U.S. Markets closed

Edited Transcript of LONN.S earnings conference call or presentation 24-Jul-19 12:30pm GMT

Half Year 2019 Lonza Group AG Earnings Call

Basel Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Lonza Group AG earnings conference call or presentation Wednesday, July 24, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Marc Funk

Lonza Group Ltd - CEO

* Rodolfo Savitzky

Lonza Group Ltd - CFO

================================================================================

Conference Call Participants

================================================================================

* Daniel Buchta

Bank Vontobel AG, Research Division - Research Analyst

* Falko Friedrichs

Deutsche Bank AG, Research Division - Research Analyst

* James Patrick Quigley

JP Morgan Chase & Co, Research Division - Analyst

* Laura Lopez Pineda

Baader-Helvea Equity Research - Analyst

* Markus Gola

MainFirst Bank AG, Research Division - VP

* Matthew Weston

Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research

* Patrick Andrew Robert Wood

BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team

* Patrick Rafaisz

UBS Investment Bank, Research Division - Director and Chemical Research Analyst

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the half-year results 2019 analyst and investors conference call and live webcast. I am Sherry, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Marc Funk, CFO of Lonza. Please go ahead, sir.

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [2]

--------------------------------------------------------------------------------

First, a warm welcome to you all. It is my pleasure to share with you our 2019 half year update. Our CFO, Rodolfo Savitzky, joins me today along with members of our Investor Relation and communication teams. Today, we will reflect on our financial performance in the first 6 months of 2019. We will review our strategy growth investment in LPBN and provide an update on the carve-out. Finally, we will turn to our outlook for the year before opening the call to questions.

Let's start with the corporate overview for H1 2019. I'm pleased to share our strong Pharma Biotech & Nutrition segment results, which showed double-digit sales growth year-on-year. The Biologics business outperformed and small molecules made a positive contribution.

New customers and biopharmaceutical partner were confirmed during H1. Specifically, we signed a number of new clinical and commercial contracts in our cell and gene technologies business. Our existing growth investments in LPBN are progressing as planned and further high-return, commercially derisked projects are under consideration. We may consider additional investment in both CapEx and OpEx to support our ongoing growth plans. As we enter H2, we plan to focus on recruiting the talent that will enable our future growth. We have hired more than 350 candidates in H1, and our recruitment efforts for H2 will bring the numbers to around 1,000. We have experienced softer demand in the Nutrition business, which was transferred from LSI to LPBN in Q1 2019. Rest assured that we are taking action to bring the performance of Nutrition back on track. We believe, there are clear benefits to be gained from the convergence of pharma and nutrition. All businesses in this segment share technologies and know-how. Importantly, the move also brings our legacy Capsugel operation back under one roof, providing an opportunity to deliver operational efficiencies and synergies. We are able to confirm our outlook for the financial year. We expect high single-digit sales growth in LPBN. The headwinds experienced in LSI in H1 were shared by the wider industry. However, we cautiously note the first signs of a recovery in sales as we enter H2. The carve-out is progressing in line with our original plan. We are working to make rapid progress while avoiding unnecessary expenditures. Our intention is to create a separate entity that remains fully owned by Lonza Group. We are on track to complete the carve-out by mid-2020, and we remain confident that the project will fulfill its purpose.

Our intention is to give LSI the autonomy to aim to become a leader in microbial control. It will also allow LPBN to maintain momentum as a major player in life science. LPBN is already a successful player in the life science industry. Its position is supported by the number of new projects and customers confirmed in H1. The map you see here provides a snapshot of all our investment projects across the half year.

You will recognize some from the Q1 qualitative update. But let me take you on a short tour of selected new contracts. In Q1, we confirmed that we have already contract 100% of our 2020 clinical manufacturing capacity in Ibex. The California-based biotech Alector confirmed a contract for our full service, single-site clinical offering. We have worked with other partners to stick with equally important contracts in Ibex. Remaining in Switzerland, you may have seen the announcement this morning that we are expanding our bioconjugation capacities in Visp. The contractual commitments are already in place. At the same time, we will commence production of a third commercial antibody drug conjugate, which has recently received a regulatory approval. We are also expanding our highly potent active pharmaceutical ingredients called HPAPI, capacities in Visp with customers including AstraZeneca. We look forward to progressing our partnerships with all these customers as well as many others. In the Netherlands, you will see that we are expanding our cell and gene technologies at our facility in Geleen. This is already one of 4 global centers of excellence and we plan to extend it with a dedicated suite for long-term partners, including Gamida Cell. The company has developed a potentially life-saving allogeneic stem cell transplant solutions for patients with a particular form of blood cancer. The treatment is currently in Phase III trials. Such innovative treatments targeting a specific patient group really reveals the breadths and depths of our capabilities. We can bring customers from clinical to commercial and collaborate along the full life cycle of a drug. Alongside this, we are moving cell and gene manufacturing from manual processes to scalable industrialized solutions. Our project locations and new partner portfolio give us a sense of our key growth area moving forward. With this, I will hand over to Rodolfo to share some insights on our H1 financials.

