Executives: Richard Ridinger - Chief Executive Officer Rodolfo Savitzky - Chief Financial

Officer
Analysts: Matthew Weston - Credit Suisse James Quigley - J.P. Morgan Cazenove Paul Knight - Janney Montgomery Scott Markus Gola - MainFirst Bank Laura López Pineda - Baader Helvea Patrick Rafaisz - UBS Peter Welford - Jefferies Justin Bowers - Bloomberg Intelligence Daniel Jelovcan - Mirabaud

Securities
Operator: 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 through the 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.

In addition, Pharma & Biotech grew organically by nearly 15% on the topline, like-for-like compared with last year. And 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 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 include 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. But 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. And 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.

And 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, also 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.

Rodolfo Savitzky: 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 confirm 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.

So, clearly, delivering on our strategy to grow substantially along the health care 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. We'll speak more about this new reporting structure for Specialty Ingredients later in this presentation. Now, as we have promised to the capital markets, we have opened up this segment to better display the parts along and beyond the healthcare continuum. As you will see, we have taken on a new key performance indicator, specifically return on invested capital, or ROIC.

To make sure 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 RONOA. Richard will later discuss our ROIC target for 2022. So, from the financial side, a positive story for the overall company, which for one year now has included the Capsugel businesses.

And with that, I hand back over to Richard.

Richard Ridinger: Thanks, Rodolfo. And 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 & 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 continued 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 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 midscale 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 the task in the first half. And we are already transferring customers into our Houston cell and gene therapy facility. Furthermore, we continue to invest in automation, in manufacturing and innovation in process development across all Pharma & 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 will 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, but 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. And we have already launched operational and commercial excellence initiatives to make sure that that happens. Finally, you might be thinking – or at least some of you – that the great numbers for Consumer Health only reflect the addition of Capsugel. That's actually not true.

Core EBITDA margin improvement are also an effect of performance increases in legacy Lonza's Consumer Health portfolio and in the legacy Capsugel one because 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.

And the global footprint of the combined company started to facilitate geographic expansion across all three key portfolios, means ingredients, dosage forms and hard capsules. Our Consumer Health and Nutrition businesses are cross-selling and bringing innovation in form and function to the marketplace. And the industry is taking note with customer demand increasing. We are continuing to see synergy opportunities from combining 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, but it's a kind of a hybrid division as it includes specialty and high-margin businesses as well as the more mature basic chemical part of the portfolio. Last year, 2017, some of our basic products were at a cyclical high. But this year, the downward cycle for some high-volume basic products and the raw material price increases on top have had an impact on this division. Although, the delayed construction season in North America due to the weather was reflected in the results of the wood business, for instance. Strong demand in composite materials in the aerospace and electronics industry continued as before, and Lonza is well positioned in these markets.

We achieved 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.

But as I mentioned before, May and June were much improved. And the momentum continues to build going forward. We were boosted by sales initiatives and expected new business, and so we've got a strongly positive outlook for the second half onward. The ongoing business model redesign has resulted in restructuring costs that are reflected in these numbers. In addition, we have made significant investments in commercial excellence programs and in innovative offerings that are beginning to bear fruit, like new digital concepts in residential water.

We expect this turnaround in the Water Care business to continue. Water Care will continue to focus on further growing the business and developing new technologies, while we are now in the process of considering all strategic options for the future. Just a side remark, as we are on the process, I will also later in the Q&A provide not 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.

It's net operating profit after taxes divided by year-to-date average invested capital. Our core RONOA is now complemented by ROIC. And today, we are setting an effective 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 revenue and our investments for growth.

We'll even explore initiatives to grow beyond 2022. I do hope you can join us in September here in Switzerland. That's it, ladies and gentlemen. That's our story for today and – I think you'll agree – it's a positive one. I'm sure you may have many questions and that's why we are all here to answer them.

Who would like to begin now?

Operator: [Operator Instructions]. The first question from the phone comes from Matt Weston from Credit Suisse. Please go ahead, sir.

