opportunity for outsourcing will increase. With our selected investments, we want to remain well positioned to offer quality services that properly address the needs of our pharma and biotech customers, and underpin our ambition to remain a world-leading contract development and manufacturing organization (CDMO) company in scope, capability and innovation.

Alongside our investment activities in 2019, we have also been making improvements across the existing business. We have continued to drive forward our operational excellence agenda, with a focus on improving our manufacturing and logistics systems and processes. These efforts have been supported by the establishment of a global Technical Operations (TechOps) community, which brings together all aspects of our operational and manufacturing functions within a single framework, which is designed to promote an internal culture of efficiency and performance.

Our Commitment to Sustainability

We are consolidating our efforts to achieve industry best practice in sustainability. This is an ethical and commercial imperative for the business and is increasingly a topic of discussion both in the boardroom and across our customer communities. Our intention and activities to deliver a sustainable business can be seen in our designated Sustainability Report, which forms a companion document to this 2019 Annual Report.

Our sustainability policy and practice is not only a critical reflection of our integrity in doing business, it also attracts a new generation of world-class talent. Millennial job candidates are increasingly attracted by corporate purpose, alongside fulfilling work, opportunities for progress and the ability to make a meaningful difference. Like so many companies operating in our markets, our performance and success depend on our ability to attract and maintain leading talent. This is especially important as strategic growth projects begin to come online in 2020, requiring sustained recruitment efforts and a strong employer brand.

Outlook

I am confident about our current momentum, and our ability to deliver on our targets in 2020. Our outlook includes above mid-single-digit sales growth, driven by high single-digit sales growth in LPBN and low single-digit sales growth in LSI, accompanied by an overall stable CORE EBITDA margin. We look forward to the successful start of operations for major investment projects, completing the carve-out, announcing a new Group CEO and continuing to work on the delivery of our Mid-Term Guidance 2022, which we have confirmed.

On behalf of the business, let me extend our thanks to all our stakeholders, our customers, shareholders and suppliers, who have supported the Lonza business over the last year. As a final word, I would also like to share my sincere thanks to our community of 15,500 employees for their hard work and commitment in 2019 to serving our hundreds of customers and their millions of patients and consumers globally. With our employees’ dedication and determination, we have navigated a transformational journey which has enabled us to achieve our financial targets for the Group, while setting a foundation to deliver long-term advantage. I am proud of their achievements and look forward to working with them on the next stage of our journey in 2020.

Albert M. Baehny
Chairman of the Board of Directors, CEO ad interim

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