Ladies and gentlemen, welcome to the Q3 Results 2018 Analyst and Investor Conference Call and live webcast. I am Alice, the conference 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&A session. You can register for questions at any time by pressing star 1 on your telephone. For operator assistance, please press star 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Richard Ridinger, CEO of Lonza. Please go ahead, sir.
Ladies and gentlemen, good morning and good afternoon. Thank you all for joining our conference call on Lonza's third quarter quality update for 2018. Joining me in the room are Rodolfo Savitzky, our CFO, as well as members of our investor relations and corporate communications team. It's not been too long since you last heard from us. We had about 120 analysts and investors at our Capital Markets Day a few weeks ago at Zurich Invest in Switzerland. We really appreciated your participation. Today's news release confirmed that our strong momentum has continued throughout the third quarter for our businesses along the healthcare continuum. We want to provide you even more qualitative insights into our Q3 business performance. Let's take a look at the highlights now on the slide three. As we already mentioned, our healthcare continuum businesses performed robustly and drove growth throughout our company.
Here's a reminder of what we discussed in more detail at our Capital Markets Day. The healthcare continuum includes all three Lonza pillars: Consumer & Resources Protection, Consumer Health, and Pharma & Biotech. The healthcare continuum stretches all the way from preserving our environment and protecting precious resources in a sustainable, healthy way, to preventing health problems, to treating diseases. We look at each of these pillars and their contributions to our growth in a few minutes. First, let me give you an overview of their performance here. The combined businesses for Lonza ingredients, both pharmaceutical and nutritional, and for dosage forms and delivery systems, as well as hard capsules, are all doing extremely well and are performing above expectations. One of the highlights of the quarter was definitely the expansion of our Ibex Solutions. We extended our innovative Ibex offering to include clinical development and manufacturing services.
Now we can offer customers the full range of services from pre-clinical to commercial, including fill and finish. This is at our Visp site. Much more about that unique approach shortly. Within Lonza's Specialty Ingredients segment, Consumer Health benefited not only from the synergistic potential of combined nutritional ingredients and dosage forms offerings, but also from good market demand for consumer and professional hygiene. However, a challenging environment for cyclical businesses in mature parts of our Consumer & Resources Protection portfolio, like Basic Materials & Intermediates, continued to have an impact. This quarter, the Water Care business gained good momentum based on successful implementation of commercial initiatives. Finally, today we are confirming our 2018 outlook, which was already upgraded with our half-year 2018 results. We are confident we will achieve the attractive targets already communicated externally while we prepare for further investments and ongoing operational improvements in the future.
Let's take some time here on slide five to look in more detail at our three Ibex offerings, Design, Develop, and Dedicate. We want you to fully understand the offering. The feedback is extremely positive from our customers. Following discussions at Capital Markets Day and after, we would like to provide additional explanation. To clarify, we now provide clinical development and manufacturing services along the whole value chain for drug substance and drug product. Again, that includes fill and finish. You can see on the slide our three Ibex solution offerings. Ibex Design is from pre-clinical to phase I. Ibex Develop covers phase II to commercial. Those two together are only one wing of a building, which means only half a building. The third offering is Ibex Dedicate. It's aimed primarily at late-phase clinical to commercial stage manufacturing.
Ibex Dedicate is intended as a generation project, meaning that it will be ongoing for many years. We will only build based on customer demand and with contracts or ownership models in place. Customers can start with just a small suite and then build up. A so-called dedicated facility is aimed primarily at late-phase clinical and commercial stage manufacturing. The Ibex Dedicate building displayed here refers to the Lonza Sanofi joint venture, we think more Dedicate will come in the future. We announced at the Capital Markets Day that we expect revenues to reach CHF 500 million in the mid-2020s out of Ibex Design and Ibex Develop alone. This offering includes drug substance and drug product development and manufacturing. We are now offering fill and finish. I mention that again because this was not clear to all participants of the Capital Markets Day after that day.
That's the orange wing you can see on the right-hand side of the slide. We are looking forward to discussing Ibex solutions in further detail during our upcoming roadshow in early November. On the next slide is a brief update on some other projects that are currently underway. They too will drive the growth of our biologics businesses toward and beyond 2022. Like Ibex Design and Develop, the expansion in Singapore and the new Hayward, California site focus on single-use technology. They are already operational, the first customer batches having been released in this quarter three. This was earlier than expected. The teams did a great job ramping up and getting it operational. Demand is steady for all these assets displayed here.