Matthew Weston: 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 would be a number of asset transfers around the network this year, and that could cause some disruption. Can you let us know whether any of those transitions happened in the first half or whether or not we're expected to see them potentially impact growth or profitability in the second half? And, I guess, that includes any planned maintenance within Specialty Ingredients. Secondly, you've clearly reiterated the 2022 guidance, but based on your current trajectory, the revenue target appears easily achievable even with a meaningful slowdown in sales growth. Now, clearly, I'm not expecting you to revisit 2022 now, but 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? And then, finally, one of the surprises for us today was around the finance charge, considerably lower than we expected on the Capsugel financing. Rodolfo, can you just confirm there's no hedging gains or other one-time items in there that mean that that's not a sustainable number? And should we simply multiply it by 2 to get to an estimate of full-year 2018 financing?

Richard Ridinger: Yeah.

Let me [indiscernible] through the first two questions, the asset transfers and also other operational things. We don't expect any significant changes in the second half of the year. Of course, we have a big network. It's happening all the time. It's 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 ROIC on our results. And, 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, let's say, half year has gone up. And now for me, what makes me extremely confident that also 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.

So, this is really going quite well. So, that's – I can just say we are confident. And now, I hand over to Rodolfo.

Rodolfo Savitzky: So, Matt, on the financial charges, you're right. Indeed, this includes some foreign gains and gains from some currency swaps.

So, in terms of thinking about interest charges, we have committed our interest rates over all the baskets of interest rate that we place around 2% on roughly – again, rounding numbers – CHF 4 billion of debt. And, 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 numbers we've used because of, what I said before, the forex gains in some of our loans and some interest rates swaps.

Matthew Weston: Many thanks indeed.

And, if I could, just one appeal, Rodolfo. If at some point you could send us the Specialty Ingredients revenue and earnings break down 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.

Rodolfo Savitzky: Okay. Let me follow up with Dirk on that point.

Matthew Weston: Thank you.

Operator: The next question from the phone comes from James Quigley from J.P. Morgan. Sir, you may now go ahead.

James Quigley: Hello.

Thank you for taking my questions. So, first, Clinical Development and commercial development sound like they're going very, very well. In the annual report, you said you had 2019 large molecules in development and 22 commercial products. How has that developed in the first half? You started to transfer some product over to the Hayward site. Do you need to invest in more capacity in the short term to meet some of this strong demand? And then, the second question on the margin guidance, and I'm trying to work out what level of conservatism you baked in here.

Pharma & Biotech, if it goes at the same rate as was suggested on the first quarter call and 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. And the Water business and some of the smaller or the lower-margin businesses may have a 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.

Richard Ridinger: Yeah.

First, on the Clinical Development business also in Hayward, I think we are still – I think, as we speak, we are permanently investing. I think we are investing in all existing sites like Slough, Hayward, Singapore where we are already doing this business, and I think stay tuned. More will come going forward. Latest with the Capital Market 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's what plans 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 very specialist in terms of business. And, yes, the other things in connection with Ibex, we will talk more when it's the right time.

So, definitely. Our outlook is of course – I think this is what we see at this moment in time. It's a realistic one. So, taking all things into consideration, which we see. Of course, it was an extreme strong growth.

I think we still expect double digit for Pharma & Biotech, but not at the same extreme pace. It always has a little bit to do with order patterns where they – are they breaching 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 they are going. I think, currently, this is, I think, from our perspective, a quite realistic picture.

And it's not a bad one, I think.

Operator: The next question from the phone comes from Paul Knight from Janney Montgomery Scott. Sir, please go ahead.

Paul Knight: Good morning. Thank you for taking the question.

Was the Pearland or Houston facility, was it operational and contributing to revenue in the first half? And could you talk about the ramp up in the overall cell and gene therapy business globally? And then, secondly, could you talk to the progress on Water? I know that's being reviewed. Is this a 2018 event or how long of a development time do you see on Water?

Richard Ridinger: Yeah, the Houston facility, as I said before, it's really – I think we are 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's worth 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.

