Ladies and gentlemen, welcome to the Lonza's Investor and Analyst Conference Call. I'm Alessandro, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference is now being recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mr. Marc Fonk, CEO of Lonza. Please go ahead, sir.
Thanks to you all for joining this ad hoc call. I know you received the invitation at short notice, so I appreciate you finding the time. By now, you will already have seen our news. Today, we have announced our decision to carve out the Specialty Ingredients segment from the Lonza business. Before I talk about the announcement in detail, I want to explain our decision to arrange this call.
I know it has not been standard practice for longer to schedule ad hoc calls before now. This may lead you to think that we are making a major announcement today. Yes, this is an important move for us. It is also a logical conclusion to a comprehensive research and review process. For me, our call today is a chance to talk about our decision in person.
It allows me to provide some details and give you a chance to ask some questions. I know we have not provided these opportunities in the past and it has caused some frustration. This is our chance to show we have learned from your feedback and we are committed to improving our levels of transparency and accountability. With this in mind, I want to allow you time to ask questions in this short session. But first, I will take a moment to share some detail about our decision and what it means for the wider Lonza business.
As we turn to the detail of the carve out, let me be clear about what I can talk about and what I cannot. You will remember in our Q1 update call that I talked about an accelerated portfolio review. The decision to carve out the LSI segment is an outcome of that review. Is it the final outcome or is it one more step in the review process? That question is impossible to answer at this time.
We are clear and comfortable in our decision to proceed with the carve out. And we understand that any further decisions about the future of the business can only be taken once the carve out process has progressed and we have increased transparency. It is a challenge to see beyond the time out and into the future, but I can talk about how we arrived at the decision to proceed with this plan. You will remember that we have already completed a review of our segment structure earlier in the year. This has resulted in us deciding to transfer our LPD has since then been renamed LPDN, pharma Biotech and Nutrition.
Even at this early stage, we see that this was the right move for the business. It has allowed each segment to focus clearly and completely on their separate customer communities and market environments. In a recent communication to employees, I talked about the challenges in comparing the 2 segments. If you are listening to this call from the U. K, you would say it's like comparing apples and tails.
If you are listening to this call from the U. S, you would say it is like comparing apples and oranges. Either way, the challenge is the same. As you listen, you may feel that the decision to proceed with the carve out was inevitable. But the obvious thing to do is not always the right thing to do.
This is why we have worked to complete our due diligence before coming to a decision. The carve out carries an impact on operations and costs. So we wanted to make sure it was the right decision. In making the decision, we agreed on 2 main aims. First, we have an operational objective.
The carve out creates full transparency on the costs and operational structures of the LSI segment. This will allow LSI to manage itself in a way that improves efficiency, addresses challenges and drives performance. 2nd, we have a strategic objective. For some time, LSI has aspired to be the leading solution provider in microbial control. We see the carve out as a way of enabling and empowering LSI to deliver on its ambition.
A clear separation will allow LSI to focus more completely on delivering customer value and competitive advantage. It is more likely to achieve this with a greater level of ownership and oversight from its own management. Now let me turn from objectives to execution. We are under no illusion. The 2 longer segments have been integrated historically and this means that the carve out process carries implication of cost and complexity.
Our Chief Strategic Officer, Scott Waldman, has been fully committed to the carve out along with a dedicated task force. There will be a regular reporting process to ensure that both the executive committee and the Board of Directors are fully informed of progress and involved in key decisions. Even at this early stage, we understand that the carve out is a complex process, and we believe it will take around 12 months to complete. We anticipate that the carve out will be most complex at our sites in Rizp and non shore China. These are the sites where there is a particularly high level of integration between the manufacturing processes and facilities used to be the 2 segments.
We have already begun to discuss how we complete the carve out at this site and we are confident that it can be achieved by creating a clear three way division of employees and facilities. People and assets will be owned by either LPL, LSI or a shared service center, which manages utilities catering health and safety for the whole site. At the wider level, some employees working for the support function will be split between segments. Employees working for the group corporate functions will remain in their current position as segment allocation is not required at this level. As you will see in our announcement today, the carve out is part of a commitment to ensuring that the business runs at optimum levels of efficiency.
With this in mind, we continue to focus on our sales level, but we are also committed to ensuring the best possible level of productivity across our business. The recent efficiency audit has resulted in a redundancy program. Also announced today, just under 130 roles have gone into consultation for redundancy. We take the decision seriously and we are in the process of minimizing the number of redundancies by transferring impacted employees to vacant positions and offering early retirements where appropriate. Once the consultations are completed, we are confident that the business will remain able to deliver at an improved level of efficiency.
