Ladies and gentlemen, good morning or good afternoon. Welcome to the Lonza's Half Year 2018 Conference Call and Live Webcast. I'm Yaron, the close call operator. I would like to remind you that all participants may listen only mode and the conference is being recorded. After the presentation, there will be a 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. Richard Kriedinger, 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 half year results for 2018. Joining me in the room are Rodolfo Sawitsky, our CFO, who is here to answer your financial questions as well as members of our Investor Relations and Corporate Communications teams. We'll be looking at our overall business and segment specific highlights as well as our outlook for 2018 and the midterm guidance 2022, now that we are more than halfway through the year. As you read into the news release, we have had a strong first half of the year, especially for our businesses along the healthcare continuum.
Pharma and Biotech and Consumer Health achieved combined double digit double digit organic sales growth. The Healthcare Continuum was positively supported by the former Capsugel businesses, which exceeded our expectations in performance and in synergistic potential. Let's look at more of the highlights now on Slide 3. The number that jumps off the slide here is the 2 70 basis points margin increase in Pharma and Biotech. In addition, Pharma and Biotech grew organically by nearly 15% on the top line, like for like compared with last year.
And just to clarify here, the figures we are mentioning unless specialty specifically stated otherwise are like for like pro form a numbers that include Capsugel and therefore show our organic growth. Like you see, Capsugel was a strong competency that to all the different businesses they joined, even above our expectations for the first half of this year. We'll talk more about the successful integration later in the presentation. Within Specialty Ingredients, the Consumer Health Businesses, which also includes some Capsugel Businesses, had an outstanding organic 380basispointimprovementincoreebidearmargin with about 8% organic sales growth. Although we had a strong momentum in some specialty parts of our Consumer and Resources Protection division, the more mature cyclical parts of the business faced some headwinds in the first half.
But we are addressing these issues and seeking solutions to balance our portfolio even better going forward now. In May June, our Water Care business recovered well from a weak start to the year. And with this good momentum, we have a positive outlook for the second half twenty eighteen right into 2019. The next slide mentions the fact that our major investments are progressing as expected. And let me remind you what we said at the Q1 qualitative business upgrade that we are moving to a new KPI for measuring return on those investments, not only on those of the acquisition, return on invested capital, ROIC.
Today, we are announcing our mid term guidance 2022 target of double digit return on invested capital as well as upgrading our full year 2018 sales outlook. Further, it's still data for 2017 and additional details about the return on invested capital calculation are in the first half year report we published today. Rodolfo will say more in a minute, but he will certainly provide more granularity on our growth trajectory at the Capital Markets Day from the 24th to 26th September in Switzerland.
Thanks, Richard. Ladies and gentlemen, welcome also from my side to today's half year results call. I'll be referring to Slide 5 for further insights into our strong financial performance during the 1st 6 months of this year. Here, we are presenting our pro form a results. That means our reported loans on half year twenty seventeen financial results, including CapRequel half year twenty seventeen financial numbers.
This same explanation applies to the terms pro form a, like for like and organic, which we are using as synonyms. I think it is safe to say that organic growth of 8% in sales and 11% in core EBITDA confirmed Lonza's positive momentum. Core EBIT grew even more than 12% compared with the same period last year, again organically. We are now at more than CHF 3,000,000,000 in sales and CHF 800,000,000 in core EBITDA. As Richard already mentioned, growth drivers have been our businesses along the health care continuum.
Pharma and Biotech and Consumer Health combined had a 13% pro form a sales growth and a 300 basis point pro form a core EBITDA margin improvement. So we're clearly delivering on our strategy to grow substantially along the healthcare company. Capsugel contributed to this organic growth in the businesses where it was integrated specifically in pharma and biotech and in consumer health within specialty ingredients.
We will see
more about the new reporting structure for specialty ingredients later in this presentation. Now as we have promised to the capital markets, we have opened up this segment to better display the parts along and beyond the Healthcare Continuum. As you will see, we have taken on a new key performance indicator, specifically return on invested capital or ROC to measure the return on all our growth initiatives, including acquisitions. We have applied a stringent definition of ROIC. The ROIC calculation takes net operating profit after tax, or NOFAD, and divides it by the year to date average invested capital.
The new ROI KPI complements our existing measure of return on net operating assets or core RONOA. Richard will later discuss our ROI target for 20 2. So from the financial side, a positive story for the overall company, which for 1 year now has included the capsulated businesses. And with that, I hand back over to Richard.
Thanks, Rodolfo. And speaking of Capsugel, before we look at the highlights of our 1st successful year together, I want to recognize the valuable contributions made by Dieter Driessen, Capsugel's former CEO during the integration of Capsugel. Ivo is winding down his full time support of the integration now. He is prepared to help us on other projects in our global network in the future. These contributions during the last 12 months were extremely valuable for the entire Lonza Group.
