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Lonza Group AG - 2024 Earnings Review
Lonza Group AG: Resilient Performance Amid Strategic Investments and Cost Discipline
The Octopus Value Investing
February 04, 2025
The CDMO leader presented its 2024 yearly results on the 29th of January, leading to a negative market reaction as the share price decreased ↓1.6% intraday. Today I am bringing (with some delay), Lonza’s FY24 earnings review. This write-up provides a comprehensive analysis of Lonza’s financial performance.
DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.
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Executive Summary
Revenue CHF 6.57 billion, down 2.1% YoY (-0.2% at CER1 ).
P&L bottom line, margins and capital efficiency ratios dragged due to high cost of sales caused by capacity underutilization.
Diluted EPS 9.11 CHF, up 2.5% YoY.
Lonza Group AG generated negative cash flows again, having a loss of €29.4 million of free cash flow. Although FCFF was positive thanks to working capital management.
Mid-double digit revenue growth guidance announced for 2025.
Dividend maintained of CHF 4 per share.
Income statement
The reported revenue in 2024 reached CHF 6.57 billion, down -2.1% YoY (-0.2% at CER1). FX effect impacted revenue growth although it came within the provided guidance of flat sales.
Take into consideration that Lonza sold in 2021 its Specialty Ingredients division for CHF 4.5 billion, which explains why revenue hasn’t grown much since 2018 when you look at figure 1.
Figure 1: Lonza Group AG revenue evolution since 2018. Own elaboration.
Revenue Breakdown by Division
All segments - with the exception of the Small Molecules division - reported flat sales.
At first sight, the revenues generated by the Biologics division decreased. However, Biologics revenue grew 13% YoY excluding the effect of Covid-19 related contracts.
Similar situation is observed in the C&G division, whose revenue grew by 10% excluding the impact from Codiak termination in 2023.
Figure 2: Lonza Group AG revenue breakdown by area, excluding Specialty Ingredients division. Own elaboration.
Revenue Breakdown by Geography
Lonza doesn’t usually provide a breakdown of the sales by geographic area in their full-year report. Every year, they publish shortly after the annual report which provides way more detailed insights on the company’s yearly performance, including the regional revenue breakdown.
Margins
Gross and operating margins improved year-over-year as capacity utilization is improving due to demand reactivation since mid-2024.
Figure 3: Lonza Group AG margins evolution since 2018. Own elaboration.
While sales were flat, operating profit grew 9.6% confirming installed capacity has been better utilized in 2024 compared to 2023, driving profitability.
Figure 4: Lonza Group AG operating profit evolution since 2018. Own elaboration.
Regarding the operating expenses, they decreased by CHF 124 million - from CHF 1.20 billion to CHF 1.07 billion - resulting in a year-over-year reduction of -10.4%. It will be in the annual report where further breakdown between operating expenses categories will be provided but I love to see the cost discipline shown during 2024.
Net income
Impairment losses and larger interest expenses have negatively impacted the net income margin, causing net income to decrease -2.8% on a year-over-year basis.
Figure 5: Lonza Group AG net income evolution since 2018. Own elaboration.
Balance sheet
Lonza Group AG continues having a strong balance sheet despite net debt increased from CHF 1.13 billion to CHF 3 billion.
This net debt increase has been caused due to the acquisition of Vacaville large-scale biologics site from Roche. The company reached an agreement with Roche earlier in 2024 to acquire the manufacturing site for CHF 1.27 billion plus CHF 360 million liability to manufacture certain Roche drug substances under a manufacturing service agreement. It is estimated that the Vacavilla site will contribute CHF 0.5 billion to the group’s total 2025 revenue.
Long-term borrowing were issued at the following conditions:
Eurobond of EUR 1 billion, due on 24 April 2036 (coupon: 3.875% p.a.)
Eurobond of EUR 600 million, due on 4 September 2030 (coupon: 3.25% p.a.)
Eurobond of EUR 600 million, due on 4 September 2034 (coupon: 3.5% p.a.)
As a consequence, the net-debt/EBITDA ratio is now 1.86. I don’t this is a problem because:
Lonza holds CHF 1.7 billion in cash and cash equivalents, sufficient to cover its 2025 short-term debt obligations of CHF 468 million and CHF 150 million in bonds maturing in 2026. The next debt maturity will occur in 2029, when CHF 450 million in bonds come due.
The peak of the investment cycle has passed (see figure 9). Combined with a rebound in demand, I anticipate a significant improvement in cash generation in the coming years.
Figure 6: Lonza Group AG balance sheet since 2018. Own elaboration.
Cash flow statement
Working Capital Management
Inventories reached CHF 1.72 billion at the end of 2024, compared to CHF 1.59 billion in FY23. The increase was particularly notable in the first half of 2024, when inventories rose to CHF 1.72 billion before stabilizing for the remainder of the year. This suggests that Lonza strategically built up stock in anticipation of a demand rebound in the second half of 2024. This strategy is further supported by the fact that Lonza manufactures biologics on demand for its customers—drugs with short shelf lives that typically prevent long-term stockpiling.
Furthermore, it can be observed that Lonza managed to improve their cash conversion cycle by exerting their negotiation power into their suppliers as days-payable-outstanding (DPO) greatly increased year-over-year, surpassing Days Sales Outstanding (DSO). See figure 7.
Figure 7: Lonza Group AG working capital evolution. Own elaboration.
FCFF Generation
Lonza has reported fo ther 4th consecutive year negative free-cash-flow (FCF) has capital expenditures surpassed operating cash flow (OCF).
