Ladies and gentlemen, welcome to the Q3 Results 2018 Analyst and Investor Conference Call and Live Webcast. I am Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode. Any conference is being recorded. The presentation will be followed by Q and A session.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Rachel Reitinger, 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 3rd quarter qualitative update for 2018. Joining me in the room are Rodolfo Tsaritsky, 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 in Zurich Invest in Switzerland.
We really appreciated your participation. Today's news release confirmed that our strong momentum has continued throughout the Q3 for our businesses along the healthcare continuum. We want to provide you even more qualitative insights into our Q3 business performance. So let's take a look at the highlights now on the Slide 3. As we already mentioned, our Health Care Continuum businesses performed robustly and growth grows throughout our company.
Here's a reminder of what we discussed in more detail at our Capital Markets Day. The Healthcare Continuum includes all 3 launch pillars, consumer and resources, protection, consumer health and pharma, biotech. The health care 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. But first, let me give you an overview of their performance here.
The combined businesses for our Lanta Ingredients, both pharmaceutical and nutritional and for dosage forms and delivery systems, as well as half capsules are all doing extremely well and are performing above our expectations. One of the highlights of the quarter was definitely the expansion of our IDEXX solutions. We extended our innovative Ibex offerings to include clinical development and manufacturing services. So now we can offer customers the full range of services from preclinical to commercial, including fill and finish. This is at our WISC site.
Much more about the 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 and mature parts of our consumer and resources protection portfolio like Basic Materials Intermediate continued to have an impact. This quarter, the Water Care business gained good momentum based on successful implementation of commercial initiatives. And finally, today, we are confirming our 2018 outlook, which was already upgraded with our half year twenty eighteen results.
We are confident we will achieve the attractive targets already communicated externally, while we pay off of further investments and ongoing operational improvements in the future. Let's take some time here on slide 5 to look in more detail at our 3 Ibex offerings, design, develop and dedicated. We want you to fully understand the offering. The feedback is extremely positive from our customers. Following discussions at Capital Market Day and after, we would like to provide additional exploration.
To clarify, we now provide clinical development and manufacturing services along the whole value chain for drug substance and drug product, and again, that includes fill and finish. You can see on the slide our 3 Ibex solution offerings. IBEX design is from preclinical to Phase 1. IBEX developed covers Phase 2 to commercial. Those 2 together are only one wing of a building, which means only half a building.
And the 3rd offering is Ibexpedicate is aimed primarily at late phase clinical to commercial stage manufacturing. Ibexpedicate 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 commercial stage manufacturing.
The Ibex Dedicated Building displays here refers to the Lonza Sanofi joint venture. And we think more dedicate will come in the future. We announced at the Capital Markets Day that we expect revenues to reach CHF 500,000,000 in the mid-twenty 20s out of Ibex Design and Ibex Develop alone. This offering includes drug substance and drug product development and manufacturing. So we are now offering fill and finish.
I mentioned that again because this was not clear to all participants of the Capital Markets Day after that day. That's the orange ring you can see on the right hand side of the slide. We are looking forward to discussing Ibrance 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 focused on single use technology. They're already operational, the first customer batches having been released in this quarter 3. And this was earlier than expected. The teams did a great job where it came up and getting it operational. Demand is steady for all these assets displayed here.
Moving quickly over Slide 7, let me just point out that pharma and 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. Now on Slide 8, non plus small molecule businesses show further high interest in highly potent active pharmaceutical ingredients. One example is the recent grand opening of a new monoblast where we are working with 1 of our pharma customers, Globus Oncology, on their drug for ovarian cancer. This partnership showcases our expertise in handling high 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.
And we are very happy about it. At the Capital Markets Day, we also talked about repurposing assets. As one example, in quarter 3, we launched a pharmaceutical early intermediate supply initiative to leverage chemical production facilities at the risk 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 3.
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 3. 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, and we are having success with, for example, long term delayed release capsules for specialty applications, most notably probiotics. The quarter we also held the groundbreaking ceremony for our expanded U. S.
