Executives: Richard Ridinger - CEO Rodolfo Savitzky -

CFO
Analysts: Daniel Buchta - Vontobel James Quigley - J.P. Morgan Markus Gola - MainFirst Bank Patrick Rafaisz - UBS Paul Knight - Janney Laura López Pineda - Baader Bank Gunnar Romer - Deutsche Bank Peter Welford - Jefferies Krishna Arikatla - Goldman

Sachs
Operator: Ladies and gentlemen, welcome to the Q3 Results 2018 Analyst and Investor Conference Call and Live Webcast. I'm Alice, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by 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 Lonza. Please go ahead, sir.

Richard Ridinger: Ladies and gentlemen, good morning and good afternoon.

Thank you all for joining our conference call on Lonza’s third quarter qualitative update for 2018. Joining me in the room are Rodolfo Savitzky, our CFO, as well as members of our Investor Relations and Corporate Communications team. It’s not been too long since you last heard from us. We had about 120 analysts and investors at our Capital Markets Day a few weeks ago in Zurich & Visp in Switzerland. We really appreciated your participation.

Today’s news release confirmed that our strong momentum has continued throughout the third quarter for our businesses along the healthcare continuum. We want to provide you even more qualitative insights into our Q3 business performance. So, let’s take a look at the highlights now on the slide three. As we already mentioned, our healthcare continuum business has performed robustly and drove growth throughout our Company. Here is a reminder of what we discussed in more detail at our Capital Markets Day.

The healthcare continuum includes all three

Lonza pillars: Consumer & Resources Protection; Consumer Health and Pharma & Biotech. The healthcare continuum stretches all the way from preserving our environment and protecting precious resources in a sustainable healthy way to preventing health problems to treating diseases. We’ll look at each of these pillars and their contributions to our growth in a few minutes, but first, let me give you an overview of the performance here. The combined businesses for Lonza ingredients, both pharmaceutical and nutritional, and for dosage forms and delivery systems as well as hard capsules are all doing extremely well and are performing above expectations. One of the highlights of top the quarter was definitely the expansion of our Ibex Solutions.

We extended our innovative Ibex offerings to include clinical development and manufacturing services. So, now, we can offer our customers the full range of services from preclinical to commercial, including fill and finish. This is at our Visp site; much more about this unique approach shortly. Within Lonza’s Specialty Ingredients segment, Consumer Health benefitted of only from the synergistic potential of combined nutritional ingredients and dosage forms offerings but also from good market demand for consumer and professional hygiene. However, a challenging environment for cyclical businesses and mature parts of our Consumer & Resources Protection portfolio, like basic materials, intermediate continued to have an impact.

This quarter, the Water Care business gained some good momentum, based on successful implementation of commercial initiatives. And finally, today, we are confirming our 2018 outlook, which was already upgraded with our half-year 2018 results. We are confident we will achieve the attractive targets already communicated externally, while we prepare payout for further investments and ongoing operational improvements in the future. Let's take some time here on slide five to look in more detail at our three Ibex offerings, Design, Develop and Dedicate. We want to fully understand the offering.

The feedback is extremely positive from our customers. Following discussions at Capital Markets Day and after, we would like to provide additional explanation. To clarify, we now provide clinical development and manufacturing services along the whole value chain for drug substance and strong product, and again that includes fill and finish. You can see on the slide, our three Ibex Solution offerings. Ibex Design is from preclinical to Phase 1; Ibex Develop covers Phase 2 to commercial.

Those two together are only one wing of a building, which means only half a building. And the third offering is Ibex Dedicate is in primarily at late phase clinical to commercial stage manufacturing. Ibex Dedicate is intended as a generation project, meaning that it will be ongoing for many years. We’ll only build based on customer demand and with contracts or ownership models in place. Customers can start with just a small suite and then build up.

A so called dedicated facility is aimed primarily at late phase clinical to commercial stage manufacturing. The Ibex Dedicate building displayed here refers to the Lonza-Sanofi joint venture. And we think more Dictate will come in the future. We announced at the Capital Markets Day that we expect revenues to reach CHF 500 million in mid-2020s out of Ibex Design and Ibex Develop alone. This offering includes drug substance and drug product development and manufacturing.

So, we are now offering fill and finish. I mentioned that again, because this was not clear to all participants of the Capital Markets Day after that day. Thus, the orange wing you can see on the right-hand side of the slide. We're looking forward to discussing Ibex Solutions in further detail during our upcoming road show in early November. On the next slide is a brief update on some other projects that are currently underway.

