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Ladies and gentlemen, welcome to the Q3 Results 2018 Analyst and Investor Conference Call and Live Webcast. I am Alex, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Richard Ridinger, CEO of Lonza. Please go ahead, sir.
Ladies and gentlemen, good morning and good afternoon. Thank you all for joining our conference call on Lonza's third quarter quality update for 2018. Joining me in the room are Rodolfo Savitzky, our CFO; as well as members of our Investor Relations and Corporate Communications team. It's not been too long since you last heard from us. We had about 120 analysts and investors at our Capital Markets Day a few weeks ago in Zurich and Visp in Switzerland. We really appreciated your participation.Today's news release confirm that our strong momentum has continued throughout the third quarter for our businesses along the healthcare continuum. We want to provide you even more qualitative insights into our Q3 business performance, so let's take a look at the highlights now on the Slide 3.As we already mentioned, our healthcare continuum business has performed robustly and drove growth throughout our company. Here is a reminder of what we discussed in more detail at our Capital Markets Day. The healthcare continuum includes all 3 Lonza pillars: Consumer & Resources Protection, Consumer Health and Pharma & Biotech. The healthcare continuum stretches all the way from preserving our environment and protecting precious resources in a sustainable healthy way, to preventing health problems, to treating diseases. We'll look at each of these pillars and their contributions to our growth in a few minutes, but first let me give you an overview of their performance here. The combined businesses for Lonza Ingredients, both pharmaceutical and nutritional, and for dosage forms and delivery systems as well as our capsules are all doing extremely well and are performing above expectations. One of the highlights of the quarter was definitely the expansion of our Ibex Solutions. We extended our innovative Ibex offerings to include clinical development and manufacturing services, so now we can offer customers the full range of services from preclinical to commercial, including fill & finish. This is at our Visp site. Much more about that unique approach shortly.Within Lonza Specialty Ingredients segment, consumer health benefited not only from the synergistic potential of combined nutritional ingredients and dosage forms offerings but also from good market demand for consumer and professional hygiene. However, a challenging environment for cyclical businesses and mature parts of our Consumer & Resources Protection portfolio like basic materials intermediate continued to have an impact. This quarter, the Water Care business gained some good momentum based on successful implementation of commercial initiatives.And finally, today, we are confirming our 2018 outlook, which was already upgraded with our half-year 2018 results. We are confident we will achieve the attractive targets already communicated externally, while we prepare for further investments and ongoing operational improvements in the future.Let's take some time here on Slide 5 to look in more detail at our 3 Ibex offerings: design, develop and dedicate. We want you to fully understand the offering. The feedback is extremely positive from our customers. Following discussions at Capital Markets Day and after, we would like to provide additional explanation. To clarify, we now provide clinical development and manufacturing services along the whole value chain for drug substance and drug product. And again, that includes fill & finish. You can see on this slide our 3 Ibex solution offerings. Ibex Design is from preclinical to Phase I, Ibex Develop covers Phase II to commercial. Those 2 together are only one wing of a building, which means only half a building. And the third offering is Ibex Dedicate is in primarily at late-phase clinical to commercial stage manufacturing. Ibex Dedicate is intended as a generation project, meaning that it will be ongoing for many years. We will only build based on customer demand and with contracts or ownership models in place. Customers can start with just a small suite and then build up. The so-called dedicated facility is aimed primarily at late-phase clinical and commercial stage manufacturing. The Ibex Dedicate building displayed here refers to the Lonza-Sanofi joint venture. And we think more Dedicate will come in the future. We announced at the Capital Markets Day that we expect revenues to reach CHF 500 million in the mid-2020s out of Ibex Design and Ibex Develop alone. This offering includes drug substance and drug product development and manufacturing. So we are now offering fill & finish. I mentioned that again because this was not clear to all participants of the Capital Markets Day after that day. That's the orange wing you can see on the right-hand side of the slide. We are looking forward to discussing Ibex Solutions in further detail during our upcoming roadshow in early November.On the next slide is a brief update on some other projects that are currently underway. They too will drive the growth of our biologics businesses toward and beyond 2022. Like Ibex Design and Develop, the expansion in Singapore and the new Hayward, California site focus on single-use technology. They are already