Manufacturing site in Greenwood, South Carolina. The facility, a new one due to opening in 2019, is a part of an ongoing program to enhance production of Lonza's nutritional ingredient and dosage formed technology. On Slide 11, you'll see that the cyclical part of the portfolio as well as the supply chain or material bias issues continue to have an impact on consumer and resources protection results in quarter 3. We expect a challenging situation will be ongoing, and we are continuing to implement countermeasures. As discussed in the Capital Markets Day, we are taking action to optimize our product portfolio and consumer resources protection will especially focus on the high margin specialty chemicals for formulary products and solutions and re 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. But first, let me add here one thing to put things into perspective. And you could see it also in the Capital Market Day. It's in the meantime a minor part of the total ONSAR portfolio. And this is because of the actions we have taken in the last 2 to 3 years.
After a soft second half twenty seventeen, which is a year ago, and the first half twenty eighteen, now Water Care is gaining good momentum, and the outlook is positive. Increased market demand and commercial and operational initiatives all contributed to that progress as Water Care continues to focus on brand restaging, innovation and e commerce. The strategic value of the World Health 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 twenty eighteen results publication. Until the end of quarter 3, PAMA and 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. And we have also to put it in perspective, we have 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 3 pillar strategy is the key foundation for our growth trajectory going forward. Through it, we will be strengthening synergies, levering overlaps and mitigating portfolio risks. So overall, we expect grow along the healthcare continuum, thought and to grow along the healthcare continuum toward and beyond 2022.
That's it, ladies and gentlemen, that's our story is 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. We would like to begin.
We will now begin the question and answer session. The first question comes from the line of Daniel Buchta from Vontobel. Please go ahead.
Yes, thank you very much for the presentation. Two questions I have. The first one on your chemical manufacturing business here, your peer in Switzerland.com was recently giving a profit warning by stating that supplier outages in China particularly affected them negatively. Mean, how is that with you? I think the 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 initiative for early intermediate term. Could you elaborate a bit about the situation and how you are different in that regard? Then the second question on the more industrialized businesses in Specialty Ingredients like Coatings, Composites and also Material Protection. You were mentioning that these businesses saw a robust performance. So does it mean that on a sequential basis compared to the first half, there is no slowdown and yes, especially from the macro side, which might be a bit negative for these businesses?
Thank you very much.
Thank you for the questions. So what I can say, our pharma, chemical manufacturing businesses are doing well. So we cannot see really anything what has been recorded somewhere else. I think we are doing extremely well in this business. I think it's further, as we reported in the last year that we have changed business models, we have no operational models.
I think we get I think very we are very successful this year, and that's no reason to believe that it's going to stop. We have I think we are now harvesting what we have done over the last 2 to 3 years. A little bit on China through sky policy and outages. I think it has I think rightly that's where it has positives but also negative. It depends always on the product.
If you had a supply out of China and the follow-up, the government decided to disrupt 2 assets, which are the same supply chain, then of course, you face some challenges, and we had some. Let's not lay down. On the other side, what we see and of course, we see opportunities always rightly assumed by you. I think it's a little bit 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 who are not totally happy.
And they now value more than maybe years ago a reliable Swiss supply chain, if you want. So And of course, we are recuracting a little bit. I think we are taking these initiatives to address that. And 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. So I think we see there an opportunity out of the reasons you have just mentioned in your question.
Yes, I think about bottom line, I think here in this field, we are feeling very good. I think we cannot 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, really good business is not because this is reported together with the more basic business. Maybe it's not totally fair to that business.
It's doing better. 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 growth is good. And it's just still, I think, the basic business, which we are running at this point for 40, 50 years, which is fine to a certain extent this year more cyclical down after cyclical up of last year.
So the specialty part, what I mentioned in presentation, I think the development is good and 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 2 quarters.
That sounds good. Thank you very much. Very helpful.
Welcome.
Our next question comes from the line of James Quigley, JPMorgan. Please go ahead.