--------------------------------------------------------------------------------

Rodolfo Savitzky, Lonza Group Ltd - CFO [3]

--------------------------------------------------------------------------------

Thank you, Marc. Let's turn to some financial highlights for the half year. We're pleased to confirm continued positive momentum in our core health care businesses in the first 6 months of 2019. Our performance sits at 6.4% sales and 7.7% core EBITDA growth for the group, resulting in a core EBITDA margin of 27.8%. These figures relate to our continuing operations excluding the Water Care business unit. They are in now reported currency of Swiss francs and are compared with the same period in 2018.

I want to share some of the special impacts on our current level of sales and profitability. Our positive top line development was supported by Forex tailwinds. These resulted in 30 basis points positive effect for H1 mainly driven by weaker Swiss franc against U.S. dollar in H1 2019 versus H1 2018. The temporary service agreement we have in place for the divested Water Care business units support our sales at the corporate level as well. In H1, there was a positive impact of around 30 bps, and for the full year, we expect 40 bps positive sales impact.

Our positive development of core EBITDA was supported by the IFRS 16 accounting adjustment on leases. This resulted in 40 bps incremental margin for the group. We have assumed around 30 bps to be offset by the standard cost arising from the Water Care divestment, which we closed in February. So the positive IFRS impact is now slightly higher. Transit costs only account for around 10 bps and have a lesser impact. The service agreements with Water Care, however, have an additional 10 bps negative influence on margin in H1, so in total with minus 20 bps expected for the full year. Even without the IFRS 16 impact partially offset by Water Care, our core EBITDA margin is slightly positive at group level, especially in the context of investments in LPBN and the headwinds in LSI. Our net working capital increased in H1 based on a buildup of inventory levels across all our businesses. We have increased inventory prior to H2 schedule maintenance, shutdown in LSI facilities, and our growth projects in LPBN also resulted in higher inventories driven by customer demand for secure supply and improved flexibility. Inventory management will remain a focal area as we go into H2. Net working capital contributed to reduced cash flows before Water Care divestiture alongside increased CapEx investment expenditures and dividend payments in H1.

I should also point to our tax rate of 11.1% in H1 2019. We guided for below 20%, but we also had some favorable one-offs related to Swiss tax reform among others. We do not expect this tax rate to be sustainable going forward and I take this chance to confirm our previous guidance of a tax rate below 20% for H2. Of course, the tax rate for the full year will be low. Our return on invested capital, ROIC, increased by 110 bps to 9.4%. This is also related to lower tax rate in H1. We have guided for a double-digit ROIC in the midterm based on our current investment plans. With the profile of high return in commercially derisked projects, we are confident that we will grow our ROIC to very attractive levels.

The 7.7% growth in core EBITDA and 7% core -- growth in core EBIT translated to an increase of our core earnings per share, EPS. Our EPS has grown by 10% to CHF 7 per share.

Now let me turn to the development of our deleveraging level. We provided guidance for below 2 net debt/core EBITDA by the end of 2019. We're currently standing at 2.1x. In H1, we have seen incoming cash flows from the divestiture of Water Care. This resulted in estimated net proceeds of CHF 530 million. We have used the cash to support our strategic growth project deleveraging and dividend payment. The latter naturally falls in the first half of the financial year. At group level, we have spent CHF 306 million on CapEx in H1 and expect a further increase in H2. Our anticipated CapEx sits at 11% to 13% of sales for the full year. This is based on currently approved projects, all of which adhere to a clear and structured process approval. Marc will talk more about this in a few minutes. We expect CapEx to be higher in H2 2019 and some of the planned investments will continue into 2020. Alongside CapEx spend, we are focusing on OpEx for talent recruitment to support new growth projects. To give you a sense of direction in spending, 80% of CapEx at group level was invested into the Pharma Biotech & Nutrition business. Now let me hand back to Marc for a review of our segments and businesses in more detail. He will also share the outlook for the full year.