They too will drive the growth of our biologics business toward and beyond 2022. Like Ibex Design and Develop, the expansion in Singapore and the new Hayward, California, sites focus on single-use technology. They are already operational with first customer batches having been released in this quarter three. This was earlier than expected. The teams did a great job getting up and getting it operational.

Demand is steady for all these assets displayed here. Moving quickly over slide seven, let me just point out that Pharma & Biotech performance was driven particularly by clinical development and manufacturing and by commercial manufacturing in the biologics businesses. Also cell-and-gene therapy offerings continue to see strong interest from aspirational biotech and established pharma companies that are receiving approval and fast-track designations. Now, on slide eight. Lonza small-molecule businesses saw further high interest in highly potent active pharmaceutical ingredients.

One example is the recent grand opening of a new monoplant where we’re working with one of our pharma customers, Clovis Oncology on their drug for ovarian cancer. This partnership showcases our expertise in handling high potent APIs, our commitment to develop new business models to satisfy specific customer needs, and our ability to support the fast-track launch of breakthrough designated products, and we’re very happy about it. At the Capital Markets Day, we also talked about repurposing assets. As one example, in quarter three, we launched a pharmaceutical early intermediate supply initiative to leverage chemical production facilities at the Visp site. It allows us to offer customers an integrated supply chain from early intermediates that are not cGMP to advanced intermediates and APIs that are cGMP.

Our capsule and dosage form and delivery system business was also above our expectations in quarter three. On the Specialty Ingredients side, here on slide 10, the momentum in our Consumer Health businesses which we were reporting during the half-year results was ongoing in quarter three. We’re benefiting greatly from the synergistic potential of combined nutritional ingredients and dosage form offering as well as from robust demand across all regions for hard capsules. Innovation is the theme here, and we’re having with, for example, Lonza’s delayed-release capsules for specialty applications, most notably probiotics. In the quarter, we also held the groundbreaking ceremony for our expanded U.S.

manufacturing site in Greenwood, South Carolina. The facility, the new one, due to open in mid-2019 is a part of an ongoing program to enhance production of Lonza’s nutritional ingredients and dosage form technologies. On slide 11, you’ll see that the cyclical parts of the portfolio as well as the supply chain and raw material price issues continue to have an impact on the consumer and resources protection results in quarter three. We expect the challenging situation will be ongoing, and we’ve continuing to implement counter measures. As discussed at the Capital Markets Day, we are taking action to optimize our product portfolio and Consumer & Resources Protection especially focused on the high-margin specialty chemicals for formulated products and solutions and re-optimizing of assets used for lower value product portfolios that will be over time discontinued.

We are confident that this focus will help to achieve our gross margin targets, despite the challenging environment. But, just let me add here one thing to put things into perspective. And you could see it also in the Capital Markets Day. It’s in the meantime a minor part of the total Lonza portfolio. And this is because of the actions we have taken in the last two to three years.

After a soft second half 2017, which is a year ago, and the first half 2018, now, Water Care is gaining good momentum, and the outlook is positive. Increased market demand and commercial and operational initiatives all contributed to that progress Water Care continues to focus on brand restaging, innovation and e-commerce. The strategic value of the Water Care business is ongoing, as we already mentioned at the Capital Markets Day. Looking to the future now on slide 14, let me reiterate what I said earlier. We are right on target for meeting our full-year 2018 numbers, which were already upgraded in July with the first half-year 2018 results publication.

Until the end of quarter three, Pharma & Biotech performed even better than expected at the meaning of the year, while the cyclical businesses of basic materials, came lower in because of the reasons we have discussed, and we have also -- to put in the perspective, we had an especially strong year 2017. On balance however, the end result was positive. That means our positive overwrote [ph] the challenges. For our midterm guidance, we can confirm today what we said at the Capital Markets Day. We expect to continue to have highly attractive midterm guidance.

Lonza’s three-pillar strategy is the key foundation for our growth trajectory going forward. Through it, we will be strengthening synergies, levering overlaps and mitigating portfolio risk. So, overall, we expect to continue our sustainable growth while optimizing our business and product portfolios and making targeted investments to grow along the healthcare continuum toward and beyond 2022. That’s it. Ladies and gentlemen, that's our story for today.