Moving quickly over slide seven, let me just point out that Pharma & Biotech's performance was driven particularly by clinical development and manufacturing, and by commercial manufacturing in the biologics businesses. Also, cell and gene therapy offerings continue to see strong interest from aspirational biotech and established pharma companies that are receiving approvals and fast-track designations. On slide eight, Lonza's small molecule businesses saw further high interest in highly potent active pharmaceutical ingredients. One example is the recent grand opening of a new monoplant, where we are working with one of our pharma customers, Clovis Oncology , on their drug for ovarian cancer. This partnership showcases our expertise in handling highly potent APIs, our commitment to develop new business models to satisfy specific customer needs, and our ability to support the fast-track launch of breakthrough-designated products, we are very happy about it.
At the Capital Markets Day, we also talked about repurposing assets. As one example, in quarter three, we launched a pharmaceutical early intermediate supply initiative to leverage chemical production facilities at the Visp site. It allows us to offer customers an integrated supply chain for early intermediates that are not cGMP to advanced intermediates and APIs that are cGMP. Our capsule and dosage form and delivery system business was also above our expectations in quarter three. On the Specialty Ingredients side, here on slide 10, the momentum in our Consumer Health businesses, which we are reporting during the half-year results, was ongoing in quarter three. We are benefiting greatly from the synergistic potential of combined nutritional ingredients and dosage form offerings, as well as from robust demand across all regions for hard capsules.
Innovation is the theme here. We are having success with, for example, Lonza's delayed release capsules for specialty applications, most notably probiotics. We also held the groundbreaking ceremony for our expanded U.S. manufacturing site in Greenwood, South Carolina. The facility, a new one, due to open in mid-2019, is a part of an ongoing program to enhance production of Lonza's nutritional ingredient and dosage form technologies. On slide 11, you see that the cyclical part of the portfolio, as well as the supply chain raw material price issues, continue to have an impact on Consumer & Resources Protection results in quarter three. We expect that challenging situation will be ongoing. We are continuing to implement countermeasures.
As discussed in the Capital Markets Day, we are taking action to optimize our product portfolio. Consumer & Resources Protection will especially focus on the high-margin specialty chemicals for formulated products and solutions and the optimizing of assets used for lower-value product portfolios that will be over time discontinued. We are confident that this focus will help to achieve our growth and margin targets despite the challenging environment. Just let me add here one thing to put things into perspective, and you could see it also in the Capital Markets Day. It's in the meantime a minor part of the total Lonza portfolio, and this is because of the actions we have taken in the last two to three years. After a soft second half 2017, which is a year ago, and the first half 2018, now Water Care is gaining good momentum and the outlook is positive.
Increased market demand, commercial and operational initiatives all contributed to that progress as Water Care continues to focus on plant restaging, innovation, and e-commerce. The strategic value of the Water Care business is ongoing, as we already mentioned at the Capital Markets Day. Looking to the future now on slide 14, let me reiterate what I said earlier. We are right on target for meeting our full year 2018 numbers, which were already upgraded in July with the first half year 2018 results publication. Until the end of quarter three, Pharma & Biotech performed even better than expected at the beginning of the year, while the cyclical businesses of Basic Materials came lower in because of the reasons we have discussed. We have also to put it in perspective, they had an especially strong year 2017. On balance, however, the end result was positive.
That means our positive overweight the challenges. For our midterm guidance, we can confirm today what we said at the Capital Markets Day. We expect to continue to have a highly attractive midterm guidance. Lonza's three-pillar strategy is the key foundation for our growth trajectory going forward. Through it, we will be strengthening synergies, levering overlaps, and mitigating portfolio risk. Overall, we expect to continue our sustainable growth while optimizing our business and product portfolios and making targeted investments to grow along the healthcare continuum toward and beyond 2022. That's it, ladies and gentlemen. That's our story for today, and it's another positive one on this quarter. I'm sure you have questions. That's why we are here to answer them. Who would like to begin?