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [4]

--------------------------------------------------------------------------------

Thank you, Rodolfo. Let me open this section by commenting on the strong performance of the Pharma Biotech business. This was balanced by softer demand in Nutrition, which is reflected in the results. However, we delivered double-digit growth in this segment. It is worth noting that Pharma & Biotech excluding Nutrition has seen year-on-year sales growth in the mid-teens. We achieved CHF 2.1 billion sales in H1 2019, and a core EBITDA of CHF 693 million. We are pleased to have maintained our high margin while continuing to invest in strategic growth projects. However, Rodolfo already mentioned that our investments will be geared towards the second half of the year. We will continue to balance priorities between growth and margins.

Let's take a moment to look at our CDMO services within the LPBN segment. I will not linger on every point here, but I encourage you to review the details of our businesses. Let me draw your attention to our work in preclinical and complex molecules, both of which are growth areas for the segment going forward. Examples of success include the launch of a preclinical service package in small molecules and the new expression technologies for complex molecules in mammalian. And you will remember, we already mentioned our ADC and HPAPI expansion projects are fully backed by customer contracts. We now have 11 investigational new drug completed and 3 out of 5 commercially available antibody drug conjugate are supported by Lonza. Looking at customer commitments and at the pipeline of clinical programs, there is a key need for commercial provision that we offer to our pharma and biotech partners. Our continuing expansion will enable us to capitalize on these opportunities. AstraZeneca entered into a long-term manufacturing agreement for a number of HPAPI-based products from our Visp site, with operation planned to start from July 2020. These are only a handful of examples.

Now in turn to another interesting and high-potential area for our company. I mean of course, cell and gene technologies may be a small proportion of the wider arms of business, but it has a leading position in the industry. We're excited about our opportunities in this area. We can drive forward our technological offering, bring our customers to commercial and collaborate closely with regulators where needed. We are well positioned in the industry with 4 centers of excellence, including the U.S., Europe, and Asia, and more than 10 years of experience. Our offer will have grown to a substantial size by 2025. We are already working across all modalities, including autologous and allogeneic cell therapy and viral vector, including virally modified cells better known as gene therapy.

In H1 2019, we have secured a strong number of clinical and commercial agreements. The high volume of contractual commitment reflects the value of our capabilities and offerings in a dynamic market environment. It also shows that our investments are paying off and gives us reason to continue to focus on this important area. At the same time, we are working to enhance profitability via technological advances. Drug Product Services will be another growth area for us going forward. The business supports our strategic focus on delivering full life cycle solutions to our partners. We have made an agreement to acquire a sterile fill and finish manufacturing facility from Novartis in the Basel area of Switzerland. The acquisition builds on our existing parenteral drug product development and testing capabilities. We are now able to offer an end-to-end service to our customers for clinical supply and commercial launch. We will produce drug product at the facility for Novartis as well as providing capacity for additional customers. Looking more widely at our approach to investment, we're focusing on high-return, commercially derisked project to support future growth and development. These include full life cycle management, the handling of complex molecules and the commercialization of cell and gene technologies. Where there are opportunities in these areas, we review the rate of return alongside the timeline. Any projects under consideration need an internal rate of return of above 20%. We have a wide range of projects and each competes with the other when it is presented to our Executive Committee. With clinical projects, viability is assessed on demand projections, VC funding potential and the favorability of the regulatory environment. With commercial projects, preference is given to proposals that are commercially derisked and can be paid off within contract duration. The remaining successful investment projects are the most viable and relevant to our business from a commercial and strategic standpoint. In addition to those already announced, new projects are currently under review

Now let's turn to Consumer Health & Nutrition within LPBN. Consumer Health & Nutrition performed below expectations and against a strong year-on-year comparable base. Ingredient sales were softer driven by customer inventory prebuild in 2018 and supply challenges. Additional capacity is coming on stream in 2019, with expansion starting from mid-2020 at our Greenwood facility in the U.S. We're also working towards improved inventory management and operational scheduling.