And it's another positive one on this quarter. I'm sure you have questions. That's why we are here to answer them. We would like to begin.

Operator: [Operator Instructions] The first question comes from the line of Daniel Buchta from Vontobel.

Please go ahead.

Daniel Buchta: Yes. Thank you very much for the presentation. Two questions I have. The first one on your chemical manufacturing business.

Here, your peer in Switzerland, Dottikon, most recently, given a profit warning by stating that supplier outages in China, particularly affected them negatively. I mean, how is that view? [Ph] I think the impression I gained is that our outages in China were even very favorable for you because demand was coming back to Lonza. And you’re also mentioning your marketing initiative for early intermediates. Could you elaborate a bit about the situation and how you’re different in that regard? And then, the second question on the more industrialized businesses and Specialty Ingredients, like coatings, composites and also material protection. You were mentioning that these businesses saw a robust performance.

So, does that mean that on a sequential basis compared to the first half, there is no slowdown, especially from the macro factor, which might be as it negative for these businesses? Thank you very much.

Richard Ridinger: So, what I can say, our pharma chemical manufacturing businesses are doing well. So, we cannot see really anything what has been reported somewhere else. I think we are doing extremely well in this business. I think it further values [ph] that we reported in the last years that we have changed business models, we have now operational models.

I think, we get I think very successful this year. And there is no reason to believe that it’s going to stop. And we have -- I think we are now harvesting what we have done over the last two to three years. A little bit on China, blue-sky policy and outages. I think, it has I think rightly said so; it has positives but also negatives.

It depends always on the products. If you had a supplier out of China and the government decided to stop [ph] supply chain, then of course you face some challenges and we have some, let’s not play it out. On the other side, what we see, and of course we see opportunities, rightly assumed by you. I think it’s a little bit of something, what we said repurposing high valuable fine chemical assets. I think this is what we want to do because we see also some customers who are now totally happy, and they now value more than maybe years ago, a reliable supply chain, if you want.

And of course we’re correcting little bit. I think we’re taking this initiative to do that. And of course especially as I mentioned in the presentation, in the pharma intermediates, we want to take really advantage and build this business stronger than it is today. So, I think we see then opportunity out of the reasons you have just mentioned in your question. Yes.

But bottom-lime, I think here in this field, we’re feeling very good. I think we cannot -- I have not any problem there in this part. To the industrial businesses, material protection, coatings and composites groups, good development. I think what I said in the Capital Markets Day, a little bit -- this is not because this partly together with the more basic business, maybe it’s not totally fair to that business, it’s doing better. I don’t see negative development at this moment in time, still also for the [indiscernible] I think we see -- this looks good.

And the basic business which we are running since 40, 50 years which to certain extent this year marked a cyclical down after a cyclical up of last year. So, the specialty part, what I mentioned in presentation, I think the development is good and we’re happy, and don’t see any indicator in this business I can say in a moment which makes me think negative, at least what I can see for the next two quarters or so.

Operator: Our next question comes from the line of James Quigley, J.P. Morgan. Please go ahead.

James Quigley: So, on the cyclically exposed businesses, we know that currently the Consumer Resources and Protection is around 22% of group sales and 16% of group EBITDA. How much is actually cyclical exposed? You are talking about the other industrialized businesses there. Surely, they have some kind of impact. And what leading indicators are you looking at in this business and how they’re tracking today? And secondly, again on that side or in Consumer Resources and Protection, first half, so EBITDA or EBIT, down 11%. Should we expect similar results in the second half? And then, looking further on 2019, we had heard a lot about investments you’re making for future growth.

So, Ibex, the highly potent API, the consumer nutrition plants as well. I expect a good chunk of this is probably going to be CapEx. But, as we look into 2019, consensus is expecting core EBITDA margin expansion of 100 basis points. What factors should we be thinking around or considering when we’re looking at 2019 margins? Thank you very much.

Richard Ridinger: Okay.

Let me start with the first question. I think, what we said in the Consumer & Resources Protection pillar, particularly [ph] the business is definitely in the minority, if it comes to the total sales contribution. And it's a mix pack. It's not one business. I give you, one is vitamin B3 for animal feed.

And this for example is following totally different dynamics. I think, it’s not necessarily only the raw material price here. It’s always depending. And in the meantime animal feeds vitamin B3 I regard as a typical commodity, which is fluctuating every year depending on supply-demand equilibrium if it's -- I think it’s a little bit charged [ph] and you can have an over-proportional margin gain; if capacity is along, you get the other. It's a part of it, of the cyclical business.

