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01/26/2005
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| Financial Results 2004 |
After completion of the efficiency improvement and cost reduction program started in 2003, Lonza successfully rebased its business to reflect current market conditions in 2004. While the custom manufacturing activities continued to face a challenging business environment, the other operations had to contend with high raw material and energy prices. In line with expectations, Group operating income (before special items and amortization of goodwill) for 2004 decreased to CHF 215 million, down 28.8% against the previous year. Net income increased by 51.6% on the prior year to CHF 138 million, the 2003 figure having been affected by CHF 107 million in special after-tax items. The Board of Directors has finalized its review of the strategic options available for Lonza and is confident about the Group's future. It will propose a dividend of CHF 1.30 per share, consistent with the Group's medium- to long-term earnings capability.
The full versions of the Results 2004 are available in the download area |
Financial highlights
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million CHF
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2003
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2004
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Net sales
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2'242
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2'182
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Change in %
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(2.7)
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EBITDA
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299
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376
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Change in %
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25.8
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Margin in %
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13.3
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17.2
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Operating income (before special items / GW amort.)
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302
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215
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Change in %
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(28.8)
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Margin in %
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13.5
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9.9
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Special items net 1
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(158)
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2
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Result from operating activities (EBIT)
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139
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212
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Change in %
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52.5
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Margin in %
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6.2
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9.7
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Net income before special items
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198
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136
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Change in %
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(31.3)
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Net income
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91
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138
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Change in %
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51.6
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Cash flow before change in net working capital
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264
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256
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Change in %
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(3.0)
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Net debt
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978
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1'027
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Debt - equity ratio
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0.79
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0.80
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Change in %
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1.3
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EPS basic (CHF) before special items
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4.18
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2.87
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Change in %
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(31.3)
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EPS diluted (CHF) before special items
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4.12
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2.89
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Change in %
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(29.8)
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EPS basic (CHF) after special items
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1.92
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2.91
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Change in %
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51.6
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EPS diluted (CHF) after special items
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2.00
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2.93
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Change in %
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46.5
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Number of employees
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5'659
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5'668
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Change in %
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0.2
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Overview
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Group sales decreased in 2004 to CHF 2 182 million, down 2.7% (2% on a currency-adjusted basis) on the previous year. Operating margins fell to 9.9% from 13.5% in 2003. Operating earnings were in line with the guidance provided by the Group throughout the year. The shortfall against the minimum levels set at the beginning of 2004 was caused by weak niacin pricing, an adverse US Dollar exchange rate in the fourth quarter and the postponement of biopharmaceuticals deliveries until early 2005.
Our custom manufacturing activities were mainly affected by very low utilization of the 2 000 l/5 000 l reactor capacity in Biopharmaceuticals. Sales decreased to CHF 676 million, 19.0% below the previous year's level. Operating income (before special items and amortization of goodwill) dropped from CHF 147 million to CHF 61 million, down 58.5%, with operating margins declining from 17.6% to 9.0%. Business in Exclusive Synthesis continued its slow improvement for the third consecutive semester despite a persistently tough business environment.
Organic Fine & Performance Chemicals sales increased slightly to CHF 852 million, up 3.1% on the prior year. The operating income (before special items and amortization of goodwill) of CHF 125 million was on a par with the previous year's level, with operating margins nearly constant (14.7% in 2004; 15.1% in 2003). Profitability was sustained by a high level of plant utilization, stable market shares, positive effects from the cost-reduction projects and strong performance from newly introduced products. But there were negative effects of the same magnitude in the form of high raw material and energy costs, the unfavorable US Dollar exchange rate and competitive pressure due to overcapacity in certain markets.
Polymer Intermediates achieved sales of CHF 649 million, up 12.3% on last year, driven mainly by strong demand from European customers. Operating income (before special items and amortization of goodwill) fell 12.2% to CHF 36 million, and operating margins dropped to 5.5%, from 7.1% in 2003, mainly due to the impact of historically high raw material costs. The Euro/US Dollar exchange rate and plant shutdowns also contributed to this decrease, despite generally improved market demand.
Group net income reached CHF 138 million, up 51.6% compared to CHF 91 million in 2003. Cash flow before the change in net working capital reached CHF 256 million, 3.0% below the prior year. |
Net debt, Capital Expenditure and Taxation
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Lower results and significant start-up costs for the large-scale mammalian plant in Portsmouth, NH (USA) were offset by lower capital expenditure, leaving Group net debt basically stable at CHF 1 027 million (CHF 978 million in 2003). Capital expenditure of CHF 249 million was significantly down on the previous year (CHF 424 million), with the current investment cycle in biotechnology coming to an end.