Hello. Thanks for taking my questions. So on the cyclically exposed businesses, we know that Caterpillar Consumer Resources and 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 and Protection, first half saw EBITDA or EBIT down 11%. Should we expect a similar results in the second half? And then looking further on into 2019, we've heard a lot about investments you're making for future growth.
So Ibex, the highly potent API, the consumer nutrition plants as well.
And I
expect a good chunk of this is probably going to be CapEx. But 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.
Okay. Let me start with the first question, the figures. I think what we said in the consumer results is Protection Pillar, particularly the business is definitely in the minority if it comes to the total sales contribution. And it's a mixed pack. It's not one business.
I'll give you one is vitamin B3 for animal feed. And this, for example, is following totally different dynamics. I think it's not necessarily only raw material price here. It's always depending. In the meantime, animal feed, whilst I'm in D3, I regard as a typical commodity, which is fluctuating every year depending on supply demand equilibrium.
If it's I think 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. And then you have the traditional, what I say, 1, 2 level downstream Quaker products, which you have in this. But all in all, it's even in the 3rd pillar, which you rightly described in a number of what is a 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 6 to 7 years, what would have been an issue for a long time, maybe 7 years ago, I think it's not one today because we can really I think we are not so much as a group, we are not so much getting an influence by that. On 2019, as you say, we are in the middle of the planning process. I think your question comes a little bit early because I think we are now in the way that my CFO told me that in a couple of weeks, he will give me the first indication. That's why, of course, what is clear, of course, we will every year try as a company to move more towards our midterm target. But how much?
I think we want really to communicate once we see a little bit better where we are in the planning and how the and I think normally we communicate about this when we have the full year result presentation and not yet in the quarter, so we update. But the only the 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, and 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 generally in the first half, the similar dynamics continue in quarter 3, and the expectation is also to continue for the balance of the year. So when we talk about the different pillars and then your question was, I think, more related to the continuing resources protection, we expect more or less similar dynamics in the sector.
Excellent. Thanks very much.
Your next question from the phone comes from Marcos Gola, MainFirst Bank. Please go ahead.
Hi, and thank you for taking my question. So 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?
And 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 contribution from commercial batches within this year, this financial year from these capacities? And my third question, if I may, for the water 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, this, I would say, different or different opinion about the 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, and it's important what we also continue to do, And 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, but we said we want to not we want to eliminate transactional losses on exchange rate as a Swiss company, you remember. And 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.
But there are minor crossovers between China and U. S, absolutely. Now you can say the bad news is our China business is not so good yet. The good and the bad news though. And I think the exposure from China to U.
S. Is some, but it's, from my perspective, not too significant to the total group. And going forward, definitely, I think we will align our asset strategy, which we did already, we will even continue focused on making us less dependent on cross regional supply chain. We'll never be 0, 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 voices, so we have sales and margins. Harry said that, of course, it's a start. It's not that we are fully under collaboration, but it gives us, of course, my expectation is those things which are ramping up are getting up in 2019 to more to hit more sales for sure. What I said is it was the pricing. One of them was is the clinical manufacturing in Hayward.
It's really dedicated to clinical. This was a repurposing of a pharma side, which we acquired from the pharma company, which has a very low utilization. We had to repurpose if we had to hire people because we are running now 20 fourseven on that. And this was a lot of people training and so on. And that's why I think the most difficult thing is not only the radiology, but also to get the people and the shift and the qualification up and running.
And now we are happy that we made it I think we expected it in quarter 4. We had the 1st pitch batches we could invoice in quarter 3. 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, it supports late stage, early commercial disposable. Also, there, we have ramped up. And also, there, I would say, the bigger impact is going to happen in 2019 versus 2018. And your last question, we didn't get paid perfectly. Maybe we can repeat it again.