The first half results of the Lonza Capsugel combination were a touch better than anticipated in all businesses they joined. And commercial synergies are being identified as we speak. Our first combined offerings are reaching the markets and even more new product launches are to be announced in the second half of twenty eighteen. Integration of enabling and support functions like finance, IT and procurement have also produced synergies to add to our 1st year success. Overall, the CapExcel acquisition has proven its merits already as it is complementing our value proposition along all the healthcare continuum.
We are now able to provide a full range of offerings from molecule to patient in pharma and biotech and from ingredient to consumer and specialty ingredients. Capsugel was a great contributor and added to the strong pharma and biotech performance, as you can see on slide 8. I won't cover all the numbers in detail, but certainly noteworthy are the 14.7 percent organic sales growth and the 33.1% core EBITDA margin. How did we achieve this level? Of course, we are capitalizing on the momentum in the marketplace, but that's not the only reason.
Our offerings and our expertise are moving us forward at such a pace. Lonza is an integrated provider across all technologies and at the forefront of innovation. We also have a global footprint and flexible business models that help us to meet the rapidly changing needs of our customers. Next two slides outline the achievements of each of the businesses in Pharma and Biotech. Clinical Development and Manufacturing and Commercial Manufacturing led the way, but all our technologies were thriving.
We secured new contracts for the mid and long term in commercial, manelian and microbial manufacturing and demand continues to be high. Fueled by increasing demand for our development services and clinical manufacturing, we are expanding and preparing ourselves for the future again as we speak. Also to beat market demand for cell and gene therapies, we have redefined our asset strategy to focus on centers of excellence. We also continue to evolve our chemicals business with operational and commercial improvements. That business is on a growth trajectory, and we are expanding our small molecule business with legacy Capsugel offerings and expanding our dosage forms and delivery systems services.
In fact, Lonza is in the lead now for bioavailability enhancement. Pharma hard capsules were above expectations and bioscience product business has increased production to meet demand. Slide 11 gives you an update on just how Lonza is delivering on our promises. Our investments in assets and innovation continue to support profitable growth and are made based on the necessary demand from the market. Here you can see the breadth of technologies we are leading the market where we are leading the market.
We have most recently announced the mid scale biologics manufacturing expansion in our Portsmouth site. Our single use bioreactor facility is coming into operation and I think has made great progress on the path in the first half. And we are already transferring customers into our Houston cell and gene therapy facility. Furthermore, we continue to invest in automation, in manufacturing and innovation, in process development across all pharma and biotech technologies and assets. Slide 13 shows you the overall picture of Specialty Ingredients as we have it in the past.
However, now we are providing more transparency into the business as promised. As you'll see on the next slide, our new reporting structure for Specialty Ingredients consists of 2 divisions, Consumer Health and Consumer Resources Protection, as well as the business unit Water Care. Here we are disclosing sales, core EBITDA and core EBITDA margins as KPIs. Let's look first at the Watershed Year numbers and put them into perspective. We had a weak first 4 months due to the weather, but we are encouraged by the performance in May June and by the positive outlook.
More about Water Care later. Moving up the row, our Consumer and Resources Protection division faced some headwinds in the mature cyclical parts, while performing strongly in specialty solutions. Improvements are necessary in order to unleash some of the hidden value in this important pillar. And we have already launched operational and commercial excellence initiatives to make sure that that happens. Finally, you might be thinking at least some of you, that the great numbers for consumer health only reflect the addition of Capsugel.
That's actually not true. Core EBITDA margin improvement are also an effect of performance increases in legacy long term consumer health portfolio and in the legacy Capsugel 1. Because Capsugel became the part of consumer health or part of Capsugel, That's why we see the pro form a numbers here only for this part of specialty ingredients. You can see more details about consumer health now on Slide 1516. Despite the additional challenge of integrating different organizations into 1 division, Consumer Health had an excellent first half.
Improvements were equally spread across the businesses and robust performance was particularly driven by nutritional ingredients, delivery forms and hygiene offerings across all applications. On the global footprint of the combined company started to facilitate geographic expansion across all three key portfolios, means ingredients, dosage forms and hard capsules. Our consumer health and nutrition businesses are cross selling and bringing innovation in form and function to the marketplace. And the industry is taking note with customer demand increasing. We are continuing to see synergy opportunities from combining the traditional ingredients, delivery technologies and dosage forms in our now expanded portfolio.
Moving to Slide 17, consumer resources protection. This is an important pillar for Specialty Ingredients, but it's a kind of a hybrid division as it includes specialty and high margin businesses as well as the more mature basic chemical part of the portfolio. Last year, 2017, some of our basic products were at the cyclical high. But this year, the downward cycle for some high volume basic products and the raw material price increases on top have had an impact on this division. Although the delayed construction season in North America due to the weather was reflected in the results of the wood business, for instance.
Strong demand in composite materials in the aerospace and electronic industries continued as before, and Lonza is well positioned in these markets. To achieve a better balance in this important pillar, we have launched operational and commercial excellence initiatives and product portfolio revenues and optimizations. More insights will be provided during the Capital Markets Day in September. On Slide 18, the Morteck share story is one of acceleration. Even worse than usual weather delayed the start of the poor season in key markets such as North America.
