Executives: Richard Ridinger - CEO Rodolfo Savitzky -

CFO
Analysts: Jo Walton - Credit Suisse James Quigley - JPMorgan Patrick Rafaisz - UBS Carla Baenziger - Bank Vontobel Markus Gola - MainFirst Bank Peter Welford -

Jefferies
Operator: Ladies and gentlemen good afternoon. Welcome to the Lonza's Half Year Results 2017 Analyst and Investor Conference Call and live Webcast. I'm Alice, the chorus call operator. I will like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session.

[Operator Instructions] 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 the Lonza. You will now be joined into the conference room.

Richard Ridinger: Good morning, good afternoon.

Thank you for joining our conference call on Lonza's half year results for 2017. We are here all in Visp, in the nice canton of Valais in Switzerland and I'm sitting here together with almost the entire Executive Committee. Rodolfo Savitzky, our CFO, the two Chief Operating Officers from Pharma&Biotech and Specialty Ingredients, Marc Funk and Sven Abend, our Investor Relations team with Dirk Oehlers and Kristin Koehler and Corporate Communications team with Dominik Werner and Constance Ward. We've quite a number of good news here to tell today. That's why we are also in Visp, but this is related to the news which we will come to later.

Once again, I'm right to tell you that the positive momentum of Lonza continues. We are again able to report on improved results with an outstanding first half of the year. Strong performances were supported by both of our segment Pharma&Biotech and Specialty Ingredients. With 15.1% sales growth and 43.3% core EBIT growth, our numbers speak for themselves. They demonstrate that we've been making the right decisions since 2012.

We've not only achieved the turnaround this time, but five years later, we're continuing on our growth path and starting from an ever higher level. That growth path along the Healthcare Continuum means we are making a clear commitment to both segments. Lonza is further bolstering our position in the Pharma&Biotech and Consumer Health markets through the acquisition of Capsugel, which happened earlier this month. We'll talk about that later in the presentation. We do expect the momentum from our strong H1 will continue in the second half 2017, but a reminder that the result -- or the results will then be compared which our exceptional second half of 2016.

That's why today we are confirming our full year outlook for 2017, which we already upgraded during the Q1 qualitative business update. Now, Rodolfo Savitzky, our Chief Financial Officer, as a kind of a special bonus to him, will now have the pleasure of presenting an overview of the financial results. The floor is yours Rodolfo.

Rodolfo Savitzky: Thanks Richard. Indeed I'm very pleased to point out that our sales, EBITDA, and EBIT were at an all-time high.

And of course this half year results exclude Capsugel as the transaction closed only on July 5, 2017. A couple of additional highlights include the improvement in EBITDA margin to almost 25%, up by 2.7 percentage points versus prior year. Coro RONOA at 31% and strong operating cash flow with CHF300 million in the first half including the acquisition of PharmaCell in May 2017. Our top and bottom-line growth came from a broad range of factors, improved customer relationship management, product and process innovations, and operational improvement programs in the sites like automation, streamlining, and debottlenecking initiatives. We have delivered on profitability increases as promised year-after-year since 2012, but we are not stopping here.

Our commercial and operational excellence initiatives will continue to gain momentum. Slide six gives you an overview of our financing measures in the first half related to the Capsugel acquisition. Equity financings, with an accelerated book-building from our authorized capital in February and our discounted rights offering in May were both successful generating high interest in the market. We have already started refinancing our bridge facility with a Dual Tranche Swiss Franc bond in July and we expect to complete the out-financing in the second half of 2017. Lonza expects to achieve a pro forma net debt to core EBITDA ratio at the closing of the Capsugel acquisition on July 5th of 2.8 times.

That's the leverage level consistent with the previously communicated ratio of up to three times net debt to core EBITDA. Further deleveraging back to the approximate level of the net debt to core EBITDA at the end of 2016 is expected to achieve as originally announced by 2019 in approximately two years. Now, we'll begin with our successful results of Pharma&Biotech on slide eight and nine. Pharma&Biotech's performance reached a record high with sales up 27% to approximately CHF1.1 billion in core EBITDA of CHF273 million, that's up by a staggering 72% compared with the same period last year. In the core EBITDA margin in the first half of 2017 was 31.5%.