So, it's not comparable with the mammalian business, for example. So, it's definitely – I always was saying it has started some time ago, think we're making the right investments. It's still a field where we expect a lot of movement. It's growing nicely. But 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 is no doubt. But just to make sure, I see, for sure, that the major contributors in the total portfolio are much more coming from those parts of biologics which are more in our bigger assets. But there is no doubt. The ramp up is going well.

And we will definitely continue to try to make the right decisions going forward because I'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, but we are confident. And as I said, in Water Care, it's a process which has 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.

Paul Knight: Okay, thank you.

Operator: The next question from the phone comes from the line of Mr. Markus Gola from MainFirst. Please go ahead, sir.

Markus Gola: Hi.

Thanks for taking my question. So, my first one would be on Pharma & Biotech. Could you shed some light what drove the strong organic growth and margin expansion of the segment, despite the high comp and ramp-up costs for new 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-on-year looks also very good.

How sustainable is this? And do you see, from here on, still upside to the margin or is this how highest you can get in this business unit? And finally, if I may, a follow-up question on the guidance. You achieved high-single digit growth in H1, but a very tough comparison base. You mentioned further sales contribution from capacity ramp-ups in Pharma & Biotech. And also, it seems that the cyclical business units are coming back and the comps are becoming a bit less challenging. So, I just wanted to make sure, is there anything what worries you or what could slow down in H2 with the exception of the limited visibility on the cyclicals? Thank you.

Richard Ridinger: Yeah. Pharma, Biotech, I think if you just make a little bit the math – and I don't have the exact numbers, but just – what we said in previous calls and presentations, we said, I think, if you see that Capsugel goes maybe around more or less plus/minus two-third in Pharma, Biotech and one-third in Consumer Health, and if you see the total size of Pharma, Biotech just mathematically, this cannot have been the major impact. And if you go back saying that we had around 32 point – 33 percentage points EBITDA margins, the 33, now we have 32 in Capsugel, 33 in total. I think you could say it was even quite dilutive. But the drivers definitely – and it was good.

I think it's not that – Capsugel was really good. But I think the majority, of course, is the legacy Lonza business in Pharma, Biotech, driven by all different technologies. And what I think I really can report, it's biologics. The trajectory in the small molecules was, again, excellent in this first half. I'm very, very happy about it.

And there's still – of course, in some areas, still some opportunities to come. And that's why I think, for me, it was a good thing. It was a broad performance. It was not a single part of this business, which made, I think, the special impact and all others were mediocre. It was just good, I think.

In this business – and it comes also a little bit to some question about the second half and so on. I think, definitely, we have not, every quarter, the same delivery. So, we have to be also a little bit realistic. I think it's just sometimes, I think, 1%, 2%, 3% can just be on the half year based on some order patterns. So, that's why, still, its overall momentum will be strong in Pharma, Biotech and we will also be strong H2 versus H2.

But I think we should not overshoot expectations because I think it's already good as it is and also the forecast, I think, is – from my expectation – promising. Consumer Health. Of course, maybe some high level messages because also here I can say, what I said in the Capital Markets Day, there is a chapter on it. So, Sven Abend will give some depths 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 good market, being it nutritional supplements, hygiene and personal care, and especially the combination of us and also the sale 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 Market Day. I think it's a little bit – there's a lot of work to be done, I tell you. It was a tremendous job of the management team, the newly – I think the new management team, which Sven Abend, our COO, has put together, it was, as I said, if you are not – if you recall a little bit what happened in the last two years, so we had an acquisition of InterHealth with some new active ingredients. They were still in the rollout phase.

And now, another integration of Capsugel. If you ask, is the global rollout already done? By far, not. So, we are still working. I think it's still very strong, driven by the – more the mature market because we need to set up ourselves together in this new business. I think it's still, from my perspective, in a work in progress mode.