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets when asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Daniel Buchta from Vontobel. Please go ahead.
Thank you very much for the presentation. Two questions I have. The first one on your chemical manufacturing business. Your peer in Switzerland, Dottikon, was recently giving a profit warning by stating that supplier outages in China particularly affected them negatively. How is that with you? I think an impression I gained is that outages in China were even very favorable for you because demand was coming back to Lonza, and you were also mentioning your marketing initiatives for early intermediate term. Could you elaborate a bit about the situation and how you are different in that regard? The second question on the more industrialized businesses and Specialty Ingredients, like coatings, composites, and also material protection. You were mentioning that these businesses saw a robust performance.
Does that mean that on a sequential basis compared to the first half, there is no slowdown and, especially from the macro side, which might be a bit negative for these businesses? Thank you very much.
Thank you for the questions. What I can say, our pharma chemical manufacturing businesses are doing well. We cannot see really anything what has been reported somewhere else. I think we are doing extremely well in this business. I think it's a further use that we reported in the last years that we have changed business models. We have no operational models. I think we are very successful this year, and there's no reason to believe that it's going to stop. I think we are now harvesting what we have done over the last 2 to 3 years. A little bit on China, Blue Sky policy and outages. I think rightly that side has positives but also negatives. It depends always on the product.
If you had a supply out of China and all of a sudden, the government decided to disrupt two assets which are in the same supply chain, then of course, you face some challenges, and we had some. Let's not play down. On the other side, what we see, of course, we see opportunities only rightly assumed by you. I think it's a little bit of something what we said, repurposing high valuable fine chemical assets. I think this is what we want to do because we see also some customers were not totally happy, and they now value more than maybe years ago, a reliable Swiss supply chain, if you want so. Of course, we are re-correcting a little bit. I think we are taking this initiative to react.
Of course, especially as I mentioned in the presentation, in the pharma intermediates, we want to take really advantage and even build this business stronger than it is today. I think we see there an opportunity out of the reasons you have just mentioned in your question. Yes, I think. Bottom line, I think here in this field, we are feeling very good. I think I have not any problem there in this part. To the industrial businesses, materials protection, coatings and composites, good development. I think what I said in the Capital Market Day a little bit, because this is reported together with the more basic business, maybe it's not totally fair to that business. It's doing well. I don't see a negative development at this moment in time. It's still also for the outlook of the year. I think we see this goes good.
It's just the, I think the basic business which we are running exists in 40, 50 years, which finds to a certain extent this year, a cyclical down after a cyclical up of last year. The specialty part, what I mentioned in presentation, I think the development is good, we are happy and don't see any indicator in this business, I can say in the moment, which makes me think negative. At least what I can see for the next two quarters or so.
It sounds good. Thank you very much. Very helpful.
Welcome.
Our next question comes from the line of James Quigley, JP Morgan. Please go ahead.
Hello. Thank you for taking the questions. On the cyclically exposed businesses, we know that Consumer & Resources Protection is around 22% of group sales and 16% of group EBITDA. How much is actually cyclically exposed? You're talking about the other industrialized businesses there. Should they have some kind of impact, and what leading indicators are you looking at in this business, and how are they tracking today? Secondly, again, on that side, on Consumer & Resources Protection, first half saw EBITDA or EBIT down 11%. Should we expect a similar result in the second half? Looking further on into 2019, we've heard a lot about the investments you're making for future growth. Ibex, the highly potent API, the consumer nutrition plant as well. I expect a good chunk of this is probably going to be CapEx.
As we look into 2019, consensus is expecting core EBITDA margin expansion of 100 basis points. What factors should we be thinking around, or considering when we're looking at our 2019 margins? Thank you very much.
Let me start with the first question, the cyclical. What we said in the Consumer & Resources Protection pillar, the cyclical business is definitely in the minority as it comes to the total sales contribution. It's a mixed pack. It's not one business. I give you one is vitamin B3 for animal feed. This, for example, is following totally different dynamics. It's not necessarily only the raw material price here. It's always depending. In the meantime, animal feed, vitamin B3, I regard as a typical commodity, which is fluctuating every year depending on supply, demand, equilibrium. If it's a little bit shorter, then we can have an over proportional margin gain. If capacities are long, we get the opposite. It's a part of it, of the cyclical business.
