Lonza Group AG - H1 2024 Earnings Review

CDMO giant within expectations

Last 2024.07.25, Lonza AG group presented its H1 2024 results. After the results presentation the stock price surged ↑7.12% in the day as the market reacted positively to them.

In today’s newsletter I will provide a comprehensive overview of the reported results, linking them to the long thesis of Lonza AG published earlier this year,

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.

Executive summary

  • H1 2024 sales were CHF 3057 million, down 0.7% YoY (1.8% in Constant Exchange Rate). Impact of big contracts termination.

  • Margins improvement from 2023 lows. Favorable product mix & utilization rate improvement in some business units.

  • Operational FCF reached CHF 296 million vs CHF -37 million in H1 2023.

  • Solid balance sheet and efficient capital allocation.

Income statement

H1 2024 sales were CHF 3057 million, down 0.7% YoY from CHF 3078 million in H1 2023. At Constant Exchange Rate (CER), revenue for the period of scope was up 1.8%. Excluding the impact on sales of the termination of Moderna agreement related to COVID-19 vaccine, revenue during H1 2024 grew 6% YoY.

Revenue distribution per division

Lonza Group AG revenue has been supported by strong growth of the Biologics division with 7.3% growth at CER (mid teens excluding Moderna agreement contract termination) with a great performance of both business units, mammalian and bioconjugates, commercial projects portfolio.

Small molecules division growth at CER was 2.3% (2.5% at CER), lower than expected. According to management, this is related to customers’ campaigns timing and is expected to revert during H2 2024.

Cell & Gene (C&G) division has reported an 8.8% revenue decrease (6.6% at CER). This impact was expected due to termination of a big contract with Codiak. Normalizing the impact of Codiak termination to the CDMO business unit, revenue is estimated to have grown around 20% at CER. Moreover, it should be noted that restricting funding to early-stage biopharmaceutical companies negatively impacted the tools business unit, Bioscience.

Finally, Capsules & Health Ingredients division sales decreased 9.2% (6.1% at CER). Although the company reported customers destocking is coming to an end for both business units:

  • Nutraceutical capsules: demand is back after destocking and 3% CAGR sale growth coming forward is expected.

  • Pharma capsules: destocking after COVID-19 is expected to be completed by end 2024 - start 2025. 2% CAGR market growth from that moment is expected.

Figure 1: H1 2024 financial results per division.

Margins

The reported margins for the period have been:

  • H1 2024 gross margin: 36.5%

  • H1 2024 CORE EBITDA margin: 29.2%

  • H1 2024 EBIT margin: 17.5%

  • H1 2024 profit margin: 10.8%

Main margins observations are the gross margin recovery from 2023 bottom of just 29.0%. Moreover, all the other margins experienced a comparable improvement.

Stripping out the one-time factors reveals an underlying improvement in Lonza's core profitability, driven by a favorable product mix and operational efficiencies. These gains were facilitated by network optimization initiatives implemented last year. Overall, while the short-term margin picture is clouded by transitory factors, the company's underlying operational performance is encouraging.

Figure 2: Lonza Group AG FY margins from 2018 to 2023.

Note: Lonza’s business model does not show any seasonality but product mix variations impacting the margins occur due to different projects molecules manufacturing planning.

Operating income metrics

The company does not report the R&D and SG&A expenses separately on the quarterly reports but all together. In H1 2023, R&D+SG&A expenses amounted to CHF 555 million. In H1 2024 the expenses remained flat, amounting to CHF 557 million.

The YoY change on full time employees is negligible. Headcount has decreased 0.3%, from 17896 employees in H1 2023 to 17834 employees in H1 2024.

Balance sheet

Lonza Group AG maintains a strong balance sheet, with cash & cash equivalents of CHF 2017 million being current liabilities CHF 2609 million. Hence Lonza could repay almost all its current debt entirely with its current cash position.

Net debt amounts CHF 1636 million, being the Net Debt-EBITDA ratio 1.9.

Lonza´s liabilities have increased in CHF 1288 million from H1 2023 due to the issuance in April 2024 of a new Eurobond of EUR 1 billion, due on 24 April 2036 at 3.875%.