operational with first customer batches having been released in this quarter 3. This was earlier than expected. The teams did a great job, definitely up and getting it operational. Demand is steady for all these assets displayed here.Moving quickly over Slide 7, let me just point out that Pharma & Biotech's performance was driven particularly by clinical development and manufacturing and by commercial manufacturing in the biologics businesses. Also, cell and gene therapy offerings continued to see strong interest from aspirational biotech and established pharma companies that are receiving approvals and fast-track designations.Now on Slide 8. Lonza small molecule businesses saw further high interest in highly potent active pharmaceutical ingredients. One example is the recent grand opening of a new mono plant, where we are working with one of our pharma customers, Clovis Oncology, on their drug for ovarian cancer. This partnership showcases our expertise in handling high potent APIs, our commitment to develop new business models to satisfy specific customer needs and our ability to support the fast-track launch of breakthrough designated products. And we are very happy about it. At the Capital Markets Day, we also talked about repurposing assets. As one example, in quarter 3, we launched a pharmaceutical early intermediate supply initiative to leverage chemical production facilities at the Visp site. It allows us to offer customers an integrated supply chain from early intermediates that are not cGMP to advance intermediates and APIs that are cGMP. Our capsule and dosage form and delivery system business was also above our expectations in quarter 3.On the Specialty Ingredient side, here on Slide 10, the momentum in our Consumer Health businesses, which we are reporting during the half year results, was ongoing in quarter 3. We are benefiting greatly from the synergistic potential of combined nutritional ingredients and dosage form offerings as well as from robust demand across all regions for our capsules. Innovation is the theme here, and we are having success with, for example, Lonza's delayed-release capsules for specialty application, most notably probiotics. The quarter -- or we also held the groundbreaking ceremony for our expanded U.S. manufacturing site in Greenwood, South Carolina. The facility, the new one due to open in mid-2019, is a part of an ongoing program to enhance production of Lonza's nutritional ingredients and dosage form technology.On Slide 11, you'll see that the cyclical part of the portfolio as well as the supply chain and raw material price issues continue to have an impact on the Consumer & Resources Protection results in quarter 3. We expect that challenging situation will be ongoing, and we are continuing to implement countermeasures. As discussed in the Capital Markets Day, we are taking action to optimize our product portfolio, and Consumer & Resources Protection will especially focus on the high margin specialty chemicals for formulated product and dilutions and re-optimizing of assets used for lower-value product portfolios that will be, over time, discontinued. We are confident that this focus will help to achieve our gross and margin targets despite a challenging environment. But just let me add here one thing to put things into perspective and you could see it also in the Capital Market Day. It's, in the meantime, a minor part of the total Lonza portfolio and this is because of the actions we have taken in the last 2 to 3 years. After a soft second half 2017, which is a year ago, and the first half 2018, now Water Care is gaining good momentum and the outlook is positive. The increased market demand and commercial and operational initiatives all contributed to that growth as Water Care continues to focus on brand restaging, innovation and e-commerce. The strategic revenue of the Water Care business is ongoing, as we already mentioned at the Capital Markets Day.Looking to the future now on Slide 14. Let me reiterate what we -- I said earlier. We are right on target for meeting our full year 2018 numbers, which were already upgraded in July with the first half-year 2018 results publication. Until the end of quarter 3, Pharma & Biotech performed even better-than-expected at the beginning of the year while the cyclical businesses of basic materials came lower and because of the reasons we have discussed. And we have also, to put it in perspective, we had an especially strong year 2017. On balance, however, the end result was positive. That means our positive overweights the challenges.For our mid-term guidance, we can confirm today what we said at the Capital Markets Day. We expect to continue to have a highly attractive mid-term guidance. Lonza's 3-pillar strategy is the key foundation for our growth trajectory going forward. Through it, we will be strengthening synergies, levering overlaps and mitigating portfolio risk. So overall, we expect to continue our sustainable growth while optimizing our business and product portfolios and making targeted investments to grow along the healthcare continuum throughout and beyond 2022.That's it, ladies and gentlemen. That's our story for today, and it's another positive one on this quarter. I'm sure you have questions, that's why we are here to answer them, we would like to begin.
[Operator Instructions] The first question comes from the line of Daniel Buchta from Vontobel.