Yes. So on the hotel business, basically, I read in your presentation that you turned around the business, but there were some restructuring efforts necessary. And my question was whether that might wait on the margin in the second half of twenty eighteen, and 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 in the course and we're a little bit resetting the consumer and resources protection pillar newly up. I think this is belonging to the specialty part. And what we did here is not a heavy asset based restructuring. It's not a business model restructuring where we're saying we want to change the business model into putting more of the added value part in the forefront and reorganizing our go to market activities.
This was the major activity which we did here. And it's important to understand that we have some really extremely valuable tools in that portfolio, which I think we need to prepare ourselves to make it by that global rollout. And this is meant that we are now lining up in this overall specialty product consumer and wealth 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. And this is a little bit what we are doing in this part of our business.
Maybe just to comment on the financial side. I mean, when again, the comments about restructuring, this is in the bigger scheme of the group really minor, so no impact on margin. And of course, as you know, many of these activities, by definition, then belong to non core. But again, in the big scheme of things, these are very, very small.
Okay. Thanks for the very detailed answer.
And not restructuring assets also at this moment. So it's really setting up the business in a more efficient way.
Okay. Thank you for the very detailed answer, Richard or Doelso.
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?
Then secondly, on the guidance, you talked about 9 month performance with Pharma and Biotech better than expected beginning of the year, Specialty Ingredients below. I'm wondering within Specialty Ingredients, is can Water Care offset the softness in the basic materials and intermediates? And then lastly, Pharma and 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 Dedicated 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 category contribution from customer is always a topic in all things. Of course, it always depends a little bit. I think the contracts are always taking consideration if there are capital contributions or not.
And of course, some customers would rather like to have 1. And then, of course, it might be some, I think, benefits on a vast price, but it's still I think our experience is still very good for us. And now they 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.
And 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. And in the discussions, which are and there are many discussions ongoing, I can tell you the LTV teams are very busy. This is in all in some discussions, a big topic.
In others, it's less of a topic. So 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 2 kinds of ag business. 1 is really alcohol specialties.
This is actually doing very well, but it's not a too big business. I think it's something where we really have added value formulation and excipients in that. And then we have a long standing custom manufacturing business in alcohol, which in the big scheme of skins is really not a significant, I would say, part of the long term portfolio at all anymore. It's still existent, but it's not something in the big scheme of things, which is boring us because the near size is not so significant in the view on the picture as we see it today. And here, I think it's just more depending on contracts and just only on the overall situation in the market.
And it belongs more, of course, to what we consider, if you want, though, the basic business, yes? And 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 passenger businesses at the 1st year.
Although the organization still have to be built on the fly, I think we are quite happy that they are on the fly, their performance is already where it is today. And then in the 3rd pillar, I think, of course, we had the other part we said earlier, one is good. The lower part was what we already reported. This is the one which has all the commodity income. And Volta is coming up now.
I think it's you really have to look at all the 3 pillars, and this is how I see it today. So there we have a mixed picture on the pillars, but those 2 have also the highest margin and it's a good thing. They are 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 makes investments in CapEx overall. Now from a P and L and accounting point of view, you'll know about IFRS 15. And of course, that means that this onetime milestone for CapEx contributions will be deferred throughout the life of the contract or the projects related to the CapEx, which has the advantage of eliminating onetime bumps in the P and L. And so far, as we see positive on the cash and also positive in the sense of more predictable P and L results.
The next question comes from the line of Paul Knight, Jenny. 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?
And then secondly, the regenerative medicine startup in Houston, how is that going? And then thirdly, maybe for Rodolfo, is CapEx relative to maintenance CapEx, any change there? Or what is it on CapEx in the next year or this year from maintenance levels? Thank you.
So, about capacity, I said that we are since maybe 3 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. So from a technical perspective, we found in all our assets ready to get more out of the assets, which, of course, attractive and has led also to good very good margin. And we are continuing to, if you want to fire on all the tenants, whether it be bottlenecking or new investment to make sure that capacity is met. And I didn't and but because of the fact that the shortest capacity, especially in the cleaning room manufacturing, this is why we exactly have made Hayward and we are permanently de bottlenecking slough.