And then, we have the additional what I say one, two level downstream products which you have in this. But, all in all, even in the third pillar, which you rightly described in a number of what is the total, it’s a minority stake. That's why I said in my presentation. In the meantime, with all what we did over the last 6 to 7 years, what would have been an issue for Lonza maybe seven years ago, I think it’s not one today, because we can really -- I think we are not so much -- as a group, we are not so much getting an influence by that. On 2019, as I we say, we’re in the middle of the planning process.

I think your question comes a little bit early because I think we are now in the way that my CFO told me that he will -- in a couple of weeks, he will give me the first indication. Of course, what is clear, of course, we will every year try as a company to move more towards our mid-term target. But how much, I think we want really to communicate once we see a little bit better where we’re in the planning and how -- I think normally we communicate about this when we have the full-year results presentation and not yet in the quarter three update. But the only -- the general thing is of course -- the general confidence in our business is also there for 2019. This is what I can say you at this moment.

More to come and we’re really through the planning process for the year. Anything to add to Rodolfo from your side

Rodolfo Savitzky: Maybe from my side a couple of comments. In terms of the business dynamics of the different pillars which are mentioned, what we can confirm is what we have disclosed during the first half. The similar dynamics continue in quarter three, and the expectation is also to continue for the balance of the year. So, when we talk about the different pillars and then you question was I think more related to Consumer & Resource Protection, we expect more or less similar dynamic in the sector.

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

Markus Gola: So, my first one would be on the challenges in supply chain you mentioned. Have these challenges been amplified with the recent U.S. tariffs on China? And could you maybe provide some color, what measures you are taking here to mitigate any potential effect on your business? My second question is on your recent single-use capacity expansions.

Is it fair to assume that these capacities are still running validation and engineering batches from H2 or can we already expect contribution from commercial batches within this year -- this financial year from these capacities? And my third question if I may, on the water business. Good to hear that you've been able to turn the business around in H2. However, is it fair to assume that the margin in this business would still be burdened by the mentioned restructuring efforts?

Richard Ridinger: First, let me talk a little bit about the supply chain and what we do about it. I think we’re monitoring this, I would say this -- the different opinion about the trade of U.S. and China and what are the implications.

I think we have it quite bit under control. There are some implications, but they’re not dramatic. What we have done before, and it’s important what we also continue to do, and I think it’s not knowing what's coming in the next 10 years, we are really trying to go for regional supply chains, as much as possible. To make sure that we are matching -- we did it before, different purposes a few years ago where we said we want to -- we want to eliminate the transactional losses on exchange rates, as a Swiss company, remember. And now, of course, now we have a different reason to continue to efforts and saying we want to also make business in all regions in the world without having too much an impact of tariffs and so on.

But, there are minor crossovers, particularly in China and U.S. absolutely. Now, if you can say, the good -- the bad news is our China business is not so big yet, good and the bad news. And I think the exposure from China to U.S. is some but from my perspective, it’s not too significant to the total group.

And going forward, definitely I think we’ll align our asset strategy, which we did already and we will even continue focus on making us a less dependent on cross [ph] regional supply chain. We’ll never be zero. But, I think we’re also not in such a bad [ph] trade, as we speak. The single-use technology ramp-up, what I said, I think we have made the first invoices. So, we have [indiscernible].

Having said that, of course, it’s a start. It’s not that we’re fully in -- full operation that keeps us of course -- my expectation is those things which are ramping up are getting up in 2019 to more -- to hit more and more sales for sure. What I said is not surprising. One of them is the clinical manufacturing in Hayward. It’s really dedicated to clinical.

This was a repurposing of a pharma site which we acquired from a pharma company which had a very low utilization. We had to repurpose it; we had to hire people, because we’re running now 24/7 on that. And this was a lot of about people, planning and so on. And that’s why I think the most difficult thing is not only the technology, it’s also we get the people and the shift and the qualification up and running. And now we’re happy that we made it -- I think we expected it in a quarter four.

We had the first batch -- invoice in quarter three. Will it move dramatically the needle in 2018? I think, no, but a little bit positive it will be. Likewise in Singapore where we’re more targeted for late stage, early commercial disposal, also there we have ramped up and also there, I would say, a bigger impact is going to happen in 2019 versus 2018. And your last question, we didn't get it perfectly, maybe we can repeat it again.