Two questions I have. The first one on your Chemical Manufacturing business. Here, your peer in Switzerland, DOTTIKON, was recently giving a profit warning by stating that supplier outages in China particularly affected them negatively. I mean, how is that with you? I think the impression I gained is that outages in China were even very favorable for you because demand was coming back to Lonza, and you were also mentioning your marketing initiative for early intermediate. Could you elaborate a bit about the situation, and how you are different in that regard? And then the second question on the more industrialized businesses and Specialty Ingredients like Coatings, Composites and also Materials Protection. And you were mentioning that these businesses saw a robust performance. So does that mean that on a sequential basis compared to the first half, there is no slowdown and -- yes, especially from the macro side, which might be a bit negative for these businesses?
Thank you for the questions. So what I can say, our pharma Chemical Manufacturing businesses are doing well. So we cannot see really anything what has been reported somewhere else. I think we are doing extremely well in this business. I think it's fair values that we reported in the last years that we have changed business models, we have now operational models. I think we get -- I think we are very successful this year and there's no reason to believe that it's going to stop. We have -- I think we are now harvesting what we have done over the last 2, 3 years. A little bit on China, blue-sky policy and outages. I think it has -- I think, rightly, it said so, it has positives, but also negatives. It depends always on the products. If you had a supplier out of China and follows up -- the government decided to disrupt 2 assets, which are in the same supply chain, then, of course, you face some challenges, and we have some, let's not play it down. On the other side, what we see and of course, we see opportunities only rightly assumed by you, I think it's a little bit of something what we said, repurposing high valuable fine chemical assets. I think this is what we want to do because you see also some customers who are not totally happy, and they now value, more than maybe years ago, a reliable Swiss supply chain, if you want. So -- and of course, we are recorrecting a little bit. I think we are taking this initiative to the next step. And of course, especially, as I mentioned in the presentation, in the pharma intermediates, we want to take really advantage and [ exceeding ] build this business stronger than it is today. So I think we see there an opportunity out of the reasons you have just mentioned in your question. Yes, I think -- but bottom line, I think here in this field, we are feeling very good. I think we cannot -- I have not any problem there in this part. To the industrial businesses, Materials Protection, Coatings and Composites, good development. I think what I said in Capital Markets Day, a little bit, this is not -- because this is reported together with a more basic business, maybe it's not totally fair to the business, it's doing well. I don't see a negative development at this moment in time. It's still also for the outlook of the year. I think we see this close, [ if not ]. And it's just -- I mean, for basic business, which we are running at least since 40, 50 years, which at times, to a certain extent, this year marked a cyclical down after a cyclical up of last year. So the specialty part, what I mentioned in presentation, I think the development is good and we are happy and don't see any indicator in this business, I can say, in the moment, which makes me think negative, at least what I can see for the next 2 quarters or so.
Our next question comes from the line of James Quigley, JPMorgan.
So on the cyclically exposed businesses, we know that currently, Consumer Resources and Protection is around 22% of group sales and 16% of group EBITDA. How much is actually cyclically exposed? You're talking about the other industrialized businesses there. Surely, they have some kind of impact. And what leading indicators are you looking at in this business and how they're tracking today? Secondly, again, on that side or in Consumer Resources and Protection, first half saw EBITDA or EBIT down 11%. Should we expect a similar result in the second half? And then, looking further on into 2019, we've heard a lot about the investments you're making for future growth, so Ibex, the highly potent API, the consumer nutrition plant as well. And I expect a good chunk of this is probably going to be CapEx, but as we look into 2019, consensus is expecting core EBITDA margin expansion of 100 basis points. What factors should we be thinking around or considering when we're looking at our 2019 margins?