But as I mentioned before, May June, they are much improved and the momentum continues to build going forward. We are boosted by sales initiatives and expected new business and so we've got a strongly positive outlook for the second half onwards. The ongoing business model redesign has resulted in restructuring costs that are reflected in these numbers. In addition, we have made significant investments in commercial excellence programs and in innovative offerings that are beginning to bear fruit like new digital concepts in residential water. We expect this turnaround in the Water Care business to continue.
Water Care will continue to focus on further growing the business and developing new technologies, while we are now in the process of considering all strategic options for the future. Just a side remark, as we are on the process, I will also later in the Q and A provide much more information about it. Slide 20 outlines our specific commitment for 2018. You have no doubt noticed our positive tone for the rest of 2018 and the midterm up to 2022. But confidence is based on our strong performance for the overall company and particularly for our businesses along the healthcare continuum.
We are upgrading our outlook for the full year 2018 to the following: mid- to high single digit sales growth on a comparable basis, in line with the mid term guidance 2022 Our core EBITDA margin for full year 2018 is expected to be comparable to the core EBITDA margin of 26% for half year twenty eighteen. The key targets of our midterm guidance 2022 are covered in the graphic on Slide 21. As Rodolfo explained earlier, we have adopted a stringent definition of the ROIC with net operating profit after taxes divided by year to date average invested capital. Our core NOA is now complemented by ROIC. And today, we are setting an attractive double digit ROIC target by 2022.
At the upcoming Capital Markets Day, we will provide more details about our growth trajectory for the main pillars of the portfolio and show how they will help us to reach our mid term guidance 2022. We'll also talk about our ongoing portfolio and business composition revenue and our investments for growth. We'll even explore initiatives to grow beyond 2022. I do hope you can join us in September here in Switzerland. That's it, ladies and gentlemen.
That's our story for today. And I think you agree it's a positive one. I'm sure you may have many questions, and that's why we are all here to answer them. We would like to begin now.
We'll now begin the question and answer session. The first question from the phone comes from Matt Weston from Credit Suisse. Please go ahead, sir.
Thank you for taking my questions. 3, if I can, please. Richard, as I recall from the Q1 qualitative update, you did highlight that there'd be a number of asset transfers around the network this year and that could cause some disruption. Can you let us know whether any of those transitions happened in the first half or whether or not we're expected to see them potentially impact growth or profitability in the second half? And I guess that includes any planned maintenance within Specialty Ingredients.
Secondly, you clearly reiterated the 2022 guidance. But based on your current trajectory, the revenue target appears easily achievable even with a meaningful slowdown in future that we should see any meaningful change in the growth trajectory of the company? And then finally, one of the surprises for us today was around the finance charge considerably lower than we expected on the Capsugel financing. Rodolfo, can you just confirm there's no hedging gains or other onetime items in there that mean that that's not a sustainable number? And should we simply multiply it by 2 to get to an estimate of full year 'eighteen financing?
Yes. Let me step fast with the first two questions. The asset transfers and also other operational things, we don't expect any significant changes in the second half of the year. Of course, we have a big network. It's happening all the time.
It partly happened also in the first half. It's just a part of our normal business. I don't expect we don't see for the second half any significant impact on this work on our results. And yes, I think on the 2022, I think with the current momentum we see in the digital businesses, I think we are extremely confident that we are on the right trajectory to lead this. I think the confidence level by every half year has gone up.
And now for me, what makes me extremely confident, also the Capsugel integration after 12 months on the business and operations side has worked so well so far. But I think this, I would say, at least potential concern is off my mind. So this is really going quite well. So that's I can just say we are confident. And now I'll hand over to Rodolfo.
So Matt, on the financial charges, you're right. Indeed, this includes some foreign gains and gains from some currency swaps. So in terms of thinking about interest charges, we have committed our interest rate overall, the basket of interest rate that we pay is around 2% on roughly, again, rounding numbers, €4,000,000,000 of debt. And therefore, the interest charges would be around €40,000,000 for first half. The difference you see there, of course, it's a basket of different negative and positive effects.
But overall, the number is reduced because of what I said before, the ForEx gains in some of our loans and some currencies sorry, interest very far.
Many thanks indeed. And if I could just one appeal, Rodolfo. If at some point, you could send us the specialty ingredients revenue and earnings breakdown for full year 2017, I think that would be extremely helpful for everybody as we go about modeling going forward. Presumably, you now have the full year historic split.
Okay. Let me follow-up Dirk on that point.
Thank you.
The next question from the phone comes from James Quigley from JPMorgan. Sir, you may now go ahead.
Hello. Thank you for taking my questions. So first, clinical development and commercial development sound like they're going very, very well. In the annual report, you said you had 2019 large molecules in development and 22 commercial products. How has that developed in the first half?
You started to transfer some products over to the Haywood site. Do you need to invest in more capacity in the short term to meet some of this strong demand? And then the second question on the margin guidance, and I'm trying to work out what level of conservatism you've baked in here, Pharma and Biotech, if it goes at the same rate as was suggested in the 1st quarter call. And we have the higher margin parts of the businesses are growing faster. So in the Pharma and Biotech business, the consumer business is growing very fast as well.