And, yes, as a starting line, it's really surprisingly good. And I'm not – but I'm not expecting that it's the end of the story because what I – 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. And I think there were some nutrition sales, and we're talking mainly nutritional supplements, where this combined offer was an unbelievable attractive boost 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, North America. But having said that, I see that.

I just have been, a few weeks ago, in Asia. I don't see any different tendency there. I'm sure what I – what – this was a little bit my vision when I came to Lonza. We want to bring pharma technologies in a consumer market. And the good thing was that Guido Driesen shared this vision and now we make it happen.

I'm extremely positive about it. [indiscernible]. You're welcome.

Operator: The next question from the phone comes from Laura Lopez from Baader Bank. Please go ahead, madam.

Laura

López Pineda: Good afternoon. Thanks for taking my questions. So, 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? Second question will be – so earlier this month, Novartis reported some challenges in the commercial manufacturing of its new CAR-T product.

Is this a problem of the new technology in general that could also be a risk or limit the growth potential or is this a Novartis-specific issue? Could this also become like a risk for the technology in general and maybe to the significant investments in research and in capabilities that you have also done over the last years? And maybe, lastly, in 2010, our chemicals water business had sales of around US$600 million, but now you reported around CHF 300 million – CHF 200 million. Has the topline declined so strongly over the last seven years or is this – or are these two values not really comparable because you splitted the business differently among Lonza?

Richard Ridinger: Rodolfo will talk later about the numbers in the Capsugel side. Let's first make a comment about manufacturing and gene therapy of CAR-Ts. I think we all need to be aware, this is an extremely new field. A lot of manufacturing technologies are under development.

And as we speak, we, ourselves, have developed some, I think, maybe quite unique manufacturing technologies for this technology because we want to be an instrumental part, especially as manufacturing expert, in making those processes stable and affordable in future. And, of course, I think there is no doubt that, at this moment in time, with the positive effect on the one side in a clinical – in the clinic and potential future demand, it's a much higher need. This, I see still, as a challenge in the industry. It's not a Novartis issue, I think. It's an industry issue.

And be reassured, we want to be – Lonza wants to be a part of the solution going forward. Actually, I do not see it as a general thing. But these new technologies – and I compare this to the biologics – stability of the biologics process going back 15, 20 years. I think if I compare the stability and reliability of the today Biologics 20 years ago, it was not so much different. I think a new technology needs literally new technology in terms of resolving those problems.

And I don't go in detail, but we are also working to be one of them who is going to resolve that. And 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 don't have the numbers beside me. We are more stable since, you can say, 2014, if I may say so.

I think this is – I cannot really recall and I cannot confirm nor can I not confirm that this is totally in line with what we have – what has been in this – it was always – and I say it was always a seasonal business. And even in the time when we can look better over the years, the seasonal impact is that – is a 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 the status where, as I said, the onboard journey from now on looks promising. This is what I can say.

And Rodolfo, maybe…

Rodolfo Savitzky: Yes. So, Laura, on the Capsugel, let's say, implied margins for first-half 2017, the number – our calculation is higher than the number you quoted. It is slightly below 32%. So, yes, that's correct. As we have communicated several times, this has to do more with a slow start in terms of sales for that particular year.

What I can confirm right now is, well, first of all, you saw the numbers for second-half 2017 with 32% margin. And based on the numbers you have seen today, what I can confirm is we are exceeding the business plan we have for Capsugel. We don't report anymore the margin separately. To an extent, it's difficult because we are integrating the organizations, and so that blurs, let's say, the EBITDA margin as such, but we can look very distinctly at the gross margin, at the sales evolution. And in both of these parameters, they are definitely ahead of business plan.

And the other thing I can say is the synergies are progressing well. We're starting to see first synergies and, to that extent, also that has an impact, small at this stage, but it has an impact on EBITDA margin from an overhead economies of scale point of view. Laura

López Pineda: Perfect. Thanks a lot.

Richard Ridinger: You're welcome.

Operator: The next question from the phone comes from Patrick Rafaisz from UBS. Please go ahead, sir.