Markus Gola: Yes.

So, on the water business. Basically, I read in your presentation that you turned around the business but there were some restructuring efforts necessary. And my question was, whether that might weight on the margin in the second half of 2018 and therefore, we maybe cannot really see a strong margin and expansion here.

Richard Ridinger: This was a good [ph] business. Yes, I think what we did in the -- little bit setting the Consumer & Resources Protection pillar nearly up, I think this is belonging to the specialty part.

And what we did see is not so -- it’s not a heavy asset-based restructuring, it’s much more business model restructuring where we’re saying we want to change the business model into putting more the added value part in the forefront and be organizing our go-to-market activities. This was the major activity which we did here. And it’s important to understand that we have some really extremely valuable tools in that portfolio, which I think we need to prepare ourselves to make the global rollout. And this is meant that we’re now lining up in this over all specialty part of Consumer & Resources Protection. I think this will be the major topic for the next few years to come that we are taking advantage of many good technologies and making more global.

And this is will be what we’re doing in this part of our business.

Rodolfo Savitzky: Maybe just to comment on the financial side, I mean when -- again the comments about restructuring, this is in the bigger scheme of the group really minor, so no impact from margin. And of course, as you know, many of these activities by definition then belong to non-core. But again, in the big scheme of things, these are very, very small.

Richard Ridinger: And not restructuring assets at this moment.

So, it's really setting up the business in a more efficient way.

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

Patrick Rafaisz: Three questions, please. The first is on ag ingredients.

You talked early about the vitamins, but can you add a bit more color on crop protection and how bad is the situation there currently, and how do you see your market share evolution there over the course of 2018? Then secondly, on the guidance, you talked about nine-month performance with Pharma & Biotech better-than-expected at the beginning of the year, Specialty Ingredients below. I'm wondering, within Specialty Ingredients, is -- can Water Care offset the softness in the basic materials and intermediates. And then, lastly, Pharma & Biotech, thanks for the rundown of the key conclusions from the Capital Markets Day. I’m wondering, on Ibex Dedicate, in the current CapEx guidance which we have, do you assume any material capital contributions from customers for the buildout of the Dedicate suite in the years to come?

Richard Ridinger: Let me start from the end. In all contracts, this is always a topic.

I think, the capital contribution on customer is always a topic because it always depends a little bit -- I think the contracts are always taking consideration is there capital contribution or not. And of course some customers who like to have one, and then of course it might be some benefits on the batch price but it’s still -- I think our experience is still very good for us. And as I say, okay, we would like you to contribute fully and then of course they pay -- I think the batch prices are higher one. This is what it is. Of course we appreciate both.

And depending on the project, I think it’s also very welcome if we get customer contributions. And we’re looking for this also actively. It’s not that reached us late for it. That’s why it’s a case by case. And in the discussion which are -- and there are many discussions ongoing.

I can tell you, LTB [ph] teams are very busy. This is in all discussion -- in some discussion, it’s a big topic, in others, it’s a less of a topic. So, it’s a mixed bag as it has been in the past. Let me go to the first question on the ag business. We have actually two kinds of ag business.

One is really our core specialty. This is actually doing very well but it’s not too big business. I think it’s something where you really have added value formulation and excipients. And then, we have a longstanding custom manufacturing business. And I’ll call rich -- in the big scheme of things, it’s really not a significant, I will say, part of the long term portfolio at all anymore.

It’s still existent but it’s not something in the big scheme of things which is bothering us because the size is not so significant in the new Lonza picture as we see it today. And here, I think it’s just more depending on contracts and just only on the overall situation in the market. And it belongs more of course to what we consider, if you want so, basic business. And this is how we see that today. In Specialty Ingredients, of course, we have a little bit to differentiate in the meantime, if you recall what we said in the Capital Markets Day.

Consumer Health I think what you said, I think we’re happy. I think it’s -- this pillar is strong. I think it’s exactly what we wanted after the merger between Lonza and the former Capsugel, the business, the first year. Although the organizations still have to be built on the fly, I think we’re quite happy with on-the-fly performances already where it is today. And then, I think the third pillar, I think of course we had the upper part, we said earlier one is good; the lower part was what we already reported.

This is the one which has commodity influence. And Water is coming up now. I think it’s -- we really have to look at all the three pillars. And this is how I see it today. So, there we have a mixed picture on the pillar.