And the water business and some of the smaller or the lower margin businesses may have less of an impact in the second half. Why should we be expecting 26% and not some margin accretion in the second half?
Yes. First, on the clinical development business also in Hayward. And I think we are still, I think as we speak, we are permanently investing. I think we are investing in all existing sites like Slough, Tableau, Singapore, we are already doing this business. And I think stay tuned.
More will come going forward. Later to the Capital Market Day, some more explanation how we want what we are doing shortly even to meet even better with demand we see not only for 2018, but also going forward. I think all is running. Hayward is ramping up as expected. I think it's what's planned to be a real contributor by the end of the year.
I think we are on a very good path. Flow, our other major hub is we are permanently investing, which means also even resources because it's a very specialist intense business. And the other things in connection with Ibex, we will talk more. And it's the right time. So definitely, our outlook is that growth.
I think this is what we see at this moment in time. It's a realistic one. So taking all things into consideration, which we see, of course, it was an extreme strong growth. I think we still expect double digit for pharma biotech, but not at the same extreme pace. It always has a little bit to do with order patterns, where are they bridging over the line of half year, full year?
I think it's still positive, but since we take all things into consideration, which we see currently. We still have some cyclical and seasonal businesses where we have to see where they are going. I think currently, this is, I think, from our perspective, a quite realistic picture. And it's not a bad one, I think.
The next question from the phone comes from Paul Knapp from Janney Montgomery and Scott. Sir, please go ahead.
Good morning. Thank you for taking the question.
Was the Permian
or Houston facility, was it operational and contributing to revenue in the first half? And could you talk about the ramp up in the overall cell and gene therapy business globally? And then secondly, could you talk to the progress on water? I know that's being reviewed. Is this a 2018 event?
Or how long is the development time do you see on water?
Yes. The Houston facility, as I said before, it's really I think we're starting to roll in the first customer and its first project. I think it's starting. We have also said we are consolidating incentives. I think we have also already built out some parts of cell therapy in Portsmouth, Nijanje.
We have in the Netherlands a facility for gene therapy. I think we are setting more around those centers, our future setup to concentrate. Yes, it was growing, I think, and it's always meant to grow even from our biotech over proportionally, but just now to limit expectations, it's a small part. So it's not far not compatible with mammalian with the mammalian business, for example. So it's definitely I always was saying it has started some time ago.
We are making the right investments. It's still field where we expect a lot of movement going. It's growing nicely. But it's the addition which will take I make us even more successful much more after the mid term guidance. Although, yes, it will already contribute until then, there's no doubt.
But just to make sure, I see for sure that the major contributors in the total portfolio are much more coming from those parts of Biologics, which are more in our bigger assets. But there is no doubt the ramp up is going well, and we will definitely continue to try to make the right decisions going forward because I should be sure more technology needs to be provided and more investments need to follow to be finally on the winner side in the 2020s, but we are confident. And what I said in Water Care, it's a process which is started, which is, I think, in its phase. And I think I can really not say anything at this moment. It's not possible.
Thank you. Okay. Thank you.
The next question from the phone comes from the line of Mr. Marcos Gola from MainFirst. Please go ahead,
sir. Hi, and thanks for taking my question. So my first one would be on Pharma and Biotech. Could you shed some light what drove the strong organic growth and margin expansion in this segment? Despite the high comp and ramp up costs for the capacities, was this rather driven by the form of Capsugel activities and its integration?
Or is it really the Lonza legacy CMO business? My second question is on Consumer Health. Also here, very impressive margin and the growth profile year on year looks also very good. How sustainable is this? And do you see from here on still upside to the margin?
Or is this how high as you can get in this business unit? And finally, if I may, a follow-up question on the guidance. Yes, you achieved high single digit growth in H1, but a very tough comparison base. You mentioned further sales contribution from capacity ramp ups in Pharma and Biotech. Also, it seems that the cyclical business units are coming back.
And yes, the comps are becoming a bit less challenging. So I just wanted to make sure, is there anything what worries you or what could slow down in H2 with the exception of the limited visibility on the cyclicals? Thank you.
Yes. For our Biotech, I think if we just make a little bit the math and I think I don't have the exact numbers, but just what we said in previous calls and presentation we said, I think if you see that Capsugel goes maybe around more or less plusminus twothree in pharma biotech and onethree in consumer health. And if you see the total size of pharma biotech just mathematically, this cannot have been the major impact. And if you go back saying that we had around 30, 32 point 3 percentage points EBITDA margin, so 33. Now we have 32 in Capsugel, 33 in total.
I think you could say it was even quite dilutive. But the drivers definitely and it was good. Think it's not that casual. It was really good. But I think the maturity, of course, is a legacy Lancer business in
pharma, biopharma, biopharma, biopharma, biopharma, biopharma,
biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, biopharma, driven by all different technologies. And what I think I really can report is the biologics. The trajectory in the small molecules was again excellent in this first half. I'm very, very happy about it. And there's still, of course, in some areas, still some opportunities to come.
