Ladies and gentlemen, good morning or good afternoon. Welcome to the Lonza Half Year 2018 conference call and live webcast. I'm Iruna, the call operator. I would like to remind you that all participants will be listening on remote, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Richard Ridinger, CEO of Lonza. Please go ahead, sir.
Ladies and gentlemen, good morning and good afternoon. Thank you all for joining our conference call on Lonza's half-year results for 2018. Joining me in the room are Rodolfo Savitzky, 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 in today's news release, we have had a strong first half of the year, especially for our businesses along the healthcare continuum. Pharma & Biotech and Consumer Health achieved combined 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 three. The number that jumps off the slide here is the 270 basis points margin increase in Pharma & Biotech. Just to clarify here, the figures we are mentioning, unless specifically stated otherwise, are like-for-like pro forma numbers that include Capsugel and therefore show our organic growth. Legacy Capsugel was a strong complete contributor 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 and Consumer Health businesses, which also includes some Capsugel businesses, had an outstanding organic 380 basis point improvement in core EBITDA margin with about 8% organic sales growth.
Although we had a strong momentum in some specialty parts of our Consumer & Resources Protection division, the more mature cyclical parts of the business faced some headwinds in the first half. We are addressing these issues and seeking solutions to balance our portfolio even better going forward now. In May and June, our Water Care business recovered well from a weak start to the year. With this good momentum, we have a positive outlook for the second half 2018 right into 2019. The next slide mentions the fact that our major investments are progressing as expected. Let me remind you what we said at the Q1 qualitative business update, 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 midterm guidance 2022 target of double-digit return on invested capital, as well as upgrading our full year 2018 sales outlook. Further historical 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 of 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 five for further insights into our strong financial performance during the first six months of this year. Here, we are presenting our pro forma results. That means our reported Lonza half-year 2017 financial results, including Capsugel half-year 2017 financial numbers. This same explanation applies to the terms pro forma, 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 billion in sales and CHF 800 million in core EBITDA.
As Richard already mentioned, growth drivers have been our businesses along the healthcare continuum. Pharma & Biotech and Consumer Health combined had a 13% pro forma sales growth and a 300 basis point pro forma core EBITDA margin improvement. We're clearly delivering on our strategy to grow substantially along the healthcare continuum. Capsugel contributed to this organic growth in the businesses where it was integrated, specifically in Pharma & Biotech and in Consumer Health within Specialty Ingredients. You will see more about the new reporting structure for Specialty Ingredients later in this presentation. 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 ROIC, 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 NOPAT, and divides it by the year-to-date average invested capital. The new ROIC KPI complements our existing measure of return on net operating assets or core RNOA. Richard will later discuss a ROIC target for 2022. From the financial side, it's a positive story for the overall company, which for one year now has included the Capsugel businesses. With that, I hand back over to Richard.
Thanks, Rodolfo. Speaking of Capsugel, before we look at the highlights of our first successful year together, I want to recognize the valuable contributions made by Guido Driesen, Capsugel's former CEO, during the integration of Capsugel. Guido 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. His 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 2018.
Integration of enabling and support functions like finance, IT, and procurement have also produced synergies to add to our first-year success. Overall, the Capsugel 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 & Biotech and from ingredient to consumer in Specialty Ingredients. Capsugel was a great contributor and added to the strong Pharma & Biotech performance, as you can see on slide eight. I won't cover all the numbers in detail, but certainly noteworthy are the 14.7% 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 & 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, mammalian, 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 have 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 where we are leading the market. We have most recently announced the mid-scale biologics manufacturing expansion in our Portsmouth site. Our Singapore single-use bioreactor facility is coming into operation, and I think has made great progress on that path in the first half.
We are already transferring customers into our Pearland cell and gene therapy facility. Furthermore, we continue to invest in automation, in manufacturing and innovation, in process development across all Pharma & 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 businesses as promised. As you'll see on the next slide, our new reporting structure for Specialty Ingredients consists of two 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 Water Care numbers and put them into perspective. We had a weak first four months due to the weather, we are encouraged by the performance in May and June, and by the positive outlook.