But those who have also the highest margin, and this is good thing, they are performing really well.

Rodolfo Savitzky: Maybe just a technical comment on the customer contributions to CapEx to keep in mind. Of course, the cash impact you definitely have and [indiscernible] investments in CapEx overall. Now from a P&L and accounting point of view, you all know about IFRS 15. And of course that is one-time milestone for CapEx contributions, will be throughout the life of the contract or the projects related to the CapEx, which has the advantage of eliminating one-time bumps in the P&L, and so far as we see it, positive on the cash and also positive in the sense of more predictable P&L results.

Operator: The next question comes from the line of Paul Knight, Janney. Please go ahead.

Paul Knight: Hi, Richard. Thanks for doing the call. Could you talk about your capacity? We hear from the North American market, there is supply constraints or capacity constraints in the industry.

And Lonza, are you are tight on capacity? And then, secondly, the regenerative medicine startup in Houston. How is that going? And then, thirdly, maybe for Rodolfo is CapEx, relative to maintenance CapEx, any change there, or what is it on the CapEx in the next year or this year from maintenance levels? Thank you.

Richard Ridinger: So, about capacity, I said that we are -- since maybe three years, we’re permanently investing because definitely there is a good demand. We’re not only investing in building new ones, we are permanently investing, which sometimes I've mentioned on road shows but it’s really helping out is in debottlenecking. So, from a technical perspective, we found in all our assets, ready to get more out of the assets, which is of course attractive and has led also to good, very good margin.

And we’re continuing to, if you want, fire on cannons, the debottlenecking on new investments to make sure that capacity is met. And because of the fact that the shortest capacity, especially in the clinical manufacturing, this is why we exactly have made Hayward and we’re permanently debottlenecking slowly, [ph] building Ibex Design and Develop, and this is why we foresee to be the case also in the next five years and forward. I think, it's currently -- we definitely have done everything already last year to make sure that we are mitigating this effect. But, it’s still to certain extent in the market, there is no doubt. But, we’re doing everything to help to shorten the time for customers to get new capacity.

And Houston, I would say, it came in at the right time. It’s absolutely a high demand on this new capacity. We’re in the ramping up phase, and I think the customers are already being in. And I think, this year is fully dedicated to really make sure that we are getting fully operational with customer projects in place already. So, from my perspective, it now has after the grand opening, moved into positive challenge, the new technologies we need to get executed together with our customers, and it's going well at this moment.

Rodolfo Savitzky: Then on the CapEx front for 2018, this year, the mix that we have guided in general around 40% for maintenance, [indiscernible] for growth remains. Now of course, at the Capital Markets Day, we said we expect to increase the level of CapEx investment relative to sales, we said 10% to 12%. And this is mainly related to growth. So, if you do a bit of a math, the level of maintenance in absolute Swiss francs will remain because this is more or less a constant amount of this, the range, which is similar [ph] over time. And then what you would see in the increase in the growth CapEx, so that will change a bit to me.

Richard Ridinger: And this because, the first question on I think to help to get to biologics offer in the market, the right biologics offer, I have to say, expanded.

Operator: The next question comes from the line of Laura López Pineda, Baader Bank. Please go ahead. Laura

López Pineda: I have three more questions. So, Unilever, DuPont, and Nestlé reported some slowdown in the consumer goods space.

Has your Consumer Health business also felt this? So, any of your product portfolio has also felt any of this slowdown? And do you believe this is more a temporary thing or do you see this trend also staying for some quarters to come? And secondly, there are several companies in very different industries also highlighting increasing logistics costs. Is this an issue for Lonza as well, or can you mitigate this easily with price increases, or I don’t know? And the third one is, in the U.S., so in addition to the trade war, there’s also foreign investment restriction and there’s a lot of speculation going on that it could be a risk for the biotech industry growth since in the past China has invested a lot in the biotech U.S. venture capital funds. So, do you see this as a risk for the industry? And have you maybe heard something from biotech companies on the topic?

Richard Ridinger: Let me start first with the consumer market. Actually we don’t feel this so much, because what is happening a little bit in the -- worldwide, but I talk about the worldwide scale, we see in many consumer markets and especially also in the markets for example like consumer health and nutrition that the biggest growth is captured by small and midsized companies.