And that's why I think for me, it was a good thing. It was a broad performance. It was not a single part of this business, which made, I think, a special impact on all others in Mediocre. It was just good, I think. In this business, and it comes also a little bit to some questions about the second half and so on, I think definitely, we have not every quarter the same delivery.
So we have to be also a little bit realistic. I think it's just sometimes, I think, 1%, 2%, 3% can just be on a half year based on some order patterns. So, that's why it's still overall momentum will be strong in pharma biotech and we will also be stronger H2 versus H2. But I think we should not overshoot expectations because I think it's already good as it is and as of the forecast, I think, is, from my expectation, promising. Consumer Health, of course, maybe jump some high level messages because also here I can say, as I said in the Capital Markets Day, there is a chapter on it.
So, Sven Arben will give some depth in it and we will really talk about it. The good thing in consumer health, which is, I think, our business into the preventive healthcare, which is going into the fast moving consumer goods market, being it nutritional supplements, hygiene and personal care, especially the combination of us and also the sales synergies, which we expected are really coming and they have partly come. If the 28.5% margin the last words, I carefully say no, but more at the Capital Market Day. I think it's a little bit there's a lot of work to be done. I'll tell you, it was a tremendous job of the management team, the newly I think the new management team, which is Len Arben, our CEO, has put together.
It was, as I said, if you are not if you have if we recall a little bit what happened in the last 2 years, so we had an acquisition of Interhouse with some new active ingredients that are still in the rollout phase and now another integration of Capsugel. And I think there are a need if you ask, is a global rollout already done? By far, not. So we are still working. I think it's still very strong driven by the more mature markets because we need to set up ourselves together in this new business.
I think it's still, from my perspective, in a work in progress mode. And just as a starting line, it's really surprisingly good. And I'm not expecting that it's the end of the story. Because what we saw, just to give you some flavor, and I think it was in one of the charts, you saw a boost of a fare. And I think there were some nutrition fares that we are talking mainly in original supplements here, where this combined offer was an unbelievable attractive boost in the overall fare.
I think it was like a magnetic effect to customers, and we had a high number of leads after those different fares, especially in Europe and North America. But having said that, I see that. I just have been a few weeks ago in Asia. I don't see any different tendency there. I'm sure what this was a little bit my vision when I came to Lonza, we want to bring pharma technologies in the consumer market.
And the good thing was that Hido's recently shared this vision and now we make it happen. I'm extremely positive about it.
The next question from the phone comes from Laura Lopez from Baader Bank. Please go ahead, madam.
Good afternoon. Thanks for taking my questions. So first, looking at the pro form a numbers, I get to an EBITDA margin of 28.6% for CaptuGo in the first half of twenty seventeen. Can you remind us, I remember that you previously also mentioned that it was a little weaker, but what was the reason for this margin decrease? And is there any risks for margins to go again to that level compared to the 32% that you reported in the second half last year?
And our second question would be, so earlier this month, Novartis reported some challenges in the commercial manufacturing of its new CAR T product. Is this a problem of the new technology in general that could also be a risk or limit the growth potential? Or is this a Novartis specific issue? Could this also become like a risk for the technology in general and maybe to the significant investments in research and in capabilities that you have also done over the last years? And maybe lastly, in 2010, our chemicals Water business had sales of around CHF 600,000,000.
But now you reported around CHF300,000,000, CHF 300,000,000. Has the top line declined so strongly over the last 7 years? Or is this or are these two values not really comparable because you split the business differently among Lonza?
Rodolfo will talk later about the numbers in the Capsugel side. Let's first maybe comment about manufacturing and gene therapy or CAR Ts. I think we all need to be aware this is an extremely new field. And a lot of manufacturing technologies are under development and as we speak, we ourselves have developed some, I think, maybe quite unique manufacturing technologies for this emerging because we want to be an instrumental part, especially as manufacturing expert, in making those processes very good and affordable in future. And of course, I think there is no doubt that at this moment in time, with the positive effect on the one side a clinical in the clinic and potential future demand if there is a much higher need.
This I see still as a challenge in the industry. It's not a Novartis issue, I think. It's an industry issue. And be assured, we want to be Lonza wants to be a part of the solution going forward. Actually, I do not see this as a general thing, but with new technologies, and I compare this to the biologics stability of the biologics process going back 15, 20 years, I think if I compare the stability and reliability of the 2 day biologics 20 years ago, it was not so much different.
I think the new technology needs literally new technology in terms of resolving those problems. And I don't go in detail, but we are also working to be one of them who is going to resolve that. The Board Take Care business to be open, I think if you go back start to a long time, it was a little bit the Arch acquisition aftermath. I cannot guarantee you 100% this is like for like. I think I don't have the numbers beside me.