These remarkable numbers reflect strong commercial programs across all technologies as well as high demand for clinical development services. Now, as stated earlier by Richard, these extraordinary growth rates are not expected to continue into the second half of 2017. And again second half comparisons against prior year will seem much more moderate, I can see extremely successful second half of 2016. However, our strong momentum is expected to continue with no decrease in sales EBITDA or EBIT in the second half against prior year. Turning now to slide nine, Pharma&Biotech benefits from megatrends related to healthcare such as the need for innovative medicine, reduce time to market quality and regulatory support in outsourcing of manufacturing and development services.

Our margin progression reflects the impact not only of the strong sales growth against the positive market trends, but also for ongoing productivity and throughput initiatives. Slides 10 to 11 covered individual Pharma&Biotech businesses. It's an impressive list of achievements for each of these businesses. Unfortunately, we just don't have time to cover them in detail to-date, so I will just point to a few highlights. Slide 10, the establishment of the joint venture with Sanofi for commercial mammalian manufacturing announced in February 2017 and on slide 11, the acquisition of PharmaCell to expand our sales in gene-therapy manufacturing footprint in Europe announced back in May.

Slides 13 and 14 summarize the continued progress we made in Specialty Ingredients during the first half of 2017. Lonza Specialty Ingredients segment overall delivered robust results in most markets will improved profitability in the first half of the year. We will note that Specialty Ingredients have healthy growth rates with sales up 6.3% to about CHF1.2 billion in the segments core EBIT of CHF213 million was up by nearly 10% again compared to the same period last year. The segment's core EBITDA margin in the first half of 2017 was 21.1. So it's clear why we are pleased with the progress made by specialty ingredients in the first half.

We have continued the good year-over-year improvements over the last five years in these margin progressions reflect a value change management programs covering portfolio optimization, improved pricing and better productivity. Let me just again point to a few highlights in slide 15 to 17. On slide 15, the momentum in consumer health and nutrition was certainly very positive. Slide 16, our Agro Ingredient business experienced strong demand for animal nutrition products, particularly in China. And finally, on slide 17, you'll see that our composite materials have very strong sales.

We will try to answer any specific questions about the individual Pharma&Biotech and Specialty Ingredient businesses during our Q&A session later. I will now wrap up my section of the presentation with our outlook for the full-year 2017 which we already upgraded at Q1 business update. Let me add here that our outstanding results in the first half of 2017 are fully consistent with our expectations at that time we revised our outlook for the full-year. So today, we can confirm the following. Sales growth of high single-digit core EBITDA above CHF1 billion, double-digit core EBIT growth significantly above sales growth in a CORE RONOA above the 21.5% achieved in 2016.

Lonza thus expect to continue its positive momentum in the second half of 2017. And now I'll hand it back over to Richard.

Richard Ridinger: Thank you very much Rodolfo. I think what we conclude from this section. I think we are very positive after this extremely good first half for the full-year.

I want to turn now to a discussion of our undisputed highlight of the first half of 2017. Our acquisition of Capsugel which closed on the 5th of July, 2017 right after the first half ended. We’ve extensively talked with you about the rationale behind the deal. The perfect fit of our two corporate cultures and the potential synergies to the vertical integration of Capsugel’s and Lonza’s existing services. Successfully obtained financing was also an essential part of the whole deal.

So we're very pleased to see how the equity and debt markets have confidence in our company and our growth perspective. Now, the work really begins in earnest. We've been preparing for the integration from the beginning with the establishment of dedicated joint integration teams. Edouard Driesen, former CEO of Capsugel is working with Lonza executive committee to guarantee a successful and smooth transition. All through the integration we've been encouraging together with either our employees to keep their focus on our customers and our services to them.

We are now reviewing Capsugel finances and from what we have seen so far, we are confident that we will meet our business plan projection. Capsugel add significantly to our aim of growing along the Healthcare Continuum. Now approximately two-third of our business is in the Pharma&Biotech and consumer health markets. Capsugel will be fully integrated within Lonza businesses so that we can more easily capitalize on synergies. Discussions among the business teams have made us even more optimistic than we have already been six months ago.

Let's now move to the slides 23, 24 of the presentation. The day we are announcing the mid-term guidance that stretches all the way to 2022 which happens to be our 125th anniversary year. We are certainly successful at the moment. Lonza is not the type of company we're satisfied with the current state, no matter how good it is. We are the type of company who is looking ahead.