We see like other players in this market, we see the so called local and regional dynamos, in the meantime called, that they’re definitely taking a big part of the growth of the industry. And our consumer health and nutrition business, I think yes we have happy customers. But the bulk of the growth comes from exactly this segment of the market. And as I know from other industries which are not -- have different of how we’re moving into the same industry, this is what I see is a part of it. So, it’s not a general market for instance from my perspective.

Logistic costs, yes, partly. We see the challenges as well. And from the perspective, can you move it over, I think yes and no. Sometimes you have contracts in place where this was not put in as a flexible or as a -- the liable thing and then you’re caught by this and then you have to wait until the contract terms of 12 months or so expire and then you can try, or sometimes you can do it on a quarterly basis. And it's easier to do.

That's why it's -- we see this issue, yes, on logistic in United States. And it's a mixed bag. If it comes to is it -- can you hand it over or do you have to swallow a part of it, it’s a mixed bag from this, in time. I think it’s one of the challenges in some businesses. The foreign investment restrictions, we didn’t hear anything that in terms of that it has already any perceivable impact on the funding in the biotech arena.

So, we didn't hear anything yet. But, from a customer perspective, our experts have been informed that this is great to have an impact. I think we still see from the demand side from the interested side in our different clinical capacities, there is still high demand which is not influenced at all. And by the way even if there was an impact, it normally takes some years, until this impact comes in any case through the pipeline. But, also in general, I don't see -- we have not heard anything that it's in the beginning of the pipeline, anything remarkable coming yet.

So, this is what I can say at this moment.

Operator: The next question comes from the line of Gunnar Romer, Deutsche Bank. Please go ahead.

Gunnar Romer: The first one would be again on the Consumer Resources and Protection business. I think at the half year stage, you indicated that you would expect some acceleration in the second half.

Now, when I read through your statement today, it seems as this is no longer expected. So, just curious whether you see this business still in positive territory for the year as a whole; I think, you have 1% organic growth in the first half. Just curious whether you still think it's positive or is there risk that overall business could see a decline for the year as a whole. And then, related to that, obviously, as you’re confirming the guidance, it seems as if the Pharma & Biotech business and potentially Consumer Health business keeps on performing very well. Just curious whether you can share a bit more color on what is driving the outperformance next to your very positive comments again on the Capsugel business, any additional color would be very helpful.

Thank you.

Richard Ridinger: Yes. Capsugel, yes, it’s definitely. As a general, I think it’s now -- we have now almost -- we’re going almost in the one and half year after closing from the business perspective. I’m extremely happy.

And this is a supportive thing. Of course, you’re always not over speeding when you plan because I think a lot of things -- people have to work together and it’s good. On the other side, I think what is unique, I think biologics, again, I think after a fantastic 2017, we are expecting again a good year, and what one of the very early questions we had and even on the small molecule. So, if you see this all together, the Consumer Health and I think the different contributors in the CDMO of Lonza, I think it’s all moving in the right direction. Maybe Rodolfo comes with some forecast because I do not know it by heart.

But I can tell as a general theme to be emphasized, in Consumer & Resources Protection unchanged from half year or what is going in every direction, it’s specialty material protection part, this is doing very well. If this stands alone, I think, it’s good. And the other part, I think what I also said earlier is continuing as it was in the first half, and maybe you can give some color.

Rodolfo Savitzky: So, Richard stole my punch line. So, I think when we look at the dynamic first half and second half and now I talk specifically Consumer & Resources Protection, they already consistent.

And so we should expect that similar result for the let’s say second half and balance of the year.

Gunnar Romer: So, it won’t be too much read into your comments today that there’s a detailed reaction happening as we speak -- the first half?

Rodolfo Savitzky: No. That will be incorrect conclusion I would say. I think you talked about growth momentum that was your first question. You said it limited.

What I am saying is that the second half would be similar to the first half. So, there’s definitely a sustained performance, of course. We’re not -- let’s say the growth in the first half was minimal. That’s correct. But as we should explain, this is a portfolio product, certain parts of the portfolio we have highlighted a few, like composites have extremely good performance.

We’re very happy with those parts of the portfolio. And then, we have the cyclical part and I highlighted again vitamin B3 where we continue to have headwind. But overall the portfolio fits one part, the negatives are offset by the positives. And then, the performance is similar, H2 versus H1.

Operator: Next question comes from the line of Peter Welford, Jefferies.

Please go ahead.