Net financial expenses rose to CHF 33 million (CHF 24 million in 2003) due to a higher level of average net debt over the year and increased interest rates compared with the previous year. The tax rate of 23% (21% in 2003) is still at the low end of the Group's expected range. |
Outlook
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In 2005 market conditions are expected to remain difficult for Exclusive Synthesis. Further de-stocking is expected, mainly by large pharmaceutical companies in the areas of chemical building blocks and APIs. Growth is targeted for the supply of clinical trial materials, peptides and selected mature products. The Biopharmaceuticals assets will see a better level of utilization with the three 20 000 l bioreactors now on stream on the back of strong customer demand. Utilization of the medium-sized vessels will improve over the second half of 2004. In the Organic Fine Chemicals business, the market situation will remain competitive for many product lines. Performance Chemicals is expected to enjoy favorable conditions thanks to new products combined with higher plant utilization. Demand for Polymer Intermediates is expected to remain at satisfactory levels, while raw material prices are not expected to increase further, thus stabilizing and improving operating margins.
The Board of Directors expects sales growth and a solid improvement in earnings in 2005 in line with our short-term (two-year) operating income targets of between CHF 300 million and CHF 400 million. |
Strategy review
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Lonza's strategy for the next four to six years will focus on sustained, above-average, profitable growth. A thorough review of all activities has shown that existing core strengths and competencies provide excellent growth platforms on which to build. Fundamental restructuring is not required. For Lonza, the objective continues to be realignment and focusing on defined life science markets. Global presence and value-chain management will be expanded in order to achieve accelerated profitable growth. Operational excellence and tight cost management will be a necessary prerequisite for success and a key element of our operational framework.
Today around 60% of Lonza's sales are in life science markets. Our long-standing partnerships with leading innovative life science companies, outstanding regulatory track record, and strong innovation capabilities in products and applications will be leveraged to build up our business in the healthcare, nutrition, personal care, hygiene and agriculture markets.
Exclusive Synthesis and Biopharmaceuticals will be the key drivers for achieving our profitability growth targets over the next three to five years. Technological leadership, speed of execution and further size and scale increases are key competitive advantages which will accelerate value creation. The Biopharmaceuticals business will deliver the strongest growth in the short, medium and long term. Biopharmaceutical services such as licensing, process development, contract plant engineering and operations offer further attractive opportunities.
Organic Fine & Performance Chemicals are geared to enhance Lonza's growth in the longer term and will strongly support our profitability objectives. Leveraging new product development capabilities and strengthening application development are key factors in our efforts to target selected niche markets in nutrition, cosmetics/personal care, hygiene/disinfection and preservation.
The strategic purpose of the Polymer Intermediates business in the Lonza mix is its cash generation potential over the medium to long term. Value enhancement will be achieved by geographical expansion in Eastern Europe and continuous improvement in the cost structure. Selected industrial partnerships are also envisaged as a way to strengthen the cash-generation profile of the business.
In the short term (over the next two years), operating income will increase to between CHF 300 million and CHF 400 million, with the cash generated being fully reinvested to secure the next growth phase. Medium term (four to six years) we expect sales to top CHF 3 billion (10% growth p.a.), while operating income is expected to be in excess of CHF 500 million (> 15% growth p.a.), with net debt not exceeding current levels.
With the implementation of the strategic plan we will strengthen our position as a pre-eminent supplier to the life science industries. Through our biotechnology and chemical platforms we aim to achieve above-average, profitable growth. We have full confidence that our employees' entrepreneurial skills, operating in Lonza's trust-based environment, will deliver these results. |
Board of Directors and Senior Management Changes
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Sergio Marchionne will not seek re-election as a director of the Company and will therefore resign his position as Chairman at the next annual shareholders' meeting. The Board of Directors will propose the nomination of Rolf Soiron as a new Board Member. He is expected to assume the position of Chairman of the Board.
The Board of Directors, the Senior Management and the employees of Lonza thank Sergio Marchionne for his leadership and guidance of the Group over the past eleven years.
Effective 1 June 2004, the Board of Directors appointed Stefan Borgas as the Chief Executive Officer of Lonza Group.
Sergio Marchionne
Chairman of the Board
Stefan Borgas
Chief Executive Officer |
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