We know from our long history that constant efforts to anticipate changing customer needs are key to being successful and remaining successful. Our vibration is to be the leader in our chosen markets and to add significant value to our stakeholders. We want to be a leader not only in regards to financial performance, but in regard to other key success factors like innovation, quality integrity and sustainability. As we strive to think and act in long-term manner, we are now announcing our financial guidance to 2022 which also reflect our current internal strategy and planning processes. So we are guiding the following for 2022, sales of CHF7.5 billion, core EBITDA margin of 30%, CORE RONOA 35%.

Our growth plan for 2022 includes many robust growth initiatives. Now there's a reason why we are here all together in Visp in our main site in Switzerland. I'm happy that we can announce today one important example of this closed project with the launch of Ibex solution. The Ibex concept is unique future shaping innovation in biological development and manufacturing. It will be based at Lonza’s Visp Switzerland site with an extra 100,000 square meter surface and several 100 new positions.

Important, to the process to the changing biopharmaceutical market and for the selected trends in the industry. To illustrate that, let's start with the video overview now. [Video Presentation] So, I just wanted to wait for a second, that you can partly digest what you’ve seen. And so let me recap what you have heard and that’s been seen in that video. Ibex Solutions is an innovative new biological development and manufacturing concept.

It couples flexibility and facility built out with fully tailored business models and leverages Lonza’s expertise and service network in Visp. Extremely important to remember Ibex is the answer to market needs. Those market needs can't be measured by fermentation volume. We must have answers to the market needs for flexibility, new technologies, new molecules, and new business models, Ibex - The Agile Advantage provides those answers. Construction already began in June.

We expect to have a formal groundbreaking ceremony in the second half now of 2017. In morning, we had the Press Conference and with all the colleagues of the press and also some members of the government here in the Valais of Rivera at the ground baiting and I can tell you the piles are already in the grounds for the first building. Again several 100 new positions are expected to be created on Lonza’s 100,000 square meter brownfield surface. Ibex bio-manufacturing comprises a modular technology independent development and manufacturing complex. Capable of supporting activities across multiple technologies mammalian, microbial, cellular or bio-conjugates and from late discovery to manufacture.

This flexibility gives our customers complete freedom in facility design and implementation and the ability to respond rapidly as their needs evolve. Ibex stands for biopharma high technology in Swiss quality. Now finally let's look at the summary slide of all the good news I just shared with you. Here is what I want you to take away from our presentation today. Lonza as a leading company in the Pharma&Biotech and consumer health markets and our vision is to grow further along the Healthcare Continuum.

Capsugel integration will further bolster our position in the marketplace. We are fast growing on both the top and the bottom line. Our aspiration is to add value to our partners and our customers and to their patients and consumers. Innovation continues to be our driver as you saw from our new Ibex offering. We are long-term oriented aim for sustainable growth.

And we spent our line of sight now than in the past. We are confidently sharing our positive mid-term guidance to 2022.our 125th anniversary. I know that was a lot for today. Ladies and gentlemen that's the overview of our success story for the first half 2017 and some insights into our future. I'm sure you may have many questions but we are here to answer those questions, who would like to begin.

Operator: [Operator Instructions] First question from the phone comes from Jo Walton, Credit Suisse. Please go ahead.

Jo Walton: Thank you very much. I'll just have a few questions to help with our modeling please? Firstly, in capital expenditure, you've highlighted your new Ibex program, is it still reasonable for us to assume 8% to 9% of sales invested going forward in capital expenditure or could there be a bolus of higher expenditure in the short term? Secondly, I wonder if you could help us on the interest charge. It went up very significantly in the first half.

I wonder if they were any onetime factors in that or whether we should look at two times the first half for the full year and I'm obviously mindful that there may be additional cost because of Capsugel coming in. And I wonder if you could also confirm what the tax rate might be that we should use for modeling? And finally, a question which is a broader one. You've obviously got an expectation of very strong operating margin growth from now to 2022. I wonder how we should think of the curve of that, whether we should think of the majority of that being seen in the next couple of years and then it tapering off a little bit or whether we should think of this as more backend loaded. So I wondered if you could just address the trajectory of the margin expansion? Many thanks.

Richard Ridinger: Here, I will start with the last question first and then later on hand over to Rodolfo for some of the financial questions. You have made a strong step forward in the right direction this year on the margin improvement. We’re also expecting the synergies which gets together, Capsugel that we will have also further expansion going forward. And then of course, we will gradually approach where we have guided for 2022 and here we made a conscious decision that we said a part of what we earn in gross profit we also want to reinvest in innovations. We see how fast the markets are moving, we’ve good ideas, we have good concepts and we will need a part of the funds to innovate.