You have the traditional, what I say one, two level downstream cracker products, which you have in this. All in all, it's even in the third pillar, which you rightly described in a number of what is the total. It's a minority stake. That's why I said in my presentation. In the meantime, with all what we did over the last six to seven years, what would have been an issue for Lonza maybe seven years ago, it's not one today. Because we are not so much as a group, we are not so much getting an influence by that. On 2019, I have to say we are in the middle of the planning process.
Your question comes a little bit early because we are now in the way that my CFO told me that in a couple of weeks, he will give me the first indications. That's why. What is clear, of course, we will every year try as a company to move more towards our midterm target. How much? We will only communicate once we see a little bit better where we are in the planning and how the. Normally we communicate about this when we have the full year result presentation and not yet any quarterly update. The only general thing is, of course, the general confidence in our business is also there for 2019. This is what I can tell you at this moment. More to come when we are really through the planning process for the year.
Anything to add, Rodolfo, from your side?
Maybe from my side, a couple of comments. In terms of the business dynamics of the different pillars, as Richard mentioned, what we can confirm is what we have disclosed in general in the first half. The similar dynamics continue in quarter 3, and the expectation is
Also to continue for the balance of the year. When we talk about the different pillars, and then your question was, I think, more related to the Consumer & Resources Protection, we expect more or less similar dynamics in the second half.
Excellent. Thank you very much.
The next question from the phone comes from Marcus Gola, MainFirst Bank. Please go ahead.
Hi. Thank you for taking my question. My first one would be on the challenges in supply chain you mentioned. Have these challenges been amplified with the recent U.S. tariffs on China? Could you maybe provide some color what measures you are taking here to mitigate any potential effects on your business? My second question is on your recent single-use capacity expansions. Is it fair to assume that these capacities are still running validation engineering batches in H2, or can you already expect a contribution from commercial batches within this financial year from these capacities? My third question, if I may, is on the Water Care business. Good to hear that you've been able to turn this business around in H2. However, is it fair to assume that the margin in this business will still be burdened by the mentioned restructuring efforts? Thank you.
First, let me talk a little bit about the supply chain and what we do about it. I think we are monitoring this, I would say, different opinion about trade of U.S. and China and what are the implications. I think we have it quite a bit under control. There are some implications, but they are not dramatic. What we have done before, it's important, what we also continue to do, I think this is not knowing what's coming in the next 10 years, we are really trying to go for regional supply chains as much as possible to make sure that we are matching. We did it before. There was a different purpose a few years ago where we said, we want to eliminate transactional losses on exchange rate as a Swiss company, you remember.
Now, of course, now we have a different reason to continue the efforts and saying we want also make business in all regions in the world without having too much an impact of tariffs and so on. There are minor crossovers between China and U.S., absolutely. Now, if you can say the bad news is our China business is not so good yet. The good and the bad news. I think the exposure from China to U.S. is some, but it's, from my perspective, not too significant to the total group. Going forward, definitely, I think we will align our asset strategy, which we did already, and we'll even continue focused on making us less dependent on cross-regional supply chains. We'll never be zero, but I think we are also not in such a bad shape as we speak.
The single-use technology new ramp-up, what I said, I think we have made the first real invoices, so we have sales and margins. Having said that, of course, it's a start. It's not that we are fully in under full operation. That gives us, of course, my expectation is those things which are ramping up are getting up in 2019 to hit more sales for sure. What I said is what's surprising, one of them is the clinical manufacturing in Hayward. It's really dedicated to clinical. This was a repurposing of a former pharma site, which we acquired from a pharma company, which had a very low utilization. We had to repurpose it. We had to hire people because we are running now 24/7 on that. This was a lot about people training and so on.
That's why I think the most difficult thing is not only the technology, but also to get the people and the shifts and the qualification up and running. Now we are happy that we made it. I think we expected it in quarter four. We had the first batches we could invoice in quarter three. Will it move dramatically the needle in 2018? I think no, but a little bit positive it will be. Likewise, in Singapore, where we are more targeted towards late-stage early commercial disposable. Also there we have ramped up, also there, I would say the bigger impact is going to happen in 2019 versus 2018. Your last questions, we didn't get that perfectly. Maybe you can repeat it again.