More about Water Care later. Moving up the row, our Consumer & 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. 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 improvements are also an effect of performance increases in legacy Lonza's Consumer Health portfolio and in the legacy Capsugel one. Capsugel became a part of Consumer Health or part of Capsugel, that's why we see the pro forma numbers here only for this part of Specialty Ingredients.
You can see more details about Consumer Health now on slide 15 and 16. Despite the additional challenge of integrating different organizations into one 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. 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. The industry is taking note with customer demand increasing. We are continuing to see synergy opportunities from combining nutritional 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, 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 a cyclical high. 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, 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 reviews and optimizations.
More insights will be provided during the Capital Markets Day in September. On slide 18, the Water Care story is one of acceleration. Even worse than usual weather delayed the start of the pool season in key markets such as North America. As I mentioned before, May and June were much improved and the momentum continues to build going forward. We are boosted by sales initiatives and expected new business, 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 investment 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 in the process, I will also later in the Q&A provide much more information about it. Slide 20 outlines our specific commitments for 2018. You have no doubt noticed our positive tone for the rest of 2018 and the midterm up to 2022. That 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 midterm 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 2018. 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 RNOA 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 midterm guidance 2022. We'll also talk about our ongoing portfolio and business composition review 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, I think you agree it's a positive one. I'm sure you may have many questions, that's why we are all here to answer them. Who would like to begin now?
We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question from the phone comes from Matthew Weston from Credit Suisse. Please go ahead, sir.
Thank you for taking my questions. Three, if I can please. Richard, as I recall from the first quarter 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? I guess that includes any planned maintenance within Specialty Ingredients. You've clearly reiterated the 2022 guidance. Based on your current trajectory, the revenue target appears easily achievable, even with a meaningful slowdown in sales growth.
Clearly, I'm not expecting you to revisit 2022 now, can you at least assure us that there's no reason that you see in the future that we should see any meaningful change in the growth trajectory of the company? 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 one-time items in there that mean that that's not a sustainable number? Should we simply multiply it by two to get to an estimate of full year 2018 financing?
Let me start 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. 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. Yes, I think on the 2022, I think with the current momentum we see in the core businesses, I think we are extremely confident that we are on the right trajectory to meet this.
I think the confidence level by every half year has gone up, and now for me, what makes me extremely confident that although the Capsugel integration after 12 months on the business and operational side has worked so well so far that I think this, I would say at least potential concern is off my mind. This is really going quite well. That I can just say we are confident. Now I hand over to Rodolfo.
Matt, on the financial charges, you're right. Indeed, this includes some foreign gains and gains from some currency swaps. In terms of thinking about interest charges, we have communicated our interest rates overall, the basket of interest rate that we pay is around 2% on, roughly again, rounding numbers, CHF 4 billion of debt. Therefore, the interest charges would be around CHF 40 million 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 currency exchanges as well.
Many thanks, indeed. 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 with Dirk on that point.
Thank you.
The next question from the phone comes from James Quigley from J.P. Morgan. Sir, you may now go ahead.
Hello, thank you for taking my questions. First, clinical development and commercial development sound like they're going very well. In the annual report, you said you had 2,019 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 Hayward site. Do you need to invest in more capacity in the short term to meet some of this strong demand? The second question on the margin guidance, I'm trying to work out what level of conservatism you've baked in here. Pharma & Biotech, if it grows at the same rate as was suggested on the first quarter call, we have the higher margin parts of the businesses are growing faster. In the Pharma & Biotech business, the consumer business is growing very fast as well.
The Water Care 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? Thank you.
Yeah, first, on the clinical development business in Hayward. I think we are still, as we speak, we are permanently investing. I think we are investing in all existing sites like Slough, Hayward, Singapore. We are already doing this business, I think stay tuned. More will come going forward later through the Capital Markets Day, some more explanation how we want what we are doing shortly even to meet even better the 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 was planned to be a real contributor by the end of the year. I think we are on a very good path. Slough, our other major hub is we are permanently investing, which means also human resources because it's a very specialist-intense business.