Okay, let me start with the first question, the cyclical. I think what we said in the Consumer & Resources Protection pillar, the cyclical business is definitely in the minority if it comes to the total sales contribution. And it's a mixed pack, it's not one business. I give you, one is vitamin B3 for animal feed. And this, for example, is following totally different dynamics, I think, it's not necessarily only the raw material price here. It's always depending -- and in the meantime, animal feeds, vitamin B3, I regard as a typical commodity, which is fluctuating every year depending on supply/demand equilibrium if it's a -- I think it's a little bit shorter, then you can have an overproportional margin gain. If it's -- if capacities are long, you get the opposite. It's a part of it, of the cyclical business. And then you have the traditional, what I’d say 1, 2 level downstream [ clinical ] products, which we have in risk. But all in all, it's -- even in the third pillar, which you rightly described in a number of what is the total, it's a minority stake. That's why I said in my presentation, in the meantime, all what we did over the last 6 to 7 years, what would have been an issue for Lonza maybe 7 years ago, I think it's not one today because we can really -- I think we are not so much -- as a group, we are not so much getting an influence by that. On 2019, I have to say, we are in the middle of the planning process, right? It's -- I think your question comes a little bit early because I think we are now in the way that -- my CFO told me that he will leave in a couple of weeks, he will give me the first indication, that's why. Of course, what is clear, of course, we will every year try as a company to move more towards our mid-term target, but how much? I think we want really to -- we will only communicate once we see a little bit better where we are in the planning and how the -- and I think normally, we communicate about this when we have the full-year result presentation and not yet in the quarter 3 update. But the only -- the general thing is, of course, the general confidence in our business is also there for 2019. This is what I can tell you at this moment. More to come, and we are really through the planning process for the year. Anything to add, Rodolfo, from your side?
Maybe from my side, a couple of comments. In terms of the business dynamics of the different pillars which are mentioned, what we can confirm is what we have disclosed in -- generally in the first half. The similar dynamics continue in quarter 3, and the expectation is also to continue for the balance of the year. So when we talk about the different pillars and then your question was, I think, more related to Consumer & Resources Protection, we expect more or less similar dynamics in the second.
Your next question from the phone comes from Markus Gola, MainFirst Bank.
So my first one would be on the challenges in supply chain you mentioned. Have these challenges been amplified with the recent U.S. tariffs on China? And could you maybe provide some color, what measures you are taking here to mitigate any potential effects on your business? My second question is on your recent single-use capacity expansions. Is it fair to assume that these capacities are still running validation and engineering batches in H2? Or can we already expect contribution from commercial batches within this year -- this financial year from these capacities? And my third question, if I may, is on the Water business. Good to hear that you've been able to turn this business around in H2. However, is it fair to assume that the margin in this business will still be burdened by the management restructuring efforts?
First, let me talk a little bit about the supply chain and what we do about it. I think we are monitoring this, I would say, this -- I would say, difference -- or the different opinion about trade of U.S. and China, and what are the implications. I think we have it quite good, under control. There are some implications, but they are not dramatic. What we have done before, and it's important what we also continue to do, and I think this is not knowing what's coming in the next 10 years, we are really trying to go for regional supply chains as much as possible to make sure that we are matching -- we did it before. There were lots of different purposes a few years ago, where we said we want to eliminate the transactional losses on exchange rate as a Swiss company, remember. And now of course, now we have a different reason to continue the efforts and saying we want to also make business in all regions in the world without having too much an impact of tariffs and so on. But they are minor crossovers between China and U.S., absolutely. Now if you can say, the good -- the bad news is our China business is not so big yet, [ it's really ] good and a bad news. So -- and I think the exposure from China to U.S. is some, but it's, from our perspective, not too significant to the total group. And going forward, definitely, I think we will align our asset strategy, which we did already, we will even continue focus on making us less dependent on cross-regional supply chains. We'll never be 0, but I think we are also not in such a bad shape as we speak. The single-use technology, we will ramp up, what I said, I think we have made the first real invoices, so we have [ failed some ] launches. Having said that, of course, it's a start. It's not that we are fully -- under full operation, that gives us, of course -- my expectation is those things, which are ramping up are getting up in 2019 to more -- to hit more sales for sure. What -- but I said it was surprising. One of them was -- is the clinical manufacturing in Hayward. It's really dedicated to clinical. This was a repurposing of a pharma site, which we acquired from a pharma company, which [ has about ] a very low utilization. We had to repurpose it. We had to hire people because we are running now 24/7 on that, and this was a lot of about people training and so on and all. That's why I think the most difficult thing is not only the technology but also to get the people and the shifts and the qualification up and running. And now we are happy that we made it. I think we expected it in quarter 4. We had the first batches we could invoice in quarter 3. Will it move dramatically the needle in 2018? I think no, but a little bit positive it will be. Likewise, in Singapore, where we are more targeted towards late stage, early commercial disposable, also there we have ramped up. And also there, I would say, the bigger impact is going to happen in 2019 versus 2018. And your last question, we didn't get perfectly, maybe you can repeat it again?