We are more stable since, can say, 2014, if I may say so. I think this is I cannot really recall and I cannot confirm nor can I not confirm that this is totally in line with what has been in this? It was always and I say it was always a seasonal business. And even in the time when we can look at butter over the years, the seasonal impact is that it is a significant one. And we are working.
We have worked successfully to mitigate this. And we are now positive going forward. That is a number of innovations and measures. The team has now achieved the status where, I believe, at the onboard journey from now on looks promising. This is what I can say.
And Rodolfo, maybe
Yes. So Laura, on the Capsugel, let's say, slight margins for first half twenty seventeen, the number that our calculation is higher than the number you quoted. It's slightly below 32. So yes, that's correct. And this, as we have communicated several times, it has to do more with a slow start in terms of sales for that particular year.
What I can confirm right now is, well, first of all, you saw the numbers for second half twenty seventeen with 32% margin. And based on the numbers you have seen today, what I can confirm is we are exceeding the business plan we have forecasted. We don't report anymore the margin separately. To an extent, it's difficult because we're integrating the organizations, and so that blurs a little bit the, let's say, the EBITDA margin as such, but we can look very distinctly at the gross margin, at the sales evolution. And in both of these parameters, they are definitely ahead of business plan.
And the other thing I can say, the synergies are progressing well. We are starting to see first synergies. And to that extent, also that has an impact. Small at this stage, but it has an impact on EBITDA margin from an overhead economic state contractor.
Perfect. Thanks a lot.
Welcome.
The next question from the phone comes from Patrick Rafais from UBS. Please go ahead, sir.
Thank you and good afternoon. Three questions from me as well, please. The first one, a follow-up on the previous question on Capsugel. You were talking very positively about this business in terms of performance and synergistic potential. Before Capsugel entirely disappears in the consolidation and in the ledgers with the other segments, Can
you quantify
where you think you're heading in terms of cost synergies and top line synergies versus the previously communicated numbers? And then secondly, you've introduced the ROIC target. Have you also broken that down on the segment level or divisional level? And have you given your business had their numeric targets? And can you talk about those in more detail, if so?
And then lastly, a short one on your corporate line and your corporate costs, minus 31 percent in H1. You think that's a good run rate for H2 as well? Or were there some unusual items you need to
be aware of? Thank you. Yes. Maybe I'll get to RIC and last question, then later to Rodolfo. On the synergies, I think as mentioned, it will be by Rodolfo before.
What I can say, I think the synergies on the top line, I think it's like in all specialty businesses as I've been in my career and this is not very different. If you when you introduce new concepts or synergistic concepts in the market, you will see already things in first one, but the real ramp up, you can expect in average in year 2 to 3. This is a very normal in these markets when we go in with innovation. Could be seen how this is going to happen in pharma bioethics, but it can be the same because a big part of the business or the synergistic ones is also not only commercial, it's also clinical. So it should be seen by this.
We are, I think, our path on top line synergies is good. I would say it's a touch better than what we expected. And I think Rodolfo maybe can confirm, but what I see is on the so called defensive ones, which are not the main driver. We know in this business, they are on track as we speak. So this for Capsugel and maybe then on ROIC, as you see, just one comment before Rodolfo takes over.
The ROIC, the ROIC is now incentive relevant for the long term incentive for Lonza. This is what we have now changed in 2018. And now more from Rodolfo.
Thank you. So Patrick, so going just confirming what Richard said a moment ago in terms of the defensive synergies, we're fully on track. Also on the upfront costs, what we said this would be the integration costs. Of course, the bond controls are related to SAP integration, which will take a few years, but
we can also be
on track. On the ROIC, for the time being, it remains a group metric
that we have published now and
Richard has communicated the midterm guidance.
So we will not wait again
for the time being at the segment level. And then to your question on the incentivization of the segments, mainly on the underlying building blocks of ROIC, of course, are the key performance targets for the different placements and divisions. And therefore, we make sure that the targets that we deploy to different units definitely add up to our growth target. This is how we are managing this specific financial metric. Then on your last question, in general, yes, we expect corporate numbers to be similar to first half.
There's a couple of strategic projects going on, which, of course, have, I would say, not a material impact, but could have an impact in some of these numbers. I would say, for modeling purposes or projection purposes, the way I think about it is first half would be similar to second half. We could expect some additional charges in the second half due to strategic projects that will impact more the later part of the year. And without
the strategic projects, who would
you say is an underlying corporate line going forward, let's say, as of 2020 or so? Well, look, in principle, I would take the baseline that we have today and project it upon further. And we, of course, continuously run productivity and efficiency initiatives at a group level, but the corporate centers in a way are relatively small part of our overall cost structure. So for practical purposes, I would assume these costs to remain constant, while inflationary increases are offset by efficiencies in across the function.
The next question from the phone comes from Peter Welford from Jefferies.
Hi. Yes, thanks for taking
my last few questions. Firstly, just on the finances. I wonder if you could just outline CapEx looks a little bit light in the first half perhaps relative to what you've outlined for the full year. Should we anticipate that to ramp up and what sort of the factors are affecting the phasing there? Secondly, can you just confirm that with regards to the Biologics business, there were no sort of phasing there of shipments.