However, Free Cash Flow to Firm (FCFF) reached CHF 60.4 million, driven by the improvement in the cash conversion cycle (CCC) detailed in the previous section. This optimization reduced net working capital investment by CHF 59 million in 2024. Without this improvement, FCFF would have been neutral at CHF 0 million.
Figure 8: Lonza Group AG FCFF generation and other related parameters. Own elaboration.
Capital Allocation
Lonza AG spent CHF 1.41 billion (-15.7% YoY) in capital expenditures in 2024. It has been the 2nd year in a row that the capital expenditures have been reduced from the peak reached in 2022.
Figure 9: Lonza AG CapEx evolution since 2018. Own elaboration.
By including the CapEx for the Vacaville manufacturing site in the total cost, we determined that the company achieved a total reinvestment rate of 219% in 2024, the largest one observed since 2018.
Finally, Lonza returned CHF 1.99 billion to shareholders, with CHF 288 million paid as dividends and CHF 1.72 billion - CHF 280 million still available to use during 2025 - through share buybacks. Through these buybacks, the company managed to retire 5.1% of its total outstanding shares. Although the average repurchase price was slightly above my estimated fair share price, I believe it was a strong initiative, especially considering the depressed share price in the first half of 2024 and the possibility that my estimates may have been too conservative.
Metrics Overview
Capital efficiency
Reported return ratios are weak, but they are temporarily depressed due to lower demand and significant capital expenditures. I expect the trend to reverse as demand recovers during 2025.
Figure 10: Lonza Group AG return ratios overview. Own elaboration.
ROE extended Dupont analysis
Use of debt to finance the acquisition of a new facility inevitably increased the balance sheet gearing, just over 2.0 assets to equity ratio. Meanwhile, assets turnover ratio should reverse its worsening trend in the coming years as capacity utilization improves.
Figure 11: Lonza Group AG extended Dupont analysis. Own elaboration.
Other Metrics
There are other metrics I also like to review which are:
NWC/Revenue (%)
No changes observed compared with previous year.
D&A/Revenue (%)
Despite the large investments in new manufacturing facilities, it is in line with previous years.
EBIT/EBITDA (%)
It is a good proxy regarding how capital intensive the business is. It is in line with the historical average since 2018.
OCF/EBITDA (%)
Cash conversion has worsened compared to 2023, as it came at 86%. Although, it is better than the reported one during the pre-covid period.
Guidance & Call with Management
2025 Guidance
Return to revenue growth has been announced for 2025:
CDMO Outlook 2025: CER sales growth approaching 20%.
Capsules & Health Ingredients (CHI): Low-to-mid-single-digit CER sales growth.
Moreover, CapEx for 2025 has been estimated to be in the low-twenties as a percentage of revenue.
By projecting the above guidance, we get revenue growth for 2025 to be 16-17%, which in absolute terms equals CHF 7.63 billion to CHF 7.69 billion. Although, approximately CHF 0.5 million are related to Vacaville site sales contribution. Hence, organic revenue growth for 2025 will be around 9.1%, in line with the CDMO market growth projections.
The projected CORE EBITDA margin, based on revenue forecasts, indicates a decline of approximately 100 basis points. This decrease is primarily driven by the Vacaville site, which is undergoing an engineering upgrade while continuing to manufacture Roche products for the time being.
Call with Management
Some of the most remarkable commentaries made during the management call where:
Lonza’s CEO talking about CapEx expectations going forward:
And here, our rough calculation, that's how we look at our business internally as well, is that we, of course, first of all, need to invest into our infrastructure, existing assets. So keep them fit and in shape, which will be on average over time a mid- to high single digit percentage of sales.
figure.And on top of that, because that is not enough for us to grow, on top of that, we expect to spend low teens of sales into growth investments. So that all adds up on average over time to mid- to high teens percentages of sales as CapEx required to support a low teens growth sales growth trajectory on average over time.
Plans with Vacaville site going forward:
And we again expect to invest up to CHF 500,000,000 into the site, not because it's high, it wouldn't be high quality, but in order to make it more flexible and increase automation and make it perfectly fit for a CDMO operation. One last thought, which might be important for you as well. In the end, what we will have to do over the next years is to balance 3 utilization factors of the site. 1st of all, of course, continuing to manufacture for Roche. 2nd of all, taking in new products. But we will also have to put time aside, downtime in a way, so that we can actually introduce the engineering changes that we want to introduce so that the site is not only able to deliver revenues today but also 5 years down the road in an as efficient manner as possible.
Customer diversification as a mitigation from large singular risks:
Our top 10 customers are roughly 50% of our sales. Most of them have multiple products with Lonza. And so if you look at the top 10 products, this makes even less than a third of our revenue. So the concentration risk is actually quite low, and we are not subject to any large singular risks. If you look at customers by type, we appeal and non site appeals to both, large pharma as well as small-medium pharma and biotech companies. 50% of our revenue are coming from large pharma. The rest, over 600 biotech and small pharma company representing half of our revenue.
Closing Remarks
Despite a modest decline in revenue in 2024, Lonza Group AG has demonstrated resilience through improved profitability, disciplined cost management, and strategic investments. The acquisition of the Vacaville site marks a significant step in strengthening the company’s long-term growth potential, even as short-term margins face temporary pressure due to ongoing upgrades.
Looking ahead, the company will return to the revenue growth path in 2025 driven by strong performance in the CDMO and CHI segments. The company’s ability to enhance capacity utilization, optimize capital allocation, and maintain a solid balance sheet underpins its long-term prospects.
Although, I think current valuation is demanding considering the profitability and returns of the company look to be lower that what I expected and modelled.
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