Yes. So in the Water business, basically, I read in your presentation that you, yes, turned around the business, but there were some restructuring efforts necessary. And my question was whether that might weight on the margin in the second half of 2018 and therefore, we maybe cannot really see a strong margin and expansion here.
This was a good business. As a good business, yes, I think what we did in the -- when we -- a little bit by setting the Consumer & Resources Protection pillar newly up. I think this is belonging to the specialty part. And what we did here is not so -- is not a heavy asset-based restructuring, it's much more a business model restructuring, where we are saying we want to change the business model into putting more the added value parts in the forefront and reorganizing our go-to-market activities. This was the major activity which we did here. And it's important to understand that we have some really extremely valuable tools in that portfolio, which I think we need to prepare ourselves to make [ a better ] global rollout. And this just means that we are now lining up in this overall specialty part of Consumer & Resource Protection. I think this will be the major topic for the next few years to come, that we are taking advantage of many good technologies and make them more global. And this is a little bit now what we are doing in this part of our business.
Maybe just to comment on the financial side. I mean, when -- again, the comment about restructuring, this is, in the bigger scheme of the group, really minor, so no impact on margin. And of course, as you know, many of these activities, by definition, then belong to non-core. But again, in the big scheme of things, these are very, very small.
And that's restructuring assets or so at this moment, so it's really setting up the business in a more efficient way.
The next question comes from the line of Patrick Rafaisz, UBS.
Three questions, please. The first is on ag ingredients. You talked already about the vitamins, but can you add a bit more color on crop protection and how bad is the situation there currently? And how do you see your market share evolution there over the course of 2018? Then secondly, on the guidance, you talked about 9-month performance with Pharma & Biotech better-than-expected at the beginning of the year, Specialty Ingredients below. I'm wondering, within Specialty Ingredients, is -- can Water Care offset the softness in the basic materials and intermediates? And then, lastly, Pharma & Biotech, thanks for the rundown again of the key conclusions from the Capital Markets Day. I'm wondering, on Ibex Dedicate, in the current CapEx guidance, which we have, do you assume any material capital contributions from customers for the build-out of the Dedicate suites in the years to come?
Now let me start from the end. And in all contracts, this is always a topic. I think the capital contribution on customer is always a topic [ in all things because ] it always depends a little bit. I think the contracts are always take in consideration, is there a capital contribution or not. And of course, some customers would [ be rather ] like to have one, and then, of course, it might be some, I think, benefits on the batch price, but I still -- I think our experience is still very good for us. And as I say, okay, we would like you to contribute fully and then, of course, they pay -- I think the batch prices are higher one. This is [ relative ]. Of course, we appreciate both and depending on the project, I think it's also very welcome if we get customer contribution, and then we can profit also actively. It's not that we just wait for it. That's why it's a case by case. And we are -- and in the discussions which are -- and there are many discussions ongoing. I can tell you the [ LTB ] teams are very busy. This is in all -- in some discussions, a big topic; in others, it's less of a topic. It's a mixed bag as it has been in the past. Let me go to the first question on the ag business. We have, actually, 2 kinds of ag business. One is really our core specialties. This is actually doing very well, but it's not a too big business. I think it's something where we really have added value formulation and excipients in that. And then we have a long-standing custom manufacturing business and our core reach, in the big scheme of things, is really not a significant, I would say, part of the Lonza portfolio at all anymore. It's still existent, but it's not something in the big scheme of things, which is bothering us because the mere size is not so significant in the new Lonza picture as we see it today. And here, I think it's just more depending on contracts and just only on the overall situation in the market. And it belongs more, of course, to what we consider, if you want so, the basic business. And this is how we see that today. In Specialty Ingredients, of course, we have a little bit to differentiate in the meantime. If you recall what we said in the Capital Market Day, Consumer Health, I think, what we said, I think we are happy. I think it's -- this pillar is strong. I think it's exactly what we wanted after the merger between the Lonza and the former Capsugel businesses at the first year. Although the organization still have to be built on-the-fly, I think we are quite happy their on-the-fly -- their performance is already where it is today. And then, in the third pillar, I think, of course, we had the upper part, we said earlier, one is good. The lower part was what we already reported. This is the one which has probably commodity influence, and Water is coming up now. I think it's -- you really have to look at all the 3 pillars. And this is how I see it today. So there we have a mixed picture on the pillar, but those who have also the highest margin, it is a good thing. We are performing really well.