I know this business sometimes can have that. And so should we anticipate the first half as a good sort of reasonable rate over any of the perhaps shipments that may have been expected in the second half fall into the first half the year in the Biologics business. Just on the water business then, if we anticipate that business to bounce back in the second half, coming back to Matthew's point on not having the full year margin, should we anticipate that should have a positive impact on the EBITDA for the water division in the second half of the year? Or is this business relatively static, if you like, to some extent with that much operating leverage? I guess I'm just trying to understand what that could mean for the implied margin then of the rest of the group in the second half of the year.
And then just finally on Singapore, the single use bioreactors there. Can you give us some sort of indication at all as to the scale of that sort of facility or whatever you want to call it in Singapore for subs? And how we should be thinking about in the context of the overall Singapore facility? Thank you.
Yes. Let me start from the end. Single use bio reactor, we have said that we think it's currently a 2x2. If it need a line with downstream, it can be expanded, I think at short notice if needed. It's our 1st Phase III commercial unit of this kind.
I think all what I hear is we are fully on track. I think we have the first projects in the plant. It was quite fast, right, because we could use the overall Singapore infrastructure. So it was a very efficient, very relatively low CapEx, very fast project. And I think it comes right at the time.
I think the demand is good. The first real batches commercial come out in this quarter of the year. I think we are already in Q3, if I'm not mistaken. So it should come out now. And this is where maybe it was the fastest thing we could do.
And the overall Singapore performance is just going to be better with this new investment. I think it's I think I'm quite happy. I think it gives us also a lot of experience in these technologies talking about IBEX and so forth. So this will be much easier to run Upland. I think it's the benefits of the network and Singapore being one of these benefits.
Yes, border EBITDA, border is seasonal. I think, obviously, we cannot say everything is the same quarter, it's the same, the major quarters of the quarter 2 and the quarter 3 in this business. I think it's definitely in the as I said, we had a good I think we have good agreements, which give us from now on into 2019 2018 into 2019 a very positive outlook. And my assumption is in total, going forward, it will be better than it has been in the recent years. So it's like I said, what is coming now is really good.
But also takes over in a minute. The Biologics, if I get your questions right, I think it's not there is nothing of significance. But it's just I think it's just to see how it really turns out. Well, it's difficult to predict what's going to happen in December right now, but it's not of any significance. I think we still are in all the guidance we see.
And here, we take also into consideration that some batches could go over the time limit of the end of the year or have been a little bit earlier in the first half. So it's not a thing which is it's not normal operations. It's nothing out of the normal line. CapEx ramping up, Rodolfo will come to that. Yes, it's going a little bit stronger in the second half, but it's just the question how the projects are progressing.
And sometimes you get more things in some quarters and less things in other quarters. And I think the first half year was not extremely high. We will definitely see a little bit more in the second half of the year. But also, if you add a few things.
People. So on the CapEx,
we continue with our guidance of roughly between 8% and 9% for the overall year. So if you compare to the first half numbers, that definitely means a ramp up, as Richard mentioned. And so that's coming in the second half. And then on the question of water, yes, we expect the business acceleration in the second half, as mentioned, and therefore, some margin improvement relative to the first half. But when you look at the overall portfolio, I confirmed what Richard said before, we expect the overall corporate or company margin to remain as we have guided, second half in line with first half.
Again, we have a lot of moving pieces in the overall portfolio. And so the impact that this margin improvement of water would have on the group.
I guess, could you just help us perhaps give us adjusting for seasonality in sort of these general things? I mean, what should we sort of be thinking about for an annualized EBITDA margin typically for the Water division? Because it's very hard for a certain division given the seasonality and given what we've seen in first half to really be able to think about that division at the moment given the given just a 6 month trend?
This one, even for us, sometimes it's difficult to forecast. Given the seasonality, you never know if the summer extends much further. And so at this stage, we would like to start speculating on the, let's say, the forecast for this particular business. So at this point in time, I would say we cannot give any further guidance.
The next question from the phone comes from Justin Bowe from Bloomberg Intelligence. Please go ahead.
Hi, good afternoon and thank you for the questions. I have 3. One is just around capacity and the question kind of emanates from some of the work I've been doing from or hearing from the biotech community and just saying that lead times to secure capacity have been increasing pretty significantly over the last 12 months. And when we look at your business, I guess the question would be, hypothetically, if customers came to you and there were a lot of projects available, would you be able to do you have the capacity you need or can you bring it online to sustain the type of growth rate that you had in the first half, let's say, for the next 1 to 2 years? And then secondarily, just on it sounds like there's some there is some improvement in Specialty Ingredients in your end markets.
And you talked about an improving kind of second half outlook and trickling into 2019. So is it fair to interpret that is a modest acceleration in organic growth? And then lastly, just a follow-up to your prepared remarks around Capsugel synergies, tracking above expectations. Could you just characterize that a little bit? Is that top line, bottom line and mix of both?
And that's it?