On the water business, basically, I read in your presentation that you turned around that business, there were some restructuring efforts necessary. My question was whether that might weigh on the margin in the second half of 2018, therefore we maybe cannot really see a strong margin expansion here.
This was a wood business. As a wood business, yes, I think what we did, it might be a little bit resetting the Consumer & Resources Protection pillar newly up. I think this is belonging to the specialty part. What we did here it's not a heavy asset-based restructuring. It's much more a business model restructuring, where we're saying we want to change the business model into putting more the added value parts in the forefront and reorganizing our go-to-market activities. This was the major activity which we did here. It's important to understand that we have some extremely valuable tools in that portfolio, which I think we need to prepare ourselves to make a better global rollout, this is meant that we are now lining up in this overall specialty part of Consumer & Resources Protection.
I think this will be the major topic for the next few years to come, that we are taking advantage of many new technologies and make them more global. This is a little bit what we are doing in this part of our business.
Maybe just to comment on the financial side. Again, the comments about the instruction, this is in the bigger scheme of the group, really minor, no impact on margin. Of course, as you know, many of these activities by definition then belong to non-core. Again, in the big scheme of things, these are very, very small.
Yeah.
Okay. Thank you for the very-
We're not restructuring as of this moment, it's really setting up the business in a more efficient way.
Okay. Thank you for the very detailed answer, Richard and Rodolfo.
You're welcome. Thank you.
The next question comes from the line of Patrick Rafaisz, UBS. Please go ahead.
Hi, good afternoon. Three questions, please. The first is on ag ingredients. You talked already about the vitamins, but can you add a bit more color on crop protection and how bad is the situation there currently, and how do you see your market share evolution there over the course of 2018? Secondly, on the guidance, you talked about nine-month performance with Pharma & Biotech better than expected beginning of the year, Specialty Ingredients below. I'm wondering within Specialty Ingredients, can Water Care offset the softness in the Basic Materials & Intermediates? Lastly, Pharma & Biotech. Thanks for the rundown again of the key conclusions from the Capital Markets Day. I'm wondering on Ibex® Dedicate. In the current CapEx guidance which we have, do you assume any material capital contributions from customers for the build-out of the Dedicate suites in the years to come? Thank you.
Let me start from the end. In all contracts, this is always a topic. I think the capital contribution from customer is always a topic in all brings, of course, it always depends a little bit. I think the contracts are always taking consideration is there a capital contribution or not? Of course, some customers would rather like to have one, and then of course it might be some, I think, benefits on a batch price, but I think our experience is still very good for us. Others say, "Okay, we would like you to contribute fully," and then, of course, they pay, I think, the batch price is a higher one. This is what it is. Of course, we appreciate both, and depending on the project, I think it's also very welcome if we get customer contributions. We're looking for this also actively.
It's not that we just wait for it. That's why it's a case by case. In the discussions which are, and there are many discussions ongoing, I can tell you, the LTB teams are very busy. This is in some discussions a big topic, in others it's less of a topic. It's a mixed bag as it has been in the past. Let me go to the first question on the ag business. We have actually two kinds of ag business. One is really agro specialties. This is actually doing very well, but it's not too big business. I think it's something where we really have added value formulation and excipients and that. Then we have a long-standing custom manufacturing business in agro, which in the big scheme of things is really not a significant, I would say, part of the Lonza portfolio at all anymore.
It still exists, but it's not something in the big scheme of things which is boring us because the mere size is not so significant in the new Lonza picture as we see it today. Here, I think it's just more depending on contracts than just only on the overall situation in the market. It belongs more, of course, to what we consider, if you want, so the basic business. This is how we see that today. In Specialty Ingredients, of course, we have a little bit to differentiate. In the meantime, if you recall what we said in the Capital Market Day, Consumer Health, I think what we said, I think we are happy. I think this pillar is strong. I think it's exactly what we wanted after the merger between the Lonza and the former business at the first year.