Maybe just a technical comment on the customer contributions to CapEx to keep in mind. Of course, the cash impact, you definitely have in that the biggest investments in Capex overall. Now from a P&L and accounting point of view, you all know about IFRS 15. And of course, that means that these onetime milestones or CapEx contributions will be deferred throughout the life of the contract or the project related to the CapEx, which has the advantage of eliminating onetime bumps in the P&L. And so far as we see, positive on the cash and also positive in the sense of more predictable P&L results.
The next question comes from the line of Paul Knight, Janney.
Could you talk about your capacity? We hear from the North American market, there are supply constraints or capacity constraints in the industry. And Lonza, are you tight on capacity? And then secondly, the [ regenerative ] medicine start-up in Houston, how is that going? And then thirdly, maybe for Rodolfo, is CapEx relative to maintenance CapEx, any change there? Or what is it on the CapEx in the next year or this year from maintenance levels?
So about capacity, I said that we are -- since maybe 3 years, we are permanently investing because definitely there is a good demand. We are not only investing in building new ones, we are permanently investing, which sometimes, I have mentioned on roadshows, that it's really helping also out is in debottlenecking. So from a technical perspective, we found in all our assets way to get more out of the assets which is, of course, attractive and has led also to good -- very good margin. And we are continuing to, if you want, to fire on all cannons, whether it's debottlenecking on new investment to make sure that capacity is met. And in -- but because of the fact that the shortest capacity, especially in the clinical manufacturing, this is why we exactly have made Hayward and we are permanently debottlenecking Slough. We are building Ibex Design and Develop. And this is why we foresee this to be the case also in the next 5 years and forward. I think it's currently -- we definitely have done everything already last year to make sure that we are mitigating this effect, but it's still, to a certain extent, in the market, there is no doubt. But we are doing everything to help to shorten the time for customers to get new capacity. And Houston, I would say, it's -- it came in at the right time. There is absolutely high demand on this new capacity. We are in the ramping up phase, and you -- and I think the customers are already being in. And I think this year is fully dedicated to really make sure that we are getting fully operational with customer projects in place already. So from my perspective, Houston is now, has from a -- after the grand opening, moved into a positive challenge with the new technologies, we need to get executed together with our customers, and it's going well at this moment.
Then on the CapEx front, for 2018, this year, the mix that we have guided in general is around 40% for maintenance; [ 50% ] for growth remains. Of course, at the Capital Market Day, we said we expect to increase the level of CapEx. The investment relative to sales, we said 10% to 12%, and this is mainly related to growth. So if you do a bit the math, then of course, what I would say is the level of maintenance in absolute Swiss francs will remain because this is more or less a constant amount, [ at least ] the range will be similar over time. And then what you would see is an increase in the growth CapEx. So that will change a bit the mix.
And this because -- the first question on, I think, to help to get the biologics offer in the market, the right biologics offer, I have to say, expanded.
Your next question comes from the line of Laura Lopez Pineda, Baader Bank.
I have Rodolfo on [ Gchat ]. I have 3 more questions. So Unilever, DuPont and Nestlé reported some slowdown in the consumer goods space. Has your Consumer Health business also felt this? So any of your product portfolio has also felt any of this slowdown? And do you believe this is more a temporary thing? Or do you see this trend also staying for some quarters to come? Secondly, there are several companies in very different industries also highlighting increasing logistics costs. Is this an issue for Lonza as well? Or can you mitigate this easily with price increases or -- I don't know? And the third one is in the U.S. So in addition to the trade war, there is also foreign investment restrictions and there is a lot of speculation going on that this could be a risk for the biotech industry growth as, in the past, China has invested a lot in the biotech U.S. venture capital funds. So do you see this as a risk for the industry? And have you maybe heard something from biotech companies on the topic?