I think that’s what is our game plan in the course of the next five years and that’s why you can say I think it will gradually get to the target line over the next five years. I would say this is how we have modeled it. From CapEx perspective, we are still of the opinion it’s around 9% should be the order of magnitude which should be okay for the modeling. And of course, if you look a little bit deeper into these Ibex project, it says also that a gradual build out depending on customer needs, market needs. I think definitely when we go on roadshows in the next three months, weeks and months we definitely have to deepen a little bit because I know that I think it needs a little bit more discussion because it’s really a very innovative approach to the market which I think is a kind of a lighthouse project in the industry because there’s nothing like this existing plan from our point of view and now I hand over for the interest and tax to Rodolfo.

Rodolfo Savitzky: Thanks, Richard. So related to the interest expense, so in the first half of 2017, we saw a charge of roughly CHF46 million and this is a onetime charge related to the Capsugel acquisition. This is a combination of option premiums to hedge the proceeds of our equity rates in Swiss francs to pay for a transaction in U.S. dollars that's when some lawsuits associated with these derivative financial instruments. For the second half of course, we will not have these charges again.

Nonetheless, given the higher level of debt, we would expect to see higher interest charges in the second half compared to the first half. Now I'm talking exclusively interest of around CHF30 million. Now just to guide you, the overall level of interest rate on our debt is going to remain around 2% as currently. Then, when it relates to the tax rate, you saw we ended up below 20% and we expect that once we fall Capsugel into Lonza’s number we would be slightly above 20%, but we expect significant tax synergies in Capsugel, we currently have a tax rate of roughly 28.4%. We expect that as we integrate them into our tax structure, we could reduce that to 24.4% for Capsugel part and then the weighted average overall would be slightly above 20%.

Operator: The next question comes from James Quigley, JPMorgan. Please go ahead.

James Quigley: Hi, thanks for taking my questions. On Capsugel, we didn't see any sort of targets or guidance today. Now that you have the book under your control, are there any surprises; is there anything that you are concerned about? I mean there was concerns [indiscernible] just doing business up for sale.

Now you have those in-house, how do you feel about the business and then what can we sort of expect for this year? Is it just a case of half of last year's earnings? Following by tax initiatives very, very strong growth, how did this breakdown sort of subdivision and also what I didn't know this was it was just pure volume growth versus things like price or mix? And finally, on the Ibex, can you walk us through exactly how you expect to be able to reduce the time-to-market by 12 months or this could be a significant selling point for you over competitors? Thank you.

Richard Ridinger: So, let me start with Capsugel, I think what we mentioned I think in this is serious evaluation we will now integrate Capsugel into the respective businesses of Lonza together with those businesses. This is the way how we can catch as fast as possible, synergies which have promised. And just to be very clear, we have not seen any surprises in the negative way which should bring us to a different opinion. We are fully confident that there is a lot to happen.

Second half of the year, all of what we know from our new colleagues is it looks as expected we have to sell this year for the second half. We don’t see from what we got so far no negative reviews. If even I can tell you in the consumer health business where the teams are already working intensively together to my positive surprise they will offer in a trade fair in less than three months from now up to 10 combined formulations -- unique formulations which are from synergies between Lonza product and the Capsugel delivery. I think they're very pleased about that. And this makes us confident in the pharma part they are also now starting to team up.

Here also we see synergies coming up, especially as we speak about the formulation of effective ingredients. Future delivery we are all confident that this is going to be a success in the midterm. Of course, it's now set before the earnest starts now. Now it's about work, I think we need to get this in for checks. But the confidence level is high.

But for the follow-up, I think we said okay I think it's not -- not for the sake of to follow-up Capsugel, we will report it, we want to have this integrated that we want to get the synergies and of course next year because I promised earlier you will by this time of the year also have a new P&Ls from our side and then we will go deeper review about how this is going to work. This is for the Capsugel, I think I hope I got all of the points you mentioned for what was the gross – where are the growth dynamos in Pharma&Biotech were lot has grown. I think growth dynamos in the company were clearly in the biologic arena in the first place, but here it was all over the place. It was not only the mammalian commercial, it was a lot in clinical and what I said earlier now it came into play we said okay after we have worked on 2014, 2015 a lot to get the mammalian back on track in all dimensions of the business. Now, the Chemicals are following and we are very pleased with the small molecule performance.