Demand for gelatin hard capsules has softened and competition has increased in Q2 2019. We have commenced commercial initiatives across the portfolio, including geographical expansion into BRICS markets. We are also focusing on further developing our specialty polymer offerings and innovative dosage form and delivery solutions. We are confident that end markets remain attractive, especially for integrated offerings that arise from Lonza-Capsugel synergies. We developed a clear business case for the acquisition of Capsugel. Despite recent disruptions, our original case remains relevant and robust for both our pharma and nutritional dosage form businesses. It is right that Nutrition now sits under the LPBN segment umbrella. The movement of the business will help us to capitalize on the conversions of pharma and nutrition. Moreover, the realignment brings the legacy Capsugel business back under one roof.

Here we can see some recent examples of innovations and launches in the Nutrition areas of business. There has been a focus on clean-label, natural ingredients and capsules, which reflects a wider development in consumer preferences. As within pharma, here we provide an integrated solution. We have worked to combine nutritional ingredients and optimal formulation alongside dosage forms. This has delivered bioavailability enhancement. We're providing these offerings across relevant nutritional ingredients, including our science-backed UC-II ingredients for joint health.

We now move from LPBN to Specialty Ingredients, LSI. The newly aligned LSI segment provides composites, fine chemical and microbial-control offerings across consumer and industrial markets. As noted in the Q1 qualitative update, LSI has continued to face headwinds in line with the broader sector. We achieved sales of CHF 859 million in H1 2019. This represents a 3.8% decline compared to H1 2018. Core EBITDA reached CHF 163 million, resulting in a robust 19% core EBITDA margin by industry comparison. Profit margins were maintained as raw material price increases were partly passed to our customer as LSI cost control measures started to deliver benefits. With these factors in mind, we may see signs of recovery within the LSI segment in H2 and beyond. We are cautious in this outlook. As we understand, the disruptive demand cycles and political uncertainties look set to continue. We're also expecting a softer core EBITDA margin in the second half of 2019 compared to H1, caused by scheduled maintenance work on our LSI sites across the whole portfolio. Alongside professional hygiene offerings, home care disinfection continued to experience healthy demand and performed above the previous year. This was primarily driven by China and North America. Personal care preservation reported softer sales caused by increased competitive pressure and lower demand, especially in skin and hair care.

Sales for microbial-control offerings in industrial and agricultural markets were below the same period last year. They were negatively impacted by the continued supply shortage of BIT, a key raw material for the business. Our BIT supply was significantly constrained in Q2 2019 when the world's largest producer of a precursor was closed down in the Yancheng areas of China. The difficulties of sourcing and supplying customers impacted the segment's top line performance. We are on track to reestablish supply by diversifying our vendor base into new geographies including India. This is particularly important while uncertainties persist regarding the supply of BIT out of China.

The Wood Protection business performed solidly in H1 2019 despite weather-related challenges in North America, one of our key markets. The composites business was negatively affected by soft demand for electronics applications, especially out of Asia. The agricultural business is still suffering from customer destocking after a dry European summer in 2018. This was exacerbated by supply chain challenges, competitive pressure in increasing feedstock costs. The markets in Australia and New Zealand were also affected by a drought in H1 2019. However, the agrochemical Contract Manufacturing Organization business benefited in Q2 from increased demand.

We expect to see a recovery in LSI business from H2 2019 onward, with a stronger top line performance partly supported by an easier year-on-year comparison. However, as we said before, we should remain very aware of potential upcoming challenges. With the transition of the Nutrition business to LPBN, LSI can further increase its market focus on microbial control. The business is innovating to remain in a leading position with key offerings, including its anti-dandruff formulation. It is also looking to grow in other areas, such as bioactives of skin and scalp care. Our regulatory expertise supports our customer offering by driving innovation and differentiation.

We now turn from a review of past performance to our outlook for the future. In summary, H1 was a robust half year driven by pharma biotech, but with headwinds in other parts of the business. We are pleased to confirm our outlook for 2019. This was first communicated with the full year 2018 results in January of this year and we confirm mid- to high single-digit sales growth. We also confirm a sustained high core EBITDA margin. We base this on the performance of our pharma biotech businesses, whilst taking into account the softer results from Nutrition and the headwinds in LSI. We expect high single digit sales growth in LPBN for the full year and the start of a sales recovery in LSI in H2 '19.