Yes. Let me start first with the consumer market. Actually, we don't see this so much, because in -- what is happening a little bit in the worldwide, but I'll also talk about the worldwide scale, we see in many consumer markets and especially also in the markets, for example, like Consumer Health and Nutrition, where we act, that the biggest growth is captured by small and midsized companies. We see -- like other players in this market, we see the so-called local and regional dynamos, they are all in the meantime called, that they are definitely taking a big part of the growth of the industry. And going to our Consumer Health and Nutrition business, I think, yes, we have happy customers, but the bulk of the growth comes from exactly this segment of the market. And as I know from other industries, which are not -- and have different of how we're moving into the same industry, this is what I see is a part of it. So it's not a general market, right, from my perspective. Logistics costs, and yes, yes, partly, we see the challenges as well. And from the perspective, can you move it over? I think yes and no. Sometimes you have contracts in place where this was not put in as a flexible or as a reliable thing and then you are caught by this, and then you have to wait until the contract terms of 12 months or so expire and then they can try to readjust it or sometimes you can do it on a quarterly basis and that it's easier to do, that's why it's -- we see this issue, yes, on logistics, in United States. And it's a mixed bag if it comes to -- is it -- can you hand it over or do you have to swallow a part of it? It's a mixed bag from this whole time. I think it's one of the challenges in some businesses. The other foreign investment restrictions, we didn't hear anything there in terms of that. It has already any perceivable impact on the funding in the biotech arena, so we didn't hear anything yet. But from a customer perspective, our experts have been informed that this is going to have an impact. I think we still see from the demand side, from the interested side in our clinical -- different clinical capacities, there is still high demand, which is not influenced at all. And by the way, even if we do -- if there was an impact, it normally takes some years until this impact comes in any case through the pipeline. But also in general, I don't see -- we have not heard anything that it's in the beginning of the pipeline, anything remarkable coming yet. So this is what I can say at this moment.
The next question comes from the line of Gunnar Romer, Deutsche Bank.
Gunnar Romer, Deutsche Bank. The first one would be, again, on the Consumer Resources & Protection (sic) [ Consumer & Resources Protection ] business. I think at the half-year stage, you indicated that you would expect some acceleration in the second half. Now, when I read through your statement today, it seems as this is no longer expected. So just curious whether you see this business still in positive territory for the year as a whole. I think you had 1% organic growth in the first half. Just curious whether you still think it's positive? Or is there a risk that overall the business could see a decline for the year as a whole? And then related to that, obviously, as you are confirming the guidance, it seems as if the Pharma & Biotech business and, potentially, your Consumer Health business keeps on performing very well. Just curious whether you can share a bit more color on what is driving the outperformance next to your very positive comments, again, on the Capsugel business? Any additional color would be very helpful.
No, I think -- on Capsugel, yes, the synergy is definitely, I think -- as a general comment, I think it's now -- we have now what almost -- we are going almost in the 1.5 years after closing. From a business perspective, I'm extremely happy. And this is a supportive thing. Of course, you are always not over speeding when you plan, because I think a lot of things -- people have to work together and it's good. On the other side, I think what is unique, I think biologics, again, I think after a fantastic 2017, we are expecting again a good year. And what one of the very early questions we had and even on the small molecule side. So if you see this all together, the Consumer Health, and I think, the different contributors in the CDMO business of Lonza, I think it's all moving in the right direction. Maybe Rodolfo comes in a minute with some forecast because I do not know it by heart. But what I can tell, as a general theme to reemphasize, in Consumer & Resources Protection unchanged from half-year or what is going in a good direction is the specialty material protection part. This is still doing very well. If this stands alone, I think it's good. And the other part, I think what Rodolfo said earlier, is continuing as it was in the first half. And maybe you can give some color on it.
Yes, so Richard stole my punchline. So, it's exactly that. I think when we look at the dynamics first half and second half, and now I talk specifically of Consumer & Resource Protection, they are very consistent, and so we should expect a similar result for the, let's say, second half and balance of the year.
So it won't be too much to read into your comments today that there is a deterioration happening as we speak, end of the first half?
No. That will be incorrect conclusion, I would say, definitely. And you talked about growth momentum, that was your first question. You said it's limited growth. And what I'm saying is that the second half would be similar to the first half. So there's definitely a sustained performance. Of course, we're not -- let's say, the growth in the first half was minimal, that's correct. But this -- as Richard explained, this is a portfolio of products where certain parts of the portfolio, we have highlighted a few, like composites, have extremely good performance. We're very happy with those parts of the portfolio. And then we have the cyclical part, and I highlight again, vitamin B3, where we continue to have headwinds. But overall, the portfolio fits one part, the negatives are offset by the positive and then the performance is similar, H2 versus H1.
The next question comes from the line of Peter Welford, Jefferies.