Patrick Rafaisz: Thank you. And good afternoon. Three questions from me as well, please.

The first one, a follow-up on the previous question on Capsugel. You were talking very positively about this business in terms of performance and the synergistic potential. Before Capsugel entirely disappears in the consolidation and in the letters with the other segments, can you quantify where you think you're heading in terms of cost synergies and topline synergies versus the previously communicated numbers? And then, secondly, you've introduced the ROIC target. Have you also broken that down on the segment level or divisional level? And have you given your business heads their numeric targets? And can you talk about those in more detail, if so? And then lastly, a short one on your corporate line and your corporate costs, minus CHF 31 million in H1. You think that's a good run rate for H2 as well or were there some unusual items we need to be aware of? Thank you.

Richard Ridinger: Yeah. Maybe I give the ROIC and last question then later to Rodolfo. On the synergies, I think, as mentioned a little bit by Rodolfo before, what I can say. I think the synergies on the topline, I think it's like in all specialty businesses I have ever been in my career, and this is not very different. If you – when you introduce new concepts, synergistic concepts in the market, you will see already things in first one, but the real ram up, you can expect in average in year two to three.

This is very normal when you're 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. So, it should be seen like this. Yeah, I think our path on topline synergies is good.

I would even say, it's a touch better than what we expected. And 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 you know, in this business, they are on track, as we speak. So, this is for Capsugel. And maybe then, on ROIC, I think we – just one comment before Rodolfo takes over.

The ROIC is now incentive-relevant for the long-term incentives – for long term. This is what we have now changed in 2018. And now more from Rodolfo.

Rodolfo Savitzky: Thank you. Patrick, so going – just confirming what Richard said a moment ago in terms of the defensive synergies, we are fully on track also on the upfront costs, what we said this would be the integration cost.

Of course, the bulk of those are related to SAP integration, which will take a few years. But we can also confirm that we're on track. Now, the ROIC, for the time being, it remains a group metric that we have published now and Richard has communicated the midterm guidance. So, we will not break this again for the time being at the segment level. And 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.

And, therefore, we make sure that the target that we deploy to the different units definitely add up to our ROIC target. This is how we're managing this specific financial metric. Then, on your last question, in general, yes, we expect corporate numbers to be similar to first half. There's a couple of strategic projects going on, which, of course, have, I would say, not a material impact, but could have an impact in some of these numbers. I would say, for modeling purposes or projection purposes where we think about this is first half could be similar to the second half.

You could expect some additional charges in the second half due to strategic projects that will impact more the later part of the year.

Patrick Rafaisz: And without strategic projects, will you say it's an underlying corporate line going forward, let's say, as of 2020 or so?

Rodolfo Savitzky: 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. So, for practical purposes, I would assume these costs to remain constant [indiscernible] inflationary increases are offset by efficiencies across the functions.

Patrick Rafaisz: Okay, okay.

Thank you.

Operator: The next question from the phone comes from Peter Welford from Jefferies. Please go ahead, sir.

Peter Welford: Hi. Thanks for taking my last few questions.

Firstly, just on the finances, I wonder if you could just outline CapEx. It 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 phasing there of shipments? I know this business sometimes can have that. And so, should we anticipate the first half was a good sort of reasonable rate or were any of the product shipments that may have been expected in the second half fall into the first half of the year in the biologics business? And just on the Water business then, if we anticipate that business to bounce back in the second half, coming back to Matthew's point on not having the full-year margin, should we anticipate that should have a positive impact on the EBITDA for the Water division in the second half of the year or is this business relatively static, if you like, [indiscernible] operating leverage? I guess I'm just trying to understand what that could mean for the implied margin then of the rest of the group in the second half of the year. And then, just finally, on Singapore, the single-use bioreactors there, can you give us some sort of indication at all as to the scale of that sort of facility, or whatever you want to call it, in Singapore for SUBs and how we should be thinking about it in the context of the overall Singapore facility? Thank you.