The other things in connection with Ibex, we will talk more when it's the right time. Definitely. Our outlook is, of course, I think this is what we see at this moment in time. It's a realistic one. Taking all things into consideration, which we see. Of course, it was an extremely strong growth. I think we still expect double digits for Pharma & Biotech, but not at the same extreme pace. It always has a little bit to do with order patterns. Are they bridging over the line of half year, full year? I think it's still positive, but I think we take all things into consideration, which we see currently. We still have some cyclical and seasonal businesses where we have to see where we are going. I think currently this is, I think from our perspective, a quite realistic picture.
It's not a bad one, I think.
The next question from the phone comes from Paul Knight from Janny Montgomery Scott. Sir, please go ahead.
Good morning. Thank you for taking the question. Was the Pearland or Houston facility operational and contributing to revenue in the first half? Could you talk about the ramp up in the overall cell and gene therapy business globally? Secondly, could you talk to the progress on water? I know that's being reviewed. Is this a 2018 event or how long of a development time do you see on water?
The Houston facility, as I said before, I think we're starting to roll in the first customer and the first project. I think it's starting. We have also said we are consolidating in centers. I think we have also already built out some parts of cell therapy in Portsmouth, New Hampshire. We have in the Netherlands a facility for gene therapy. I think we are setting more and more around those centers our future setup to concentrate. Yes, it was growing, I think, and it's always meant to grow even in Pharma & Biotech over proportionally, but just now to limit expectations, it's a small part. It's by far not comparable with the mammalian business, for example. It's definitely, I always was saying it had started some time ago. We are, I think, making the right investments.
It's still a field where we expect a lot of movement going. It's growing nicely. It's the addition which will make us even more successful much more after the midterm guidance. Although, yes, it will already contribute until then, there's no doubt. 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. There's no doubt the ramp-up is going well, and we will definitely continue to try to make the right decisions going forward because I'm absolutely sure more technology needs to be provided and more investments need to follow to be finally on the winner side in the 2020s. We are confident.
What I said on water here, 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. Markus Gola from MainFirst. Please go ahead, sir.
Hi. Thanks for taking my question. My first one would be on Pharma & Biotech. Could you shed some light what drove the strong organic growth and margin expansion this segment, despite the high comp and ramp-up costs for the capacities? Was this rather driven by the former 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-over-year looks also very good. How sustainable is this? Do you see from here on still upside to the margin or is this how high as you can get in this business unit? Finally, if I may, a follow-up question on the guidance. You achieved high single-digit growth in H1, despite a very tough comparison base.
You mentioned further sales contribution from capacity ramp-ups in Pharma & Biotech. It also seems that the cyclical business units are coming back and the comps are becoming a bit less challenging. 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.
Yeah. Pharma & 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 presentations that I think if you see that Capsugel growth may be around more or less plus minus two-thirds in Pharma & Biotech and one-third in Consumer Health. If you see the total size of Pharma & Biotech, just mathematically, this cannot have been the major impact. If you go back saying that we had around 30, 32 percentage points EBITDA margin, so 33 now we have 32 in Capsugel, 33 in total. I think we could say it was even quite dilutive. The drivers definitely, and it was good. I think it's not that Capsugel was really good.
I think the maturity, of course, is a legacy Lonza business in Pharma & Biotech, driven by all different technologies. What I think I really can report, it's the biologics, the trajectory in the small molecules was again excellent in this first half. I'm very, very happy about it. There's still, of course, in some areas, still some opportunities to come. That's why I think for me, the good thing is it was a broad performance. It was not a single part of this business which made, I think, a special impact on all others than 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. 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. That's why still, the overall momentum will be strong in Pharma & Biotech, and we will also be strong H2 versus H2. I think we should not overshoot expectations because I think it's already good as it is. Also the forecast, I think it's, from my expectation, promising. Consumer Health, of course, maybe some high level messages, because also here I can say, as I said in the Capital Markets Day, there is a chapter on it. Sven Abend will give some depth in it, and we will a little bit 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 offers and also the sales synergies which we expected, they're really coming, and they have partly come. Is the 28.5% margin the last word? I carefully say no, but more at the Capital Markets Day. I think there's a lot of work to be done. I tell you it was a tremendous job of the management team, the new management team, which Sven Abend, our COO, has put together. As I said, if we recall a little bit what happened in the last two years, we had an acquisition of InterHealth Nutraceuticals with some new active ingredients that are still in the rollout phase and now another integration of Capsugel.