Efficiency measures across all businesses are ongoing with strategic investment in LPBN, and LSI maintenance shutdowns scheduled toward the second half of 2019. We continue to focus on the execution and delivery of our strategic growth project. The carve-out is progressing as planned and we are on track to have LSI fully carved out under the Lonza Group umbrella by mid-2020. This is a time of change for Lonza. Many parts of our business must anticipate a dynamic market environment to deliver ongoing value to our customers.

Our current project and strategic growth investments will enable us to capitalize on opportunities and set up future success.

It was my pleasure to present our half year financial results, and I'm looking forward to your questions. Who would like...

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from the line of Daniel Buchta, Vontobel.

--------------------------------------------------------------------------------

Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

One question then. Maybe on the general supply situation. I mean especially your Nansha site was affected by that. Can you give more indication on whether the supply shortage and the difficulties are solved already? Or when do you expect this to be the case? And then related to that, I mean, you mentioned the maintenance shutdowns you expect for LSI in the second half. I mean is this a general issue of the supply of yourself? And why do you expect that to impact margins in the segment?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [3]

--------------------------------------------------------------------------------

So for the supply chain issue, I am pleased to confirm that there are no supply issue in our Nansha facility. On the second part of -- the shutdowns in the H2, those are planned shutdowns. We do not expect that this would cause any kind of issues. But it's good governance to announce and to say it in our overall overview that those are the things that we are doing and that are part of our business. Yes, go ahead.

--------------------------------------------------------------------------------

Rodolfo Savitzky, Lonza Group Ltd - CFO [4]

--------------------------------------------------------------------------------

And maybe just to complement. On the planned shutdowns in the second half, as you can imagine, when you have a shutdown, you have lower production volumes and these translate into higher cost -- higher [on off short] variances and this has a margin impact. We expect it around 1 to 2 percentage points in the second half.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Next question comes from the line of Matthew Weston, Crédit Suisse.

--------------------------------------------------------------------------------

Matthew Weston, Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research [6]

--------------------------------------------------------------------------------

One, please. You highlight in the release and in your opening comments that you're seeing increased customer visibility in pharma biotech for 2020 and 2021. I presume that some of that reflects increased demand for the Ibex facilities. Can you just help us understand what implications that has for startup costs and medium-term investments over the midterm? Essentially, the better it gets and the more demand do you see, does that mean the harder it is to see profit growth in the early phases of the contract as you have to invest to realize clearly the excellent medium-term opportunities? And then just one very quick follow-up. Rodolfo, you just answered the previous question with 1 to 2 percentage points impact of the shutdowns. Is that versus the margin we saw in the first half of this year? Or is that versus the margin we saw in the second half of last year?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [7]

--------------------------------------------------------------------------------

Thank you. So for the -- I'll take the first question, Rodolfo takes the second one. Of course, we are investing as there is more visibility on our customer demand that affects our Ibex project, but I would say, not exclusively. It also directly concerns our investments in the other mammalian-derived modalities, such as in Portsmouth where we have a CapEx project too. And not to forget cell and gene therapy. Investment in growth are directly correlated, not just only with CapEx but in OpEx for hiring talent that are needed before the start of the operations. Clearly, this is something that we are doing and we are on track based on our different business plans under different places to hire the peoples and that this is one of the cause why we have said that we will sustain our overall core EBITDA margin. And also certain depreciations are expected to increase in the 2020 year. It's around CHF 30 million to CHF 35 million more compared to 2019 levels. And when it comes to the overall profitability increase within -- when it comes to the full utilization, we have to count between 3 to 6 years after the start of the investment. So much for question one. Question two, Rodolfo.

--------------------------------------------------------------------------------

Rodolfo Savitzky, Lonza Group Ltd - CFO [8]

--------------------------------------------------------------------------------

Yes, Matthew, thanks for the clarification. I should have mentioned that this is compared to the H1 margin, not with the H2 2018 margin. So we expect a couple of 1 to 2 percentage points lower margin in LSI in H2 compared to LSI in H1 2019.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Next question comes from the line of Paul Knight from Janney.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

Marc, pleasure to hear your update. Rodolfo, could we talk about your capital expenditure plans? Will they be higher than last year? And could you refresh our memory on your maintenance CapEx levels versus what your CapEx seems to be this year with demand worldwide?