Richard Ridinger: Now, let me start from the end. Single-use bioreactor, we have said that this is – it's currently at 2x2. Should we need a line with downstream, it can be expanded, I think, at short notice, if needed. It's our first phase three commercial unit of this kind. I think all what I hear is we are fully on track.

I think we have the first projects in the plant. It was quite fast tracked because we could use the overall Singapore infrastructure. So, it was a very efficient, very relatively low CapEx, very fast project. And I think it comes right at the time. I think the demand is good.

The first real batches, commercial, come out in this quarter of the year. I think we are already in the third quarter, if I'm not mistaken, though it should come out now. And this is – maybe it was the fastest thing we could do. And the overall Singapore performance is just going to be better with this new investment. I think it's – I think I'm quite happy.

I think it gives us also a lot of experience in these technologies, talking about Ibex and so forth. So, this will be much easier to ramp 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 same quarter, it's the same – the major quarters are the quarter two and the quarter three in this business.

I think it's definitely in the – as I said, we had a good – I think we have good agreements which give us, from now on, into 2019 – 2018 into 2019 a very positive outlook. And my assumption, in total, going forward, it will be better than it has been in the recent years. So, as I said, what is coming now is really good. Rodolfo takes over in a minute. The biologics, if I get to your questions right, I think there is nothing of significance, but it's just – I think it's just to see how it really turns out.

It's always difficult to predict what's going to happen in December right now, but it's not of any significance. I think we still are in all the guidance we see, and here we take also into consideration that some batches could go over the time limit of the end of the year or have been little bit earlier in the first half. So, it's not a thing which is – it's normal operations. It's nothing out of the normal line. CapEx, ramping up.

Rodolfo will come to that. Yes, it's going a little bit stronger in the second half, but it's just – the question how the projects are progressing, and sometimes you get more things in some quarters and less things in other quarters. And I think the first half year was not extremely high. We will definitely see a little bit more in the second half of the year. Rodolfo, if you add, I'm sure, things…

Rodolfo Savitzky: Just a couple of comments.

People saw, on the CapEx, we continue with our guidance of roughly between 8% and 9% for the overall year. So, if you compare to the first half numbers, that definitely means a ramp-up, as Richard mentioned. And so, we see that coming in the second half. And then, on the question of Water, yes, we expect the business acceleration in the second half, as mentioned, and therefore, some margin improvement relative to the first half. But when you look at the overall portfolio, I confirm what Richard said before, we expect the overall corporate or company margin to remain as we have guided – second half in line with the first half.

Again, we have a lot of moving pieces in the overall portfolio, and so the impact that this margin improvement of Water would have on the group.

Peter Welford: I guess, could you just help us perhaps, 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 it 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 a six-month trend.

Rodolfo Savitzky: This one, even for us, sometimes it's difficult to forecast, given the seasonality. You never know if the summer extends much further. And so, at this stage, we wouldn't like to start speculating on, let's say, the forecast for this particular business.

So, at this point in time, I would say we cannot give any further guidance.

Peter Welford: Okay, thank you.

Operator: The next question from the phone comes from Justin Bowers from Bloomberg Intelligence. Please go ahead.

Justin Bowers: 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 – or hearing from the biotech community and just saying that lead times to secure capacity have been increasing pretty significantly over the last 12 months. And when we look at your business, I guess, the question would be, hypothetically, if customers came to you and there were a lot of projects available, would you be able to – do you have the capacity you need or can you bring it online to sustain the type of growth rate that you had in the first half, let's say, for the next one to two years? And then, 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.

So, is it fair to interpret that as a modest acceleration in organic growth? And then, lastly, just a follow-up to your prepared remarks around Capsugel synergies tracking above expectations, could you just characterize that a little bit? Is that top line, bottom line, a mix of both? And that's it.

Richard Ridinger: Yeah. If we start with the Capsugel, I think, in the plan, going forward, and what we also published in the face of the Capsugel acquisition of the different businesses, how they trade, for example, one is more the low-to-mid single-digit, which are the pharma capsules and so on. And the dosage forms are 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 assumptions with the acquisition, and we put then the assumptions also in our targets, I think we have been slightly better on the topline because the margin fully met our expectations.