Cash flow statement

Cash flow from operations for the period has increased driven by larger non-cash items adjustment and an improvement of the required working capital. The reported cash flow from operations was CHF 505 million.

The company free cash flow for the period has been CHF 296 million vs CHF -37 million reported in H1 2023. Additionally to mentioned operational cash flow contributors, phasing of CapEx is the main responsible of the reported FCF improvement.

Capital allocation

During the call, the acquisition of the Vacaville site from Roche announced earlier this year concentrated a lot of attention. Management highlights the following facts:

  • Acquisition deal completion is expected to be closed Q4 2024 as planned.

  • Customers find it very attractive to offer production capacity in the US.

  • New site will double mammalian capacity (Biologics BU).

Regarding the CapEx, the company’s CapEx expense has decreased 18.7% YoY, from CHF 765 million in H1 2023 to CHF 622 million in H1 2024. More than 60% is allocated to the Biologics division.

During the call, the CFO informed that the CapEx was splitted 65% to growth projects vs the remaining 35% allocated to maintenance of infrastructure and systems.

CapEx/Revenue was 20.3% for the period of scope, continuing the downward trend from 2022. Management informed them they plan to accelerate investments during H2 2024 to guided 25% CapEx/Revenue so, overall, I think CapEx investments for the FY will be lower than initailly guided.

Figure 3: Lonza Group AG FY CapEx/revenue ratio vs FY CapEx investments.

Management & guidance

The H1 2024 report has been released during the first month of Wolgang Wienand as new CEO of the company. During the call, the new CEO introduced himself and presented the changes to be introduced in the Board. The call was carried by Philippe Decke (CFO).

2024 guidance outlook was confirmed as well as mid-term 2024-2028 guidance upgrade communicated during Q1 2024 results reporting. Related to the guidance I found two interesting comments made during the Q&A session in connection with the pharma & biotech industry.

The first one is related to the pharma & biotech industry funding improvement observed during 2024:

Now to take your question on the early stage, we have seen increased requests in RFPs for early-stage work. We attribute this much more to the more healthy biotech funding than to Biosecure. I can talk to Biosecure in a second. But we have seen like all of you much better funding situation for a biotech company. I think funding is almost up 30% in this first half versus prior year. So, a different market.

Now, it always takes a while between the funding and to see the impacts on our financial numbers. Company needs to receive the fund, redo their plans, issue RFPs, companies enter the RFPs and then we end up starting the work and doing the work. So, there's always a time lag of roughly six to nine months before you would see any funding impact being reflected in our financials.

Philippe Decke (CFO) during H1 2024 earnings call Q&A session.

The second one is related to how management sees the Biosecure Act being a mid-term tailwind and not an immediate thing impacting the financials.

(...) I think as you know, the bill now would contain a great period until 2032, which has brought some relief to customers that they did not need to act immediately, but they would have to think about their supply chain more strategically.

(…)

(…) I think we do not see an impact of Biosecure today in our financials. If this is a tailwind this is more of a midterm tailwind than an immediate thing.

Philippe Decke (CFO) during H1 2024 earnings call Q&A session.

Finally, it has been reported an impairment loss of CHF 78 million (23.6% of the profit report in the period) in connection with the low likelihood to repay the shareholders loan to Bacthera, the joint venture with Chr. Hansen (now Novonesis). This is a one off item, especially considering joint ventures of this characteristic are rare among Lonza´s core operations.

Closing remarks

Overall, I think the results are within expectations. Lonza keeps executing its mid-term plan while the pharma market downturn is closer to its end. It was very very pleasant to hear management’s confident tone during the call despite flat performance being reported.

Hope you enjoyed this earnings review of Lonza AG results. If so please leave a comment, give it a like and share!

Next week I will be on holiday so I am not planning to write any newsletter. However, in the coming weeks more companies I follow report earnings (Novo Nordisk on the 7th of August and Pandora on the 13th of August). I am covering both in my earnings review and then I will switch focus to continue investigating the pharma packaging industry. If you don’t want to miss those write-ups and support this type of content… do not hesitate, subscribe!

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