I think I have not a date for you how many years we have to look back when Lonza had seen last time the performance we have seen in small molecules in the first half of the year. I'm extremely pleased and it's a combination -- it's a combination of contract of commercial successes which go back of course in the year trending 2015, 2016 because we are having this now in the hand and of course this only goes together with strong operational execution. This is what I see. And on the Ibex of course, it’s a -- the concept is -- it's a build out in a way that we always have a build out that we are ready to shoot at any time. But we are not ready to shoot in any time by the old fashioned way that we are building huge capacities.

And what I said, I mean. Volume is not -- volume or fermenter is not the dimension of innovation. It’s a dimension of the past. You need to be ready to shoot by an intelligent build out. Now, of course, I will not go too deep into that because I think this is for our customers in the first place how we do it and not necessarily for the competition how we do it.

And that's why I think I can -- I will let it here, but be assured we have intelligent ways and it's an especially the way we build it out which will save a lot of time.

James Quigley: Perfect. Thank you.

Operator: Next question comes from Patrick Rafaisz, UBS. Please go ahead.

Patrick Rafaisz: Thank you. Good afternoon. I have some follow-ups on Ibex and I realized you may not want to answer them or you can't answer them at this point, but how should we think about these additional capacities? And how much would that be in total or how much growth could that support for how many years? And what sort of paybacks would you assume for this -- for $1 of CapEx, how many sales would you get out of this capacity expansion? How does this compare, for example, for the Sanofi suite or Alexion? Then on Capsugel, would it be possible -- before you integrate Capsugel into the Lonza businesses, would it be possible to provide a standalone guidance from today's perspective only for 2017? And then lastly on -- in Specialty Chemicals, also nice margin development there, how much of that would you attribute to ongoing product pruning? And how much was just operational improvement cost efficiency et cetera? Thank you.

Richard Ridinger: Requests for a lot of details. Let me start -- go first to the Ibex.

I think this is designed just from a growth perspective to generate growth starting ramp up by the very end of the decade into the 2020s. That means with the timeframe of our 2022 guidance, we will see the first ramp up phase in growth, but it goes far beyond. And from a payback, I think the reissue that I think it has a high payback, look at our core RONOA and core RONOA is because we are much better than ever before, especially mastering the investment and the payback generation of the CapEx consuming Biopharma business and this will be not worse, the opposite. And then, of course, we have -- we cannot -- I cannot give you an exact number. Why not? Because one important thing to mention is once this bio park [ph] is completed and this will be long after my retirement, but I will not tell you when I retire.

So, this is a different thing, but when it will be completed, you will have a number of different business models. You will have Lonza investments, you will have core investments, you will have customer investments. I think it's not easy to say this is One Lonza Swiss franc will generate so many from. The one of the big advantage is that it's open for different technologies and it's opened for different business models. And what I foresee is and what I see right now in the different models we run from the results [ph] is from the early clinical to the commercial.

I think we see in all of the different models, we see really big demand and what we see here is demand of the market which nobody can fulfill right now. And this is what we want to change as fast as possible because a lot of new medicines are waiting, especially in the biological field and this is what we do. On Capsugel, I did not consult with my CEO -- CFO sorry, but I'll be -- we really go for separate guidance. What I can say today -- what we see today and maybe we will update you on the quarters we update. As we have no doubt that I think what projections and the projections which are in the business plan of the acquisition for the second half are coming.

This is what also our CFO has checked with the colleagues of Capsugel right now and we have no reason not to believe that is going to happen. And for the Chemicals, it's a combination because we have put years ago a new management in place and they have done both -- they have done three different things, it's only two. One is we have a new set of contracts in place very much with innovative products. I think we can, for example, because this is -- we made already public. We mentioned Clovis is one of them.

Clovis Oncology, it's a small molecule doing very well, but we have on top and here it's also something which we're not going to tell in detail for competitive reasons. We have changed the technology base and we are going to change the technology base on which are producing and within the existing technologies, we have made quite non-restructurings and how we run the facilities. And at the end of the day, you can say

its 30:30:30. I think it's a combination of these three effects, which bring us to results and I always was saying we want to hunt with small molecule the results of the biologics. Unfortunately, the biologics have has also moved up.

So, the challenge is still up there. But we are very confident. If you would have told me five years ago, you will see these small molecules margins, I would have taken it right away.

Patrick Rafaisz: Thank you. Thank you very much.