We are building Ibex design and develop. And this is why we foresee this to be the case also in the next 5 years and forward. And 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, but we are doing everything to help to shorten the time for customers to get new capacity. And 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. And I think this year is fully dedicated to really make sure that we are getting fully operational with customer projects in place already. So from my perspective, Houston is now after the grand opening, moved into a positive challenge. With the new technologies, we need to get executed together with our customers, and it's going well at this moment.
Then on the CapEx front for 2018, this year, the mix that we have guided in general around 40% for maintenance percent for growth remains. Of course, at the Capital Market Day, we said we expect to increase the level of CapEx investment relative to sales. We said 10% to 12%. And this is mainly related to growth. So if you do a bit of math, I would say the level of maintenance in absolute Swiss francs will remain because this is more or less a constant amount, at least the range is similar over time.
And then what you would see is an increase in the growth CapEx. So that will change
a bit the mix. And this is because the first question on I think, to 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 Lorna Lopez de Nieda, Baader Bank. Please go ahead.
Good afternoon, Rodolfo and Richard. I have three more questions. So Unilever, DuPont and Nestle reported some slowdown in the consumer goods space. Has your consumer health business also felt this? So any of your product portfolio has also felt any of this slowdown?
And 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 mitigate this easily with price increases or I don't know? And the third one is in the U. S, so in addition to the trade war, there's also foreign investments restrictions and there's 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 US venture capital funds. So do you see this as a risk for the industry? And have you maybe heard something from biotech companies on the topic?
Yes. Let me start first with the consumer market. And actually, we don't see this so much because what is happening a little bit in the world in worldwide, what I love, I talked about the worldwide scale, we see in many consumer markets and especially also in the market, for example, like consumer health and nutrition where we act, that the biggest growth is captured by small and mid sized companies. We see, like other players in this market, we see the so called local and regional dynamos as they are all in the meantime called, that they are definitely taking a big part of the growth of the industry. And also in our consumer health and nutrition business, I think, yes, we have the customers, but the bulk of the growth comes from exactly this segment of the market.
And as I know from other industries, which are not have a different offer, but moving into the same industry, which is what I see is a part of it. So it's not a general market trend from my perspective. And logistics costs, yes, yes, partly. We see the challenges as well. And from the perspective, can you move it over?
I think yes and no. Sometimes you have contracts in place where this was not put in as a flexible as a viable thing, and then you are caught by this, and then you have to wait until the contract terms of 12 months or so expire, and 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 it's we see this issue, yes, on Logistics United States and it's a mixed bag if it comes to is it can you hand it over or do you have to swallow a part of it. It's a mixed bag from this one in time.
I think it's one of the challenges in some businesses. Yes, 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. So 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 clinical different clinical capacities, there is still high demand, which is not influenced at all.
And by the way, even if we do if there was an impact, it normally takes some years until this impact comes, in any case, through the pipeline. But also in China, I don't see we have not had anything that it's in the beginning of the pipeline, anything the market will come in yet. So this is what I can say at this moment.
Perfect. Thank you.
The next question comes from the line of Gunnar Romer, Deutsche Bank.
The first one would be, again, on the Consumer Resources and 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. So 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 step overall the business could see a decline for the year as a whole? And then related to that, obviously, as you're confirming the guidance, it seems as if the Pharma and 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 Capsuger business. Any additional color would be very helpful. Thank you.
Yes.
I think at Capsugel, yes, the synergy is definitely, I think as a general comment, I think it's now we have now what almost we are going almost in the 1.5 year after closing From a business perspective, I'm extremely happy. And this is a supportive thing. Of course, we 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 is really look, I think biologics, again, I think after a fantastic 2017, we are expecting again a good year. And what one of the very good regions we have and even on the small molecule side.
So you see this all together, the consumer health and I think the different front of leaders in the CDMO business of Lonza. I think it's all moving in the right direction. Maybe those who comes in, in the middle with some forecast because I do not know it by heart, but what I can tell as a general theme to reenterprise in consumer resources protection unchanged from half year or what is going in a good direction is the specialty material protection part. This is doing very well. If this stands alone, I think it's good.