Although the organizations still have to be built on the fly, I think we are quite happy that they're on the fly. The performance is already where it is today. Then in the third pillar, I think, of course, we had the upper part we said earlier on is good. The lower part was what we already reported. This is the one which has all the commodity influence. Water is coming up now. I think you really have to look at all the three pillars, and this is how I see it today. There we have a mixed picture on the pillars, but those who have also the highest margin, and that's a good thing, they're performing really well. Maybe just a technical comment on the customer contributions to CapEx to keep in mind.
Of course, the cash impact you definitely have, and that's mitigated investment in CapEx overall. From a P&L and accounting point of view, you all know about IFRS 15, and of course, that means that these one-time milestones or CapEx contributions will be deferred throughout the life of the contract or the projects related to the CapEx. Which has the advantage of eliminating one-time bumps in the P&L, for us, we see it positive on the cash and also positive in the sense of more predictable P&L results.
The next question comes from the line of Paul Knight, Jefferies. Please go ahead.
Hi, Richard. Thanks for doing the call. Could you talk about your capacity? We hear from the North American market, there's supply constraints or capacity constraints in the industry and Lonza. Are you tight on capacity? Secondly, the regenerative medicine startup in Houston, how is that going? Thirdly, maybe for Rodolfo, is CapEx relative to maintenance CapEx, any change there? What is it on CapEx in the next year or this year from maintenance levels? Thank you.
About capacity. I said that since maybe three years, we are permanently investing because definitely there is a good demand. We are not only investing in building new ones, we are permanently investing, which sometimes I have mentioned on roadshows, but it's really helping also out, is in debottlenecking. From a technical perspective, we found in all our assets way to get more out of the assets, which is, of course, attractive and has led also to very good margin. We are continuing to, if you want to fire on all cannons, whether it's debottlenecking or new investment, to make sure that capacity is met. Because of the fact that the shortest capacity, especially in the clinical manufacturing, this is why we exactly have made Hayward and we are permanently debottlenecking Slough. We are building Ibex® Design and Develop.
This is why we foresee this to be the case also in the next five years and forward. I think it's currently, we definitely have done everything already last year, to make sure that we are mitigating these effects, but it's still to a certain extent in the market, there is no doubt. We are doing everything to help to shorten the time for customers to get new capacity. Houston, I would say it came in at the right time. There is absolutely a high demand on this new capacity. We are in the ramping up phase and I think the customers are already being in. I think this year is fully dedicated to really make sure that we are getting fully operational with customer projects in place already. From my perspective, Houston now, after the grand opening, moved into a positive challenge.
With the new technologies we need to get executed together with our customers, it is going well at this moment.
On the CapEx front, for 2018, this year, the mix that we have guided in general, around 40% for maintenance, 40% for growth remains. Now, of course, at the Capital Market Day, we said we expect to increase the level of CapEx investment relative to sales. We said 10%-12%, this is mainly related to growth. If you do a bit the math, then of course, I would say the level of maintenance in absolute CHF will remain because this is more or less a constant amount, at least the range pretty similar over time. What you would see is an increase in the growth CapEx. That will change a bit the mix.
This because the first question on, I think it will help to get the biologics offer in the market, the right biologics offer, I have to say, expanded.
Thank you.
You're welcome.
The next question comes from the line of Laura Lopez-Pineda, Bank. Please go ahead.
Good afternoon, Rodolfo and Richard. I have three more questions. Unilever, DuPont, and Nestlé reported some slowdown in the consumer goods space. Has your Consumer Health business also felt this? Any of your product portfolio has also felt any of this slowdown? Do you believe this is more a temporary thing, or do you see this trend also staying for some quarters to come? Secondly, there are several companies in very different industries also highlighting increasing logistics costs. Is this an issue for Lonza as well, or can you mitigate this easily with price increases or I don't know? The third one is in the U.S., in addition to the trade war, there's also foreign investments restrictions, and there is a lot of speculation going on that this could be a risk for the biotech industry growth.
As in the past, China has invested a lot in the biotech U.S. venture capital funds. Do you see this as a risk for the industry? Have you maybe heard something from biotech companies on the topic?
Let me start first with the consumer market. Actually, we don't see this so much because what is happening a little bit in the worldwide, what I talk about the worldwide scale, we see in many consumer markets, and especially also in the markets, for example, like Consumer Health and nutrition, where we act, that the biggest growth is captured by small and mid-size companies. We see other players in this market, we see the so-called local and regional dynamos, like they are all in the meantime called, that they are definitely taking a big part of the growth of the industry. Also in our Consumer Health and nutrition business, I think, yes, we have big customers, but the bulk of the growth comes from exactly this segment of the market.