Richard Ridinger: Rodolfo will just add one or two points.

Rodolfo Savitzky: I think there was also interest on the Specialty Chemicals in here. I would confirm also what Richard said is true, but when we look at the margin progression, it's a combination of our product mix and, of course, in that regard, there's an element of product pruning, particularly of the commoditized part of the portfolio. But also significant cost improvement and productivity initiatives that continue ongoing in the Specialty segment. So, it's a combination both of commercial initiatives, product mix, and very strong productivity program.

Richard Ridinger: And maybe I just can add one thing which I forgot earlier -- in earlier question. We are extremely pleased with the progress in the Preventive Healthcare part of the Consumer Health & Nutrition business as well as the Hygiene -- Consumer Hygiene business. Both of these areas which are in the Preventive Healthcare of the Healthcare Continuum made extremely strong progress in the first half and we are also very pleased with the KPIs of those businesses.

Patrick Rafaisz: Thank you. Thank you very much.

Operator: The next question comes from Carla Baenziger, Bank Vontobel. Please go ahead.

Carla Baenziger: Good afternoon gentlemen. I have several -- two questions actually on the outlook you gave. So, first on the 2017 outlook, is there any reason why the absolute numbers in terms of core EBIT, for example, should be lower in the second half than they were in the first half? And the second question is about the 2022 outlook and the 30% core EBITDA margin, can you maybe help us bit understand, I mean obviously CapEx should we expect it to be above the 30% anyway? But where should we see Pharma&Biotech and Specialty Ingredients? And maybe as a help can you give us already an indication how much the delta between reported and core will be for the Capsugel business? Thanks.

Richard Ridinger: Last one -- later to Rodolfo because I don't really know. Maybe he is also not, you have to come back. From the margin perspective, I think we always had -- and this is already not only recently we set our ambition level of the Pharma&Biotech division sometime before is definitely we want to cross the 30% EBITDA margin line. As we have seen, we've crossed it this first half of the year. Capsugel, as you rightly said, it's a good combination.

And now of course, we are in the phase and that's why we will be more answering those questions when we go into 2018, when we are reestablishing, reorganizing together with the Capsugel businesses, our own businesses then we will be -- by 2018 when we have done this maybe in a year from now or so, we will be much more granular on how we see different compositions of different business models and the margin development. But what we can say is definitely from the today's perspective, I'm very positive about combined Pharma&Biotech tile of the future and also positive without saying a number today on the combined Consumer Health part. Where the bigger part comes from Lonza by the way, but the total part is still positive. And maybe on the mix for the outlook 2017, if you could take over second half, first half.

Rodolfo Savitzky: Yes.

So, on the outlook for the second half, the first thing that we have said is when we look at the sales core EBIT and core EBITDA, it will be ahead of prior year. So, that's one element. Of course what we've seen many times before, is when we look at Specialty Ingredients, there's a seasonality associated with the business. Among other seasonal elements, we have the water business, where sales against the summer period are obviously skewing the results through the first half. So, by definition, Specialty Ingredients would maintain the momentum, but the absolute sales are lower in the second half than in the first half.

And therefore, some of the metrics when you compare first half and second half will just by definition be lower. Now, in the case of Pharma, here we have said during the presentation, we need to be careful when we compare against particularly strong second half in 2016. Keep in mind that the Pharma business has now increased seasonality; it depends on the phasing of contracts during the year. And what we see in 2017, it's a very even, phasing of contracts during the whole year so to speak. And then the problem is, when comparing just against 2016, you see this skew in growth rates.

So, I hope this -- we cannot get into more details at this stage, but I hope this more or less answer the question in terms of quality expectation for the second half.

Carla Baenziger: And can you give some indication about the reported and core date Rodolfo please?

Rodolfo Savitzky: Let me answer the question in two steps. First of all, for Capsugel at this stage, Capsugel as such, independently is very difficult to without getting into more details to define if there would be some non-core elements. Now, when we think of the overall business, we see that the time of several core adjustments -- bigger core adjustments are pretty much over. What we have reflected is the exchange rate ForEx impact on the divestment of the Brain business is reflected in the first half, it's around CHF30 million.

And then, we put in non-core a couple of items associated with the Capsugel transaction, some banking fees are included those results. Now, thinking of the second half, what we expect is that the restructuring charges associated with the integration would be the additional adjustments to core. But other than that, we don't expect any big exceptional items. So, again, with the already announced Brain divestment, we just had the exchange rate impact in 2017 in the first half and everything else will be associated with the -- or the majority of the charges will then be associated with the Capsugel transaction, either banking fees or integration of one-time expense.