Just a couple. Firstly, just with regards to the Biotech business. I'm just wondering whether you can comment at all on any phasing of batches? You obviously had a very good first half of the year. Do you anticipate batch release to be roughly equal? Or are you seeing any sort of late shipments I guess in the back end of the year? Secondly, I just wondered then if you could just talk a little bit about the Capsugel drug delivery growth trajectory. Is that still maintaining the strong momentum that you reported in the first half after obviously being a little bit slower on the initial consolidation of the business in 2017? Or has that sort of growth rate, would you say now more normalized during the third quarter and second half this year? And then just finally, with regards to areas of investment in R&D, obviously, you talked about increasing the R&D spend during this year and beyond. Just wondered if you can sort of give us your priority list perhaps for areas that you're looking to spend that R&D dollars in during 2018-'19 now that I guess you've evaluated that?
So for R&D, of course, it would be a lengthy discussion now. But to give you the big theme, I think it's definitely where we -- in relative terms, have the highest spend is definitely going in what we call emerging technologies of cell and gene therapy. I think this is definitely from -- if it comes to where we put most efforts in the gene therapy area. Because R&D normally should target something. First, we have incremental R&D in all different business models, but if you say what is the biggest ticket, which is targeting more in the 3 to 6 years future horizon, then it's definitely the gene therapy investments in different kinds. And this is where we think it's important that, by any case, I think we think all modalities will be through the 2020, 2030 still play a role, but this is a new one, which has, I will say, from a lower basis -- of course, we have to be clear about that, but a huge potential, and we want to be on the boat when the boat is leaving, and that's why the majority goes in here. The Capsugel -- the delivery forms and the dosage forms and delivery systems, I think it's still dynamic. I think it's -- we're not expecting a slowdown in this case. I think it's a dynamic field. It's one -- by the way, one of the real synergies which came, from my perspective, even a little bit faster than I expected. Here, the teams are really good [ underway ]. And having said that, we still have a lot of room for improvement in the next years in this area because, let's remind us, those technologies have been mainly coming out of -- on investments of Capsugel between 2013 and '16. And this tells you that even inside Capsugel, in all its exit phase, this has not been fully integrated. So we are taking, even now, some of the integration efforts. But what we see today is -- I think from my perspective, I'm encouraged. And when you see all the new things, which you can do with the technologies like probiotics, even microbiomes, I'm absolutely sure that there is more to come which we don't -- didn't touch even as of today. Batch phasing, as it what we said, until Q3, everything good. I think Q4, we are just starting. I would say, in the big scheme of things, if we talk about 12 months, I think there will be not a significant thing of phasing. But the year-end, I think -- but as I said, we are, in our guidance, I think confident because even whatever is happening in the year-end on a 12-month horizon, it doesn't play a significant role. Rodolfo, if you want to comment on that?
Yes, absolutely. So specifically on batch phasing in pharma, which is an important topic here, definitely, we do not have a hockey stick in the plan, absolutely not. We continue to see a very positive momentum until quarter 3, year-to-date. And then we have a clear plan for quarter 4. Here, the important to keep in mind, again, this is the topic we reiterate, given the contractual nature of the business, this is more related to operations, execution and releases. And again, our track record here is extremely good. So I would say where we have a clear plan, consistent with the guidance and the probability to meet the plan is extremely, extremely high.
[Operator Instructions] The next question comes from the line of K.C. Arikatla, Goldman Sachs.
You mentioned that the quarter saw impact from raw material price situation. Can you tell us if you're able to pass along these higher costs to your customers? And if so, how long does it usually take to pass this, given your contractual agreements?
Okay. Let's just start with a general comment. This is a topic not in Pharma & Biotech, it's mainly a topic in parts -- in the part of Specialty Ingredients. Even in some Consumer Health areas, it's not a topic. In the minority of the Lonza business, this is a topic. This is not different from any other business I did in my past. It depends on contracts, I think normally, but there is a general rule you need 1 to 3 quarters to get this done which obviously, when the costs are going down, I'm talking 1 to 3 quarters. So this is what I can say now. And we are in the middle of it if you want to know.
Gentlemen, there are no more questions at this time.
Well, if there is no further question, then thank you for joining our Q3 update call. It was a pleasure to discuss with you, as usual. Looking forward to see some of you during the roadshow in November. And I think also happy to host again the next call with the full year results 2018. Thank you very much, and I wish you a very nice rest of the day.
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