I think they are. If you ask, is the global rollout already done? By far not. We are still working. I think it's still very strong, driven by more the mature markets, because we need to set up ourselves together in this new business. I think it's still, from my perspective, a work in progress mode. Just as a starting line, it's really surprisingly good. I'm not expecting that it's the end of the story. 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 fair. I think there were in some nutrition fairs, and we are talking mainly nutritional supplements here, where this combined offer was an unbelievably attractive booth in the overall fair.
I think it was like a magnetic effect to customers, and we had a high number of leads after those different fairs, especially in Europe and North America. 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 was a little bit my vision when I came to Lonza, we want to bring pharma technologies in the consumer market. The good thing was that Peter Geuens shared this vision, and now we make it happen. I'm extremely positive about it. Second part.
Thank you.
You're welcome.
The next question from the phone comes from Laura Lopez from Berenberg Bank. Please go ahead, madam.
Good afternoon. Thanks for taking my question. First, looking at the pro forma numbers, I get to an EBITDA margin of 28.6% for Capsugel in the first half of 2017. 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? A second question would be, 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? Lastly, in 2010, Arch Chemicals Water Care business had sales of around $600 million. Now you reported around CHF 300 million. Has the top line declined so strongly over the last seven years, 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 make a 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. As we speak, we are ourselves Has developed some, I think, maybe quite unique manufacturing technologies for this technology, because we want to be an instrumental part, especially as manufacturing expert, in making those processes stable and affordable in future. Of course, I think there is no doubt that at this moment in time, with the positive effects on the one side 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.
Be reassured, 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, I compare this to the stability of the biologics process going back 15, 20 years. I think, if I compare the stability and reliability of the two-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. I do not go in detail, but we are also working to be one of them who is going to resolve that. The Water Care business, to be open, I think if you go back such 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 do not 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, I cannot confirm, nor can I not confirm that this is totally in line with what has been in this. It was always, I say it was always the seasonal business, even in the time when we can look better over the years. The seasonal impact is a really significant one. We are working, we have worked successfully to mitigate this, and we are now positive going forward that with a number of innovations and measures the team has now achieved a status where, as I said, the onward journey from now on looks promising. This is what I can say. Rodolfo, maybe-
Yes. Laura, on the Capsugel, let's say implied margins for first half 2017. The number that our calculation is higher than the number you quoted is slightly below 32. Yes, that's correct. 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 our numbers for second half 2017 with 32% margin. Based on the numbers you have seen today, what I can confirm is we are exceeding the business plan we have for Capsugel. We do not report anymore the margin separately.
To an extent it is difficult because we are integrating the organizations, 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. In both of these parameters, they are definitely ahead of business plan. The other thing I can say, the synergies are progressing well. We are starting to see first synergies, to that extent, also that has an impact, small at this stage, but it has an impact on EBITDA margin from an overhead economic sales point of view.
Perfect. Thanks a lot.
You're welcome.
The next question from the phone comes from Patrick Rafaisz from UBS. Please go ahead, sir.
Thank you. 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 the 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? Secondly, you've introduced the ROIC target. Have you also broken that down on the segment level or divisional level? Have you given your business heads their numeric targets, and can you talk about those in more detail, if so? Lastly, a short one on your corporate line and your corporate costs, minus CHF 31 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.
Yeah, maybe I give the ROIC and the last question then later to Rodolfo. On the synergies, I think as mentioned, alluded by Rodolfo before, what I can say, I think the synergies on the top line, I think it's like in all specialty businesses I have ever been in my career, and this is not very different. If you or 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 two to three. This is very normal in these markets when you go in with innovations. To be seen how this is going to happen in Pharma & Biotech, but it can be the same because a big part of the business of the synergistic ones is also not only commercial, it's also clinical.
It should be seen like this. Yeah, I think our pass on top-line synergies is good. I would even say a touch better than what we expected. I think Rodolfo maybe can confirm, but all what I see is on the so-called defensive ones, which are not the main driver, as we know in this business, they are on track as we speak. This for Capsugel and maybe then on ROIC, I think Just one comment before Rodolfo takes over. The ROIC is now incentive relevant for the long-term incentives for Lonza. This is what we have now changed in 2018. Now more from Rodolfo.