Carla Baenziger: The PPA question, so you don't have an answer yet there for Capsugel on the PPA?

Rodolfo Savitzky: For the PPA, we have 45 days until we can finalize the PPA from proceed.

I can tell you some preliminary numbers, we have discussed them already. We will -- we have estimated the assets to be around CHF1 billion and the remaining are split 50/50 between intangibles and complete. But of course, these numbers will be further refined, but order of magnitude, they will not change.

Carla Baenziger: Okay, great. That's what I wanted.

Thanks a lot.

Operator: The next question comes from Markus Gola, MainFirst Bank. Please go ahead.

Markus Gola: Hi, thanks for taking my question. So, my first one would be whether you could shed some light on your strategy in Preventive Health.

So, will we see Lonza, for example, entering the market for probiotics? And will this in the future still be a B2B business or can we expect at one point in time Lonza branded products in the pharmacy for example? And my second question relates to your recent innovative products Specialty Ingredients. So, here, how sustainable is actually your competitive advantage? And what are the entry barriers which protect you from competitors launches products; let's say next 12 to 18 months? And in general, what is your experience, how long does it take before we actually see competitors catching up in these markets? Thank you.

Richard Ridinger: Maybe start with the first one, for the second I need to ask little bit back in a minute. I think probiotics; I think the [Indiscernible] will be honest will play a role at Lonza, no doubt about it. We are working on those things.

We want -- and all this rightly so, the Preventive Healthcare part. At this moment in time, it's our clear target to be a leading -- a well leading provider in the business-to-business business model, especially because we are now -- after we have finally integrated the business, we are really the one and only end-to-end provider to the worldwide market of from the active ingredients over the builds to the final delivery form and especially, in this market, because there is no other end-to-end provider. I think it's already very well-received on the customer base and we expect definitely a very good momentum. At this moment in time, I don't see if I'm not differently convinced but I think it's been [Indiscernible] at this moment. So, we are of the same opinion.

We will not have into the B2C because I think this would definitely has a consequence that we would have to leave to the very successful B2B business model here, which I see as a promising model -- very promising model worldwide by the way going forward. And then can you just camp which products, maybe I missed of which product you talked in the--?

Markus Gola: Yes. So, basically, one growth driver in Specialty Ingredients that you released -- actually a couple of new products in Consumer Care, I believe it was replacement for [Indiscernible] but also in the coatings, you had some more innovative coatings and I'm wondering just in general how long does it take for competition to catch up here with innovations?

Richard Ridinger: The good thing is about those projects is, you are here in highly regulated environments. And you know what other people think it's unattractive to us, it's extremely attractive, because this is -- if you're not selling in this business model on the products, we're selling products together with registrations. And many customers just choose Lonza in the meantime and we have invested in those fields heavily also invested last years.

They are choosing Lonza because they need more support than just a antimicrobial effect and need also all the support to get their formulations and finally their B2C products registered in different legislation. This is, of course, fully true for Europe and North America, but as we speak some Asian societies like China are starting to move exactly very fast into this field, which makes us even more confident because in the emerging markets, it was so far more a wild field from a registration perspective. This is going to help us if this goes over time into a more structure field. And this is true for both, for the Healthcare part as also for the more part of coatings like that. We had quite some significant successes recently and the success it means the products are in the launch phase.

So, we had some sales and I was told that Lonza booth was clouded, because it is hitting a market need in the coatings industries, especially where nobody else has anything to offer, and here the offer is completed by all regulatory know how. I think this is something important for us, especially in those fields. Very good question, I think and here we will further work on even expanding our position as far as we can.

Markus Gola: Very interesting. Thank you.

Operator: [Operator Instructions] And our next question comes from Peter Welford, Jefferies. Please go ahead.

Peter Welford: Hi, yes. Thanks for taking the questions. I've got a couple.