And the other part, I think what Rod also said earlier, is continuing as it was in the first half. And maybe you can give some color on Hapord.
Yes. So Richard stole my punch line. So it's exactly that. I think when we look at the dynamics first half and second half, and now I talk specifically about consumer resource protection, they are very consistent. And so we should expect similar results for the, let's say, second half in balance of the year.
So it would be too much to read into your comments today that there's a deterioration happening as we
speak, kind of the first half?
No, that
will be incorrect conclusion, I would say. I think you talked about the growth momentum. That was your first question. You said it's limited growth. And what I'm saying is that the second half would be similar to first half.
So there's definitely a sustained performance. Of course, we're not let's say, the growth in the first half was was minimal. That's correct. But this is, 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.
And then we have the cyclical part, and I highlight again by Comenity 3, where we continue to have headwinds. But overall, the portfolio offsets one part. The negatives are offset by the positive, and then the performance is similar H2 versus H1.
Your next question comes from the line of Peter Welford, Jefferies. Please go ahead.
Hi, yes, thanks. Just a couple. Firstly, just 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
obviously, you talked about increasing the R and D spend during this year and beyond. Just wondering if you can sort of give us your priority list perhaps for areas that you're looking to spend that R and D dollars in during 20 eighteen-twenty 19 now that I guess you've evaluated that?
Thank you.
So for R and D, of course, it would be a lengthy discussion now. But if you're the big theme, I say, definitely where we, in relative terms, have the highest spend is definitely going in what we call emerging technologies of of cell and gene therapy. I think this is definitely from if it comes to where we put most efforts in the gene therapy area, because R and D normally should target something. 1st, we have incremental R and D in all different business models. But if you say what is the biggest ticket, which is targeting more in the 3 to 6 years future horizon, then it's definitely the gene therapy investments in different kinds.
And 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. But this is a new one, which has, I would say, from a lower basis, of course, you 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 majority goes in The capsule the delivery forms and the dosage forms and delivery systems, I think it's still dynamic. I think it's not you're not expecting a slowdown in this case. I think it's a dynamic field.
It's 1, 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. And having said that, we still have a lot of room to 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 2016. And this tells you that even inside Capsugel in all its exit phase, this has not been fully integrated. So we are taking even now some of the integration efforts.
But what we see today is, I think from my perspective, I'm encouraged. And when you 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 don't have we didn't touch even as of today. Batch tracing, I think 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 12 months, I think that will be not a significant thing of phasing. But 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 the 12 month horizon, it doesn't play a significant role.
Rodolfo, if you want to comment on that.
Yes, absolutely. So 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 3 year to date. And then we have a clear plan for quarter 4. And here, the important thing to keep in mind, again, this is the topic we reiterate given the contractual nature of the business, this is more related to operations, execution and releases.
And again, our track record here is extremely good. So I would say we have a clear plan consistent with the guidance, and the probability to meet the plan is extremely, extremely high.
That's great. Thank you very much.
You're welcome.
The next question comes from the line of KKR Capital, 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? And if so, how long does it usually take to pass this given your contractual agreements?
Thank you.
Okay. Let's just start with a general comment. This is a topic not in pharma biasing. It's mainly a topic in parts in a part of Special Ingredient. Even in some consumer health areas, it's not a topic.
In the minority of Salazar business, there is a bit of a topic. This is not different from any other business I did in my past. If you plan some contracts, I think normally, but there is a general rule, we need 1 to 3 quarters to get this done, which obviously when costs are going down, you are enjoying 1 to 3 quarters. So this is what I can say now. And we are in the middle of it, if you want.
Thank
you. You're welcome.
Gentlemen, there are no more questions at this time.
So if there are no further questions, then 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. And I think also happy to host again the next call with the full year results 2018. Thank you very much, and I wish you a very nice rest of the day.
Ladies and gentlemen, the conference is now over.