I think this is how it is. The margins were according to expectations and the top line was slightly ahead of what we have modeled. And not only modeled, also put in our internal target line. And this is what we expressed in the communication. So, the internal target line was in line with the expectations, which we published with the acquisitions, and now it was – I was slightly positive, surprised, which I think is good because it's a confirmation that I think we had a good first year of integration.

I think, 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 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.

So, it's still on the same trajectory. And also, Consumer & Resources Protection might have a better – a slightly better performance going forward in the second half. Coming to the capacities in Pharma & Biotech, as what I said before, it was a combination of many things. It's not only biologics – definitely, biologics leading everything. It's just a 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 as we try to debottleneck existing ones. There's a number of activities. And we will give a little bit more granularity how we see this going forward because it would be now – take quite a long time. It's a full presentation to give more flavor around what is the cost trajectory and why.

This is – we reserve for the Capital Market Day in September because you cannot say it just in 5 minutes how this is going to happen and what are the different moving targets in the overall portfolio. And we need to be – to present this a little bit more in detail with the chief operating officer of this segment, Marc Funk, and then we will see how this plays out in the Capital Market Day. Overall, what I can say, yes, we are absolutely positive with this part of our business, and we have provided with the investments we had in the presentation. We are providing to make sure that we can, on time, on short notice, more and more, fulfill the different demands. And now, I close it with saying, as we have partly communicated before, this is not – it's more to be flexible and it's not just the pure existing capacity which helps [ph].

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 picture. It's not some capacity. It's always – this is what we have learned over the last six years.

It's the right capacity. And this is what all our investments will underline. So, it was already much longer than I wanted, but more. I can just ask you to be a guest at our Capital Markets Day.

Justin Bowers: Okay.

Thank you very much.

Operator: The next question comes from Daniel Jelovcan from Mirabaud. Please go ahead.

Daniel Jelovcan: 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, and, I guess, you have some delays as always to pass it on to customers. Was that primarily, I guess, in the Specialty Ingredients segment? And also, on the gross margin, it was actually up quite decently, but I think it's not really comparable. I think you don't have provided a pro forma gross margin including Capsugel. So, if you could provide that, that would be great. Thanks.

Richard Ridinger: 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 head from the typical hydrogen peroxide, some carbonates, copper, cetyl alcohols, propane, butane, it's across the board.

And, yes, the assumption is also right, that it has definitely led to some delay in price adjustment in the market. And this was, I would say, not – it was exclusively a Specialty Ingredients issue. In part of Specialty Ingredients. In Consumer Health integration, a part, not so much. In consumer product ingredient, it's more of – even Consumer Health had some impact, but minor ones, but very strongly in all more industrial [indiscernible] and so on.

Here, we had really an impact mainly in the first quarter. We saw already in the second quarter an improvement. But, of course, if you have this gap in the first quarter, you cannot overcompensate it in one quarter. So, we still need to stay attuned what is going on with the cost side, and this is one of the reasons why we are not giving anything to say this is already firm. I think the market, in fact, is permanently moving.

We need to respond. But, yes, it was Specialty Ingredients. And the other questions, Rodolfo, can you…

Rodolfo Savitzky: On the gross margin, so we – Daniel, we have provided selected pro forma information that you have in the [indiscernible]. Of course, there's no such – 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.

So, what you can assume is that, of course, the gross margin in general does have a sizable impact or changes in the gross margin in the EBITDA, as you can imagine. But at this stage, I don't – because, of course, our overhead evolution is – comparison is much more stable. But at this time, we wouldn't provide the detail on gross margin for the group or for the segment. For the group, it's there, but it's not on the pro forma.

Daniel Jelovcan: Okay.

Fair enough. Thanks.

Richard Ridinger: So, 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 in Switzerland and looking forward to see many of you then.

Have a good day. Thank you very much.

Rodolfo Savitzky: Thank you.