Firstly, just returning to Ibex. Just trying to understand, is Sanofi a part of the Ibex complex that we're talking about here in terms of -- are we trying to see here where the diagram you drew. Is the Sanofi JV actually going to be a part of this? And can you give us some sort of idea I guess a try and benchmark this in our mind how the size of this and how it rates perhaps relative say Portsmouth or Singapore or some of the other sites that you have to give us some sort of idea of the footprint? And how many suites are there in total. You mentioned that there were nine that would we a full, if your customers took a full workspace, I mean how -- what is the total of number of suites we're talking about here? Moving then just onto the Services division of by Pharma&Biotech, I wonder if you just comment on how that's performing? And importantly where or not the profitability of that and you've managed to make inroads improving the margin you make on the services that you provide to the customers? And then finally, just a quick one for Rodolfo on the financials, just returning to the financial charges, I know you said that there were costs there related to Capsugel. Obviously, the financial expenses presumably include that CHF29 million Brain related FX charge.

But is there any additional cost for Capsugel within the financial part? Or are the other one-offs for the cost et cetera been booked in the OpEx for the difference between the core and then core EBITDA? Thank you.

Richard Ridinger: So, Peter, first of all, you're invited once we have the first buildings erected to pay us a visit that you can see the order of magnitude which is really big. Sanofi is -- the Sanofi investment is going together with the first investment of the first building of the bio park we have seen this Ibex -- in the video. Just to give you order of magnitude, one of our big mammalian assets, let's say Singapore, is a fraction of the building, just to give you the order of magnitude. And of course, which fraction is it depends a little bit on the technologies we are building out in the future and a lot of innovations to be expected.

So, it's really significant from the buildout and from the growth perspective, which is important. And I think one thing just to add, I think important is, and I always said it in the last year, its brownfield -- it's big, but it's brownfield. Important is people who run this, the fast men [Indiscernible] with the people and we have a lot of good people here. Good question about the development service business. We have years ago with the start of the Chief Operating Officer, Marc Funk in 2014.

We were definitely redefining all business models in this service field. I think it was a total overall of those business models. And we are extremely pleased with the significant process of the last 12 months of this service model margins. They are really getting through the levels where we want to have them, that means it's not a big difference anymore if at all depends on the quarters between the commercials and service models in that field. This is now much true for the so-called service models, which are coming with the more established technologies.

So, here we are -- we're really pleased with the progress. All said from that perspective. All before I hand later to Rodolfo, Peter?

Peter Welford: Yes, that's very useful. Thank you.

Rodolfo Savitzky: Okay, so Peter regarding your question on the financing charges.

So, we have banking fees in other expenses associated with the financing. Roughly we're talking a little bit less than CHF20 million included in the OpEx. And these expenses have been reclassified as non-core. But we can take the discussion in more detail if you want to offline.

Peter Welford: Yes.

Operator: The next question is a follow-up question from Markus Gola, MainFirst Bank. Please go ahead.

Markus Gola: Hi, thanks for taking my follow-up. So, it's a follow-up question on the Ibex solution, which seems like a great way to differentiate from here more price aggressive than newcomers into this market. And this whole project, will it be rather based on stainless steel technology or rather on single-use bags? And is it fair to assume that the backbone of the program are your innovative expression system, so that you will be able to generate much high output later? And my second follow-up question is on the FDA warning letter and [Indiscernible] for the media manufacturers, has this issue been resolved in the meantime? Thank you.

Richard Ridinger: Starting from the last question. I think this is still ongoing. I think normally it takes a while -- all initiatives, all remediation projects are on-stream and I think it will definitely from a timing perspective take a little -- until all those things have been done. So, it's much more that -- it's on track, all the things are on track and I think -- but it's just not going overnight, it's a very normal process. From the Ibex single use, it's definitely from what we see today, as a majority of what is going to happen.

Also, I think all modern systems and expansion and also modern technology, other things we want -- we will use. And, of course, on the other side, this is big enough and flexible enough to host all different technologies. I think if big blockbusters for the unsolved demands like Alzheimer would come up in the 2020s, then of course we need to build and we will be able -- would be able to build out as fast as we can. We can build out everything in all technologies to fulfil the demands. And this is basically the idea -- the assumption is fair that the single-use technologies will definitely play a very prominent role in this new field.

Markus Gola: Perfect. Thank you very much.

Operator: Gentlemen, there are no more questions at this time.

Richard Ridinger: So, ladies and gentlemen, because now as you can imagine here in Visp, we have to head to a Town Hall with our employees because big changes are coming, need also some communication with the employees who are going to be a big part of the future success. I want to thank you for joining our phone conference on this exciting first half 2017 and we are very pleased to talk to you.

Some of you on roadshows coming up and also later with the quarter three update in October. Thank you very much and have a nice summer.

Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines.

Goodbye.