As I know from other industries, which have a different offer, but are moving into the same industry, this is what I see is a part of it. It's not a general market trend from my perspective. Logistic costing, yes, partly, we see the challenges as well. From the perspective, can you move it over? I think yes and no. It depends. Sometimes you have contracts in place where this was not put in as a reliable thing, then you are caught by this, then you have to wait until the contract terms of 12 months or so expire, then you can try to readjust it, and sometimes you can do it on a quarterly basis. It's easier to do.
That's why we see this issue, yes, on logistic U.S., and it's a mixed bag if it comes to, can you hand it over or do you have to swallow a part of it? It's a mixed bag from this own time. I think it's one of the challenges in some businesses. The foreign investment restrictions, we didn't hear anything there in terms of that it has already any perceivable impact on the funding in the biotech arena. We didn't hear anything yet. But from a customer perspective, our experts have been informed that this is going to have an impact. I think we still see from the demand side, from the interested side in our different clinical capacities, there is still high demand, which is not influenced at all.
By the way, even if there was an impact, it normally takes some years until this impact comes in any case through the pipeline. Also in general, we have not heard anything that it's in the beginning of the pipeline, anything remarkable coming yet. This is what I can say at this moment.
Perfect. Thank you.
The next question comes from the line of Gunnar Römer, Deutsche Bank. Please go ahead.
Gunnar Römer, Deutsche Bank. Thanks for taking my questions. The first one would be, again, on the Consumer & Resources Protection business. I think, at the half year stage, you indicated that you would expect some acceleration in the second half. Now, when I read through your statement today, it seems as this is no longer expected. Just curious whether you see this business still in positive territory for the year as a whole. I think you had 1% organic growth in the first half. Just curious whether you still think it's positive or is there a risk that overall the business could see a decline for the year as a whole? Related to that, obviously, as you're confirming the guidance, it seems as if the Pharma & Biotech business, and potentially the Consumer Health business, keeps on performing very well.
Just curious whether you can share a bit more color on what is driving the outperformance, next to your very positive comments again, on the Capsugel business. Any additional color would be very helpful. Thank you.
Yeah. I think at Capsugel, yes, you see synergies definitely. I think as a general comment, I think we are going almost in a one and a half year after closing. From a business perspective, I'm extremely happy. This is the supportive thing. Of course, you are always not over-speeding when you plan, because I think a lot of things, people have to work together, and it's good. On the other side, I think what we say, look, I think biologics, again, I think after a fantastic 2017, we are expecting again a good year. What one of the very good questions we had, and even on the small molecule side. If you see this all together, the consumer health, and I think the different contributors in the CDMO business of Lonza, I think it's all moving in the right direction.
Maybe Rodolfo, who comes in immediately with some forecasts, because I do not know it by heart, but what I can tell as a general theme to re-emphasize in Consumer & Resources Protection, unchanged from half year or what is going in a good direction, it's the specialty material protection part. This is doing very well. If this stands alone, I think it's good. The other part, I think what Rodolfo said earlier, is continuing as it was in the first half, and maybe you can give some color on each part.
Yeah. Richard stole my punchline.
Sorry.
It's exactly that. I think when we look at the dynamics first half and second half, and now I talk specifically of the human resources perspective, they are very consistent, we should expect a similar result for the, let's say, second half and balance of the year.
It would be too much to read into your comments today that there's a deterioration happening as we speak.
No
compared to the first half.
That would be incorrect conclusion, I would say.
Okay
you talked about the growth momentum. That was your first question. You said it's limited growth. What I'm saying is that the second half would be similar to the first half. There's definitely a sustained performance. Of course, we're not, let's say, the growth in the first half was minimal, that's correct. As Richard explained, this is a portfolio of products where certain parts of the portfolio, we have highlighted a few, like composites, have extremely good performance. We're very happy with those parts of the portfolio. Then we have the cyclical part, and I highlight again, Biocon B3. Where we continue to have headwinds. Overall, the portfolio offsets one part, the negatives are offset by the positive, and then the performance is similar H2 versus H1.