If you start with the Capsugel, I think in the plan going forward and also what we also published in the phase of Capsugel acquisition of the different businesses, how they trade. For example, one is more than low to mid single digit, which are the pharma capsules and so on. And the both forms are a little bit and the formulations are growing faster and also consumer has been growing faster. If you see what we have had as assumptions with the acquisition and we put then the assumptions also in our targets, I think we have been slightly better on the top line. And I think the margin fully met our expectations.
I think this is how it is. The margins were according to expectations, and the top line was slightly ahead of what we have modeled. And not only modeled, also put in our internal target line. And this is what we expressed in the communication. So the internal target line was in line with the expectations, which we published with the acquisitions.
And now it was I was slightly positive surprised, which I think is good because it's a confirmation, but I think we had good first year of integration. Otherwise, you don't get those things. I know in many acquisitions of this kind, this is one of the biggest problem, and we don't see at this moment the problem. In Special Ingredients, one thing is Chris, we have now a free budget. I think we've discussed the water already.
If you go to consumer health, I think plusminus, it should be very similar. So it's still on the same trajectory. And also consumer and resources protection might have a better and slightly better performance going forward in the second half. Coming to the capacities in Pharma and Biotech. As I said before, I think it was a combination of many things.
It's not only biologics, it wasn't biologics leading. And we think It's just a combination of many different things and many different businesses, I think. It is biologics, commercial, clinical. We are ramping up capacities. At the same time, we try to debottleneck existing ones.
So it's a number of activities. And we will give a little bit more granularity how we see this going forward because it would be now take quite a long time. It's a full presentation to give more flavor around what is the growth trajectory and why this is really served for the Capital Market Day in September because you cannot say it is just 5 minutes how this is going to happen, what are the different moving targets in the overall portfolio. And we need to be to present this a little bit more in detail with the Chief Operating Officer of this segment, Marc Funk, and then we will see how this plays out in the Capital Markets Day. Overall, what I can say, yes, we are absolutely positive with this part of our business.
And we have provided with the investments we had in the presentation. We are providing to make sure that we can on time, on short notice more and more fulfill the different demands. And now I close it with saying, as we have partly communicated before, this is not it's more to be flexible and it's not just the pure existing capacity, which becomes it's a combination. It's also to put the right capacity in place for the products which are in demand. It's not just the black and white, which is not some capacity.
It's always this is what we have learned over the last 6 years. It's the right capacity. And this is what all our investments will underline. So it was already much longer than I wanted, but more I can just ask you to be a guest at our capital markets today.
Okay. Thank you very much.
The next question comes from Daniel Ileskhan from Mirabeau. Please go ahead.
Yes. Just one question left from my side. If you can shed some more light on the raw material situation. You mentioned in the press release that you had some price hikes and I guess you have some delays as always to pass it on to customers. Was that primarily, I guess, in the Specialty Ingredients segment?
And also on the gross margin, it was actually up quite recently, but I think it's not really comparable. I think you don't have provided a pro form a gross margin, including cash sales? Or if you could provide that, that would be great. Thanks.
Yes. Your assumption is right. Maybe I'll take the raw material. First. It was on the number of raw materials in the Specialty Ingredients and going almost to all the different businesses in Specialty Ingredients.
They all had some typical hydrogen peroxide, some carbonates, copper, fatty alcohols, propane butane. It's across the board. And yes, the assumption is also right, but it has definitely led to some delay in price adjustment in the market. And this was, I would say, not it was exclusively a specialty ingredients issue in parts of special ingredients. In consumer health and nutrition, parts not so much in consumer broader ingredients, a little bit more.
Even consumer health had some impact, but minor one, but very strongly in all more industrial composites, alcohol and so on. Here, we had really an impact mainly in the Q1. We saw already in the Q2 an improvement. But of course, if you have this gap in the Q1, you cannot overcompensate it in 1 quarter. And you still need to stay tuned to what is going on with the cost side.
And this is one of the reasons why we are not giving anything to say this is already further things. The market, in fact, is permanently moving. Need to respond. But yes, it was a special ingredient. And the other question, Francois, can you
On the gross margin, so we Daniel, we have provided selected pro form a information that we have in the leporello. Of course, there's no as such, no pro form a gross margin. I think for the time being, we don't plan to provide every single line on a pro form a basis. So what you can assume is that, of course, the gross margin, in general, does have a sizable impact or changes in the gross margin in the EBITDA, as you can imagine. But at this stage, I don't because, of course, our overhead evolution is much more stable.
But at this time, I wouldn't we wouldn't provide the detail on gross margin for the group or for the segment. I mean, for the group, it's there, but it's not on the line of pro form a.
Okay. Fair enough.
So if there are no further questions, ladies and gentlemen, thank you very much for joining our conference call on the half year results twenty eighteen. As usual, it was a pleasure to discuss with you. Of course, to be again reminded, I hope I can welcome many of you at our Capital Markets Day at 24th to 26th September at Switzerland and looking forward to see many of you then. Have a good day. Thank you very much.