The redundancies impact only LSI and the support functions. The LPN business continues to focus on accelerated growth by recruiting and retaining top talent. Before I open the call to questions, I want to take a moment to share next steps. You will hear from me again at our half year update in July. I will, of course, use that opportunity to provide a short update on the carve outs.
Before our July announcement, I will see some of you in meetings in Zurich and London, and I am already looking forward to our conversations. And our shareholders in the U. S. Will have a chance to meet with our CFO, Rodolfo Savitsky, who is attending the Jefferies conference in New York tomorrow. Many times, we have here the complex structure of our business is a challenge to understand for external stakeholders.
We hope the carve out will provide a chance for you to gain greater clarity on our structure. We also hope that the move sends a message to the market. We are making good on our intentions by pushing accelerated growth in LPN and driving the accelerated portfolio review. The carve out is a chance for LSI to own and drive its performance levels. It is evident of our increased focus on ensuring the best possible levels of efficiency while maintaining our strong track record in customer delivery.
After our segment realignment, we see the carve out as a further stepping stone on our journey. This is a time of decision and action for Lonza. We will continue to maintain momentum and keep our focus. In doing so, we will take Lonza from its current position of strength and bring it to the next level of success. Now we have around 15 minutes left for questions.
Who would like to stop?
We will now begin the question and answer
The
first question is from James Quigley from JPMorgan. Please go ahead.
Hello. Thanks for taking my question. On the business review, should we still be expecting an impact an update in the second half twenty nineteen? And now that you've fully carved out the business, what are the key factors you are considering with regard to next steps as to whether whether LSI should remain in the group? And also, with the carve out finishing in or expected to finish in mid-twenty 20, can you realistically make any decisions before that point?
Thank you.
Thank you. Today we announced the carve out and I think that it comes at the time where decisions are clear and irreversible in terms of carve out. Further decision about portfolio combined with a specific timing more than what I said today, I would not do. Rest assured that when the time comes that we have something to announce in the same way like irreversible, we will do it in due time. I will add to this that with now a few months that I am in the job, it's my desire to put a certain pace in the organization.
I will not diminish the pace of certain decisions to be done. I think that the whole organization sees what I share with you today in the same way. And that gives us great comfort to go forward in the same rhythm than what we have done so far.
Excellent. Thank you.
The next question comes from Patrick Boot with Bank of America. Please go ahead.
Perfect. Thank you for taking my questions. I'll be swift. The first would be, as a senior management team, I appreciate you're trying to engender a stronger sense of ownership within your colleagues within the CarGaut division. But how are you balancing that with the risk that employees may feel anxious about the future or about the future of the division?
How are you going to manage that split for them?
And then the other thing would be,
are there any longer term contracts that sit within the business which would preclude you from selling it longer term? Thank you.
Hello. There are 2 questions into 1, if I understand well. As an umbrella of 2 sectors and representing the company. The question is, do employees feel anxious? And that's not the way we look at it.
The way we look at this is people need to feel anxious when things do not perform well. But people should not feel anxious when certain decisions are made to perform better no matter where we are and this is what we are doing today. The way we see it and we make sure it is clearly understood in the organization, This is not about winning LPE and losing LSI. This is about a win LSI and a win LPN and both have to take their own destiny in an accelerated way to do their jobs. 1, LSI has to be executing its mission among others to be the world leader in microbial control.
2nd one is LPBN to be excelling even better in its leadership position where they are today, CDMO, healthcare supply, manufacturing, the things of the future? 2nd question, any longer term contracts that would enable us to do what we ambition to do? The answer is no.
Thanks, Richard. Thank you very much.
The next question comes from Jo Walton with Credit Suisse. Please go ahead.
Thank you. Do you have any view of what additional costs there might be? And presumably, you'd be considering perhaps strengthening the management team so that it has more of its own function rather than being part of the global support side. So any idea of any additional costs and any changes that you may be making in the remuneration or targets for the management of the LSI business? And could you just remind us how much of LSI is really microbial support sorry, microbial control?
Because this ends up with us thinking, well, what are you going to do about, let's say, wood preservatives, which in an overall bigger business might have a small place, but in a separated out LSI might not be required. So can that business LSI now make its own portfolio choices and perhaps accelerate an even greater streamlining of focus? Thank you.
So the first part of your question is what about the cost of this carve out? Yes, of course, carve out does not go without any additional cost. So here we will have additional costs that we have to be to go into that project. And that is something that we have measured and we are confident that this additional cost is a necessity to go forward and it does not is that is hindered by your question affect the 2019 guideline. Then if there different additional costs of the remuneration of new leaders, nothing is envisaged around that.