Thank you. Patrick, just confirming what Richard said a moment ago in terms of the defensive synergies were fully on track. Also on the upfront costs, what we said this would be the integration costs. Of course, the bulk of those are related to SAP integration, which will take a few years, but we can also confirm we are fully on track. On the ROIC, for the time being, it remains a group metric. We have published now and Richard has communicated the mid-term guidance. We will not break it again for the time being at the segment level. Then to your question on the incentivation of the segments, many of the underlying building blocks of ROIC, of course, are the key performance targets for the different segments and divisions.
Therefore, we make sure that the target that we deploy to different units definitely add up to our ROIC target. This is how we are managing this specific financial metric. On your last question, in general, yes, we expect corporate numbers to be similar to first half. There is 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 would 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 parts of the year.
Without the strategic projects, what 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 going further. We, of course, continuously run productivity and efficiency initiatives at the group level, but the corporate centers, in a way, are a relatively small part of our overall cost structure. For practical purposes, I would assume these costs to remain constant.
Okay
while inflationary increases are offset by efficiencies across the functions.
Okay. Thank you.
The next question from the phone comes from Peter Welford from Jefferies. Please go ahead, sir.
Hi. Yeah, 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 factors are affecting the phasing there? Secondly, can you just confirm that with regards to the biologics business, there were no sort of phasings there of shipments? I know this business sometimes can have that. Should we anticipate the first half as a good sort of reasonable rate, or were any of the perhaps shipments that may have been expected in the second half fall into the first half of 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 it 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, or something without 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. 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 of that in the context of the overall Singapore facility? Thank you.
Yeah, let me start from the end. Single-use bioreactor, we have said already it's currently a two times two. We need a line with the downstream. It can be expanded, I think, at short notice if needed. It's our third 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 project in the plant. It was quite fast because we could use the overall Singapore infrastructure. 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 third quarter, if I'm not mistaken, so it should come out now.
This is where maybe it was the fastest thing we could do. The overall Singapore performance is just going to be better with this new investment. 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. This will be much easier to run up then. I think it's the benefits of the network and Singapore being one of these benefits. Yeah, Water EBITDA. Water is seasonal. I think always you cannot say everything is the same quarter. It's the same. The major quarters are the quarter two and the quarter three in this business. As I said, I think we have good agreements which give us from now on into 2019, 2018 into 2019, a very positive outlook.
My assumption is in total, going forward, it will be better than it has been in the recent years. What I said, what is coming now is really good. Rodolfo takes over in a minute. The biologics, if I get your questions right, I think there is nothing of significance. I think it's just to see how it really turns out. It's always difficult to predict what's going to happen in November right now, it's not of any significance. I think we still are in all the guidance we see. 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. It's not a thing. It's normal operations. It's nothing out of the normal line.
CapEx ramping up, Rodolfo will come to that. It's going a little bit stronger in the second half, 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. 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. Rodolfo, if you add a few things.
Just a couple of comments. Peter, on the CapEx, we continue with our guidance of roughly between 8% and 9% for the overall year. If you compare to the first half numbers, that definitely means a ramp-up, as Richard mentioned. That's coming in the second half. Then on the question of Water, we expect the business acceleration in the second half, as mentioned, and therefore some margin improvement relative to the first half. When you look at the overall portfolio, I confirm 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. We have a lot of moving pieces in the overall portfolio, 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 and sort of these general things, what should we sort of be thinking about for an annualized EBITDA margin typically for the Water division? Because this is very hard for us, that 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 just the six-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. At this stage, we wouldn't like to start speculating on the forecast for this particular business. At this point in time, I would say we cannot give any further guidance.
Okay. Thank you.
The next question from the phone comes from Justin Bo from Bloomberg Intelligence. Please go ahead.
Hi, good afternoon, and thank you for the questions. I have three. 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. 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, 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 one to two years?
Secondarily, it sounds like 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. Is it fair to interpret that as a modest acceleration in organic growth? 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, a mix of both?