All right. That's helpful. Thank you for the clarity.
The next question comes from the line of Peter Welford, Jefferies. Please go ahead.
Hi. Yes, thanks. Just a couple. First, Richard, with regards to the biotech business, I'm just wondering whether you can comment at all on any phasing of batches. You obviously had a very good first half of the year. Do we anticipate batch release to be roughly equal or are you seeing it? Obviously, you talked about increasing the R&D spend during this year and beyond. I do wonder if you can sort of give us your priority list, perhaps, for areas that you're looking to spend that R&D dollars in during 2018, 2019, now that I guess you've evaluated that. Thank you.
For R&D, of course, it would be a lengthy discussion now, but give you the big theme, I think definitely where we, in relative terms, have the highest spend is definitely going in what we call emerging technologies of cell and gene therapy. I think this is definitely from, if it comes to where we put most efforts in, it's the gene therapy area. R&D normally should target something. First, we have incremental R&D in all different business models. If you say, what is the biggest ticket which is targeting more in the three to six years future horizon, then it's definitely the gene therapy investments in different kinds. This is where we think it's important that, by any case, I think we think all modalities will be through the 2020, 2030, still play a role.
This is a new one, which has, I would say, from a lower basis, of course, we have to be clear about that, but a huge potential, and we want to be on the boat when the boat is leaving, and that's why the maturity goes in here. The capsule, the delivery forms, and the dosage forms and delivery systems, I think it's still dynamic. I think we are not expecting a slowdown here in this case. I think it's a dynamic field. It's one, by the way, one of the real synergies which came, from my perspective, even a little bit faster than I expected. Here, the teams are really good on the way.
Having said that, we still have a lot of room for improvement in the next years in this area, because let's remind us, those technologies have been mainly coming out of bolt-on investments of Capsugel between 2013 and 2016. This tells you that even inside Capsugel, in all its exit phase, this has not been fully integrated. We are taking even now some of the integration efforts. What we see today is, I think from my perspective, I'm encouraged. When we see all the new things which you can do with the technologies like probiotics, even microbiomes, I'm absolutely sure that there is more to come, which we didn't touch even as of today. Batch phasing, as what we said, until Q3, everything good. I think Q4, we are just starting.
I would say in the big scheme of things, if we talk about the 12 months, I think there will be not a significant thing of phasing. The year end, I think, but as I said, we are in our guidance, I think confident because whatever is happening in the year end on a 12-month horizon, it doesn't play a significant role. Rodolfo, if you want to comment on that.
Yes, absolutely. Specifically on batch phasing in pharma, which is an important topic here, definitely we do not have a hockey stick in the plan. Absolutely not. We continue to see a very positive momentum until quarter three year to date. Then we have a clear plan for quarter four. Here, the important thing to keep in mind, again, this is a topic we reiterate, given the contractual nature of the business, this is more related to operations execution and releases. Again, our track record here is extremely good. I would say where we have a clear plan consistent with the guidance and the probability to meet the plan is extremely high.
That's great. Thank you very much.
You're welcome.
As a reminder, if you wish to register for questions, please press star and one on your telephone. The next question comes from the line of Keyasiya Cutts , Goldman Sachs. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. You mentioned that the quarter saw impact from raw material price situation. Can you tell us if you're able to pass along these higher costs to your customers? If so, how long does it usually take to pass this given your contractual agreements? Thank you.
Let's just start with a general comment. This is a topic, not in pharma, but I think it's mainly a topic in parts, in a part of Specialty Ingredients, even in some Consumer Health areas, it's not a topic. In the minority of the Lonza business, where it is a topic, this is not different from any other business I did in my past. It depends on contracts, I think, normally, but there is a general rule. We need one to three quarters to get this done, which obviously when costs are going down, you are enjoying one to three quarters. This is what I can say now. We are in the middle of it, if you want to.
Thank you.
You're welcome.
Gentlemen, there are no more questions at this time.
If there's no further questions, thank you for joining our Q3 update call. It was a pleasure to discuss with you as usual. Looking forward to see some of you during the roadshow in November, I think also happy to host again the next call with the full year results 2018. Thank you very much, I wish you a very nice rest of the day.
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