--------------------------------------------------------------------------------

Rodolfo Savitzky, Lonza Group Ltd - CFO [11]

--------------------------------------------------------------------------------

Yes. So happy to provide a quick perspective on CapEx. As you've seen in this first half, we spent around 10% of sales. We have guided for the year to be between 11% and 13%. My expectation is we will be on the higher end of the estimate and therefore if you do the math, you come to the conclusion that we will significantly ramp up CapEx spending in the second half. This is in line with plan. And, of course, it may well be the case that a few CapEx spendings spills over into 2020 because pacing of some projects may fall in -- also into next year. In terms of the split, we currently see 70% of CapEx spending behind growth projects, 30% behind maintenance. And when you think about the spending in H1, around 80% was dedicated to Pharma Biotech & Nutrition. Again when we say 80%, this is a combination of growth and maintenance with the majority being growth projects.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Next question comes from the line of Patrick Wood, Bank of America.

--------------------------------------------------------------------------------

Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [13]

--------------------------------------------------------------------------------

So my includes, can I ask, within LSI, the price increases that you guys managed to pass through on the higher raw material cost. If raw materials go the other way, do you get to keep those prices or do they automatically deflect back down again to your customers?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [14]

--------------------------------------------------------------------------------

It's, of course, an interesting question. I hope there are no customers in the room. And I think we are no different than anybody else in the industry to that expect -- to that respect.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Next question comes from the line of Markus Gola, MainFirst Bank.

--------------------------------------------------------------------------------

Markus Gola, MainFirst Bank AG, Research Division - VP [16]

--------------------------------------------------------------------------------

My question would refer to the expansion of your bioconjugation facility. You have also announced to expand your HPAPI capacity in Visp. Is it fair to assume that product-wise this expansion is related to the bioconjugate expansion? Or is this dedicated to completely other drugs? And maybe could you generally elaborate a bit more on the midterm revenue and margin potential of bioconjugates given that you have won a lot of new projects here?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [17]

--------------------------------------------------------------------------------

It is correct to say that we -- things may be the [level,] so see, witness, engage additional bioconjugate deals and to that extent, it is encouraging. We believe that in the foreseeable future, this will increase and the overall expansion that we do in Visp does not just cover the commercial market, but the clinical part also. And it's important to note I understand the needs to be able to give some numbers behind that in terms of projection, but to a very large extent, it depends on the success of the products that will -- how it will react into the market and this is unclear yet on the new one. We all have in mind those who are already a few years in the industry when we had projections on Kadcyla and then we have seen the outcome. Can this happen again? Possibly. So it's difficult to give an answer on this. On the HPAPI part, yes, you are correct. This is part of molecules that do not just follow one agreement that we have announced with a very important partner of us. But overall, in the HPAPI business, we see increased demand and this goes along what we continue to observe and say, complex molecules that require specialized knowledge that goes way beyond the standard manufacturing is a trend that continues to go and HPAPI are along those categories. Worth mentioning also that it's not just AstraZeneca but there are also other customers.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question comes from the line of James Quigley, JPMorgan.

--------------------------------------------------------------------------------

James Patrick Quigley, JP Morgan Chase & Co, Research Division - Analyst [19]

--------------------------------------------------------------------------------

On the -- again, sort of following up on the bioconjugate side of things. Roughly what is the CapEx cost of a new facility? And you mentioned that you involved in the production of 3 of the 5 approved conjugates in 11 INDs. What is that the pharma companies find so difficult about the ADCs that they need to outsource to contract manufacturers like yourself. And when you look into the sort of wider pipeline of ADCs -- of the contracts you have at the moment, sort of roughly what stages of development they are? Sort of what forced them to do Phase III, Phase II, Phase I? And how quickly do you see the ADC pipeline expending which you could benefit from?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [20]

--------------------------------------------------------------------------------

So yes, there was some CapEx around our Visp facility. Why do the -- our partner come to us? I would say that there is already a very good platform available in our sites. There is already the right availability to go and to bring happily a clinical project or a commercial project into our place. Probably also because we have pioneered with Kadcyla being the first one to come that this has created an important traction to our Visp facility. I am saying all this while I want to stay humble. The other thing is that it's clear that the pipeline is growing. Is it how many in Phase I, how many in Phase II, how many in Phase III. This is not something that we are totally keen on giving the exact details. But to guide you, I will tell you all of the above. This is something that is totally recurrent and inherent on the -- on this business. And they are -- it's worth mentioning that in the ADCs, there is a total of 252 molecules from preclinical to commercial today. Did I forget part of your questions? No. Let me know.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Next question comes from the line of [Chouhan, Naresh] (inaudible) Research.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