I think 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 the low-transmitting rigid, which are the pharma capsules and so on, and the dosage forms are a little bit, and the formulations are a little bit growing faster, and also Consumer Health is 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 because the margin fully met our expectations, I think this is how it is. The margins were according to expectation, and the top line was slightly ahead of what we have modeled.
Not only modeled, also put in our internal target line. This is what we expressed in the communication. The internal target line was in line with the expectations, which we published with the acquisitions, and now I was slightly positive surprised. Which I think is good because it's a confirmation that I think we had a 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 Specialty Ingredients. One thing is, of course, we have now three buckets. I think we discussed water already. If you go to Consumer Health, I think plus, minus, it should be very similar. It's still on the same trajectory.
Also Consumer & Resources Protection might have a better and slightly better performance going forward in the second half. Coming to the capacities in Pharma & Biotech, as I said before, I think it was a combination of many things. It's not only biologics. It wasn't biologics leading everything. It's just a significant combination of many different things and many different businesses. I think it is a biologics commercial, clinical. We are ramping up capacities. At the same time, we try to debottleneck existing ones. It's a number of activities, and we will give a little bit more granularity how we see this going forward, because it would now take quite a long time. It's a full presentation to give more flavor around what is the growth trajectory and by. This we reserve for the Capital Markets Day in September.
We cannot say it is just in five minutes how this is going to happen, what are the different moving targets in the overall portfolio. We need to present this a little bit more in detail with the Chief Operating Officer of this segment, Marc Funk, then you 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. Now I close it with saying, as we have partly communicated before, this is more to be flexible, and it's not just the pure existing capacity, because 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 a black and white, which is not some capacity. This is what we have learned over the last 6 years. It's the right capacity. This is what all our investments will underline. It was already much longer than I wanted. More I can just ask you to be a guest at our Capital Markets Day.
Okay. Thank you very much.
The next question comes from Daniel Jelovcan from Mirabaud. Please go ahead.
Yes. Hello. 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. I guess you have some delays, as always, to pass along to customers. Was that primarily, I guess, in the Specialty Ingredients segment? Also on the gross margin, it was actually up quite decently. I think it's not really comparable. I think you don't have provided a pro forma gross margin, including Capsugel. If you could provide that would be great. Thanks.
Yeah, your assumption is right. Maybe I take the raw material first. It was on a number of raw materials in the Specialty Ingredients and going almost through all the different businesses in Specialty Ingredients. They all had from the typical hydrogen peroxide, some carbonates, copper, fatty alcohols, propane, butane. It is across the board. Yes, the assumption is also right that it has definitely led to some delay in price adjustment in the market. This was, I would say not, it was exclusively a Specialty Ingredients issue, in parts of Specialty Ingredients. In Consumer Health and nutrition part, not so much. In consumer product ingredients, a little bit more. So even Consumer Health had some impact, but minor one. Very strongly in oil and more industrial composites, Alco, and so on. Here we had really an impact mainly in the first quarter.
We saw already in the second quarter an improvement. Of course, if you have this gap in the first quarter, we cannot overcompensate it in one quarter. We still need to stay tuned to what is going on with the cost side, and this is one of the reasons why we are never giving anything to say this is already firm. I think the market, in fact, is permanently moving. We need to respond. Yes, it was a Specialty Ingredients. The other question, Ulf, can you
On the gross margin. We have provided selected pro forma information that we have in the Leporello. Of course, there is no pro forma gross margin. I think for the time being, we don't plan to provide every single line on a pro forma basis. 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. At this stage, I don't, because, of course, our overhead evolution is much more stable. At this time we wouldn't provide the detail on gross margin for the group or for the segment. I mean, for the group it is there, but it is not on pro forma.
Okay, fair enough. Thanks.
If there are no further questions, ladies and gentlemen, thank you very much for joining our conference call on the half-year results 2018. As usual, it was a pleasure to discuss with you. Of course, be again reminded, I hope I can welcome many of you at our Capital Markets Day at 24th to 26th of September. It is Switzerland, and looking forward to see many of you then. Have a good day. Thank you very much.
Thank you.
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