We have already a team in place in the LSI business led by Sven Abernt, who is an Executive Committee member since now many years. What is true is that as an out as a result of this carve out, he will organize his team differently post this announcement that will go around his internal organization. That is correct. The third question, if I understand well, is how much microbial portfolio is within LSI, it's around 60%. When you take the example of wood, wood is part of microbial control.
So a lot of the active that we manufacture for the wood business is about avoiding mushrooms around wood and the bugs that comes into the wood, it did in New Zealand, in the U. S, in Fiji Islands or in Bern, Switzerland. It is all about microbial control, how should it be organized better. That is now the beauty of this carve out.
Thank you.
You're welcome.
The next question comes from Laura Lopez Vineda from Bauer Plumberbank. Please go ahead.
Good afternoon. So I have two questions. The first one on your strategy review, I remember that one of the main pillars going forward for Lonsau, one the targets also moving forward was to partly increase the backward integration into some raw materials and to use some of the free capacities in LSI to backward integrate the pharma and biotech or the nutrition business. So is this now with the carve out not anymore in your plan? So that means you're going to continue to source from 3rd parties or how does this change that view that we got on the strategy day?
And the second question, can you maybe give us a slight indication how the business in LSI is developing? So in the Q1, you did mention about the headwinds that you were facing on that division. So maybe a little update on that, how has the last 2 months developed? Thanks.
Good. So on your first question, the overall sourcing strategy that we explained in the past year and reiterated it in the Q1 update, This will remain unchanged. It is critically important that we have a sourcing strategy that follows not only the cost base best supplier, but also with all the adventures we had last year and early this year that we need to have more politics. So this, we will continue to use particularly in this to use some of the plants that are in the agrochemical plant to bring some pharma intermediates for our CDMO business. And of course, what does it mean then in the carve out is that mean that the overall configuration, the way we are organized will be slightly different.
So there will be some maybe some supply agreements internally, of course, between LPBN and LSI. And this is something that is very relevant and I think it's a very good point not to miss head or misunderstand that the carve out is not now reconsidering those critical issues. On the second question, I'm afraid I cannot answer. It's particularly important that we are very disciplined about the way the company performs and this follows the H1 update that will take place in July.
Okay. Thank you very much.
Thank you. You're welcome. And mindful of the time, one last question, who has the privilege?
The last question comes from Daniel Dutra with Vontobel. Please go ahead.
Yes. Thank you very much for taking my question. I'm very pleased to have the privilege asking the last one here in the round. Quickly on, I mean you were mentioning the topic of transparency a couple of times. I mean how can we from an outside perspective actually see that?
Are you going to report in more details on the remaining LSI businesses, how they are performing and everything? And then maybe a quick very last clarification question on the costs of the carve out. Are those to be treated as one off costs for restructuring and everything or are they also included some running costs, higher corporate level and everything? Thank you very much.
So I will not make an announcement today on how we will make the overall organization in terms of changes different than what I have said so far. But we have to be mindful that when we say to uncertainty, it is not just about the way we are organized, but also how we project the future. And there I think it is more important to emphasize that going around this is also to explain the different dynamics on how we will want to work in these 2 different industry market challenges opportunities in a much more clearer way. The other thing is that it's also very important to understand is that so far we have been organized with a large pillar around those 2 sectors within certain corporate functions. This relates part of it to your second question and your first question, it is also to make sure that first of all, internally, we are more transparent about which cost goes where.
But also making sure that here we are doing the right things to have the costs being much more focused within the 2 different segments. And there is a lot of work that we initially already have done. But now with the announcement, we will of course have a lot of subgroups within the organization to have much more transparency ourselves to go which goes in what and making sure that there is the efficiency that goes around this. So this is a mix of an answer between your first and the second. But I would add to this that is this a one off or is this one off plus more?
Of course, there is known for it's a bit of both. You have one offs, absolutely. And there will be costs that today we can foresee, but we also have to be mindful that this is not a journey that will just last a month. It will take some time. But at this stage, I am not overly concerned of disproportionately of what we expect today in the cost that is totally manageable and what possible uncertainties that today I would not know.
Okay, thank you very much. Very helpful.
I thank you very much for this last all the questions and looking forward to see you, Deviso, in one of those meetings that are yet to come and also in the next call that takes place in July. Thank you again for joining us and for your interest in Lonza. Goodbye.
Ladies and gentlemen, the conference is now over.