Peter Welford: Just couple, firstly just with regards to the biotech business. I am just wondering whether you can comment at all on any savings, [ph] batches. You had a very good first half year. Do you anticipate batches base [ph] to be roughly equal, or are you seeing any sort of late shipments, I guess in the back end of the year? And secondly, I just wondered then, if you could just talk a little bit about the Capsugel drug delivery growth trajectory.

Is that still maintaining the strong momentum that you reported in the first half after obviously being a little bit slower on the initial consolidation of the business in 2017? Has that sort of growth rate, would you say, now more normalized during the third quarter and second half this year? And then, just finally with regards to areas of investment in R&D. Obviously, you talked about increasing R&D spend during this year and beyond. Just wondered if you can sort of give us your priority that’s perhaps for areas that you’re looking to spend that R&D dollars in, during 2018, 2019 now that I guess you’ve evaluated that.

Richard Ridinger: So, for R&D, of course it would be a lengthy discussion now. But the big theme, I think definitely where we in relative terms have the higher spend is definitely be going in what we call emerging technologies of cell-and-gene therapy? I think this is definitely from if it comes to where we put most efforts in the gene therapy area.

Because R&D normally target something -- first we’ve incremental R&D in all different business models. But if you say what is the biggest ticket which is targeting more in the 3 to 6 years future horizon, then it’s definitely the gene therapy, investments in different kinds. And this is where we think it’s important that by any case, I think we think all modalities will be through the 2020, 2030, still play a role. But this is a new one which has I would say from a lower basis, of course, we have to be clear about that but a huge potential. And we want to be on the boat when the boat is leaving, and that's why the maturity goes in here.

The capsule, the delivery forms and dosage forms and delivery systems, I think it's still dynamic. I think it’s -- we’re not expecting a slowdown in this case, I think it’s a dynamic field. It’s one by the way one of the real synergies which came from my perspective, even a little bit faster than I expected. Here the teams are really good on the way. And having said that, we still have lot of room for improvement in the next years in this area, because let’s remind us, those technologies has been mainly coming out of -- on investment, of Capsugel between 2013 and 2016.

And this tells us that even insight Capsugel in all its exit phase, this has not been fully integrated. So, we are taking even now some of the integration effort. But, what we see today's I think from my perspective I am encouraged. And when you see all the new things which you can do with the technologies, like probiotics, even microbiomes, I'm absolutely sure that there is more to come, which we didn't touch even as of today. Batch tracing, [ph] what we said, until Q3, everything good.

I think, Q4, we are just starting. I would say, in the big scheme of things, if you talk about 12 months, I think there will be not a significant thing or facing. But the year-end I think -- but, as I said, we are in our guidance I think confident because whatever is happening in the year and on the 12-month horizon, it doesn’t play a significant role. Rodolfo, do you want to comment on that?

Rodolfo Savitzky: Yes, absolutely. So, specifically on batch facing in pharma, which is an important topic here, definitely we do not have a focus seeking [ph] the trend, absolutely not.

We continue to see a very positive momentum on this quarter three, year-to-date. And then, we have a clear plan for quarter four. It is important thing to keep in mind, again this is a topic we reiterate given the contractual nature of the business, this is more related to operations, execution and releases. And again, our track record here is extremely good. So, I would say, where we have a clear plan, consistent with the guidance and the probability to meet the plant is extremely high.

Operator: [Operator Instructions] The next question comes from the line of Krishna Arikatla, Goldman Sachs. Please go ahead.

Krishna Arikatla: You mentioned that the quarter saw impact from raw material price situation. Can you tell us, if you’re able to pass along these higher costs to your customers? And if so, how long does it usually take to pass this during your contractual agreements? Thank you.

Richard Ridinger: Okay.

Let’s just with a general comment. This is a topic, not in Pharma & Biotech, it’s mainly a topic in parts, in a part of Specialty Ingredients, even in some Consumer Health area, it’s not a topic. In the minority of the Lonza business, this is a topic. This is not different from any other business I did in my past. It depends on contracts I think normally.

But, as a general rule, you need one to three quarters to get this done, [indiscernible] one to three quarters. So, this is what I can say. And we’re in the middle of it, if you want to.

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

Richard Ridinger: So, if there’s no further questions, then thank you for joining our Q3 update call.

It was a pleasure to discuss with you, as usual. Looking forward to see some of you during the road show in November, and I think also happy to host again the next call with the full-year results 2018. Thank you very much. And I wish you a very nice rest of the day.

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. Good bye.