Just a couple of questions. One on the Ibex, the full service offering. Could you just kind of give us some color as to how your offering differs to [wishes]? Or how you -- what's the kind of sales pitch is? And then on Alector, following on with the Alector deal, they are working on -- in Alzheimer's and -- which obviously had very high failure rate. So how -- is this deal being structured as a take-or-pay deal. Otherwise, this can be quite a small deal, where potentially you set aside some capacity. And then on the gene therapy segment, could you give us a sense as to what percentage of sales is -- now is of LPBN? And what would drive its profitability? And also are you capacity constrained in this business?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [23]

--------------------------------------------------------------------------------

First question, what is our offering in Ibex? We are offering the design development of -- in Ibex, where it is the full scope with an accelerated pathway option to come with an offering in 12 months for an IND package. And in addition to that, we offer a refill if we can say. So post IND, that could be provided with a commitment on whenever time is needed, whatever quantity is needed, we commit to deliver it to the customer. The third element that is part of our Ibex offering is that through our overall network if it is a product that needs not just disposable but possibly stainless steel maybe here there is a little difference between the companies that you have named. We are capable of offering, but not just capable, we are offering it. So the life cycle management of a product that goes from molecule design up to a full delivery, up to the door of the customer within a timeline of 12 months then the ability to stay without very relevant tech transfer can stay in our network, is part of a differentiator.

Alector. Alector is one customer that what is important to mention is that they go along this kind of offering that is innovative and to that extent, it is very relevant. The trials are expected in late '19, early '20, and the operation will start in Q3 2020. What's the size of our gene therapy business or as we call it mobile cell and gene therapy? And we do not give the exact numerical numbers, but we can say that this is in the low hundreds of million.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Next question comes from the line of Friedrichs, Falko, Deutsche Bank.

--------------------------------------------------------------------------------

Falko Friedrichs, Deutsche Bank AG, Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

I would have two on the Nutrition business, please. Firstly, how would you judge your specialty polymer offering currently? And how competitive is that in the market? And then secondly, what is your strategy for improving your presence outside of the U.S. and Europe, where Capsugel already seems to be quite strong?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [26]

--------------------------------------------------------------------------------

So our offering in the specialty polymer is something that we have already inherited when we acquired Capsugel. And here, of course, we are continuing to innovate and bring additional offering into place and this is something where we can differentiate with the competitors and we have certainly capabilities in the different continents. And this is something that is, of course, very relevant to us, less affected in our H1 in that area, when we said that there is a softer performance. And in terms of market penetration, relevant to the BRICS countries, Capsugel -- legacy Capsugel, when it came to Lonza, was already present, but it's worth mentioning that the growth in those countries that follow this regions accelerates, are we totally ready to cope with this acceleration today? No. And here there is some homework to be done on our side. This is one of the learnings of H1.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Next question comes from the line of Patrick Rafaisz, UBS.

--------------------------------------------------------------------------------

Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [28]

--------------------------------------------------------------------------------

I have two questions, please. One on the working capital and you already mentioned a bit, Rodolfo, what happened with inventories, the LSI shutdowns and the LPBN growth. How do you think about the potential working capital release here in the second half of the year? And the second question would be around additional growth investments. Marc, you mentioned that these were being considered both on OpEx and CapEx. Will it be possible to size that broadly how much this could mean? And what's -- what conditions these investments would be based on?

--------------------------------------------------------------------------------

Rodolfo Savitzky, Lonza Group Ltd - CFO [29]

--------------------------------------------------------------------------------

Yes. So on the working capital, we expect, based on our plans, to see a positive development in the second half, meaning that we will end with a lower cash requirement for working capital for the full year. Of course, this doesn't happen automatically. We are putting plans in place, not only for inventory, which is a little bit more sticky but also in receivables and payables. So this is for the first part of your question. And then in terms of investments, we see the -- let's say the -- our focus is to accelerate growth and one of the levels for growth is, of course, investments in capacity. So here what we are carefully judging is, yes, we need to balance our deleveraging plans on the one hand with our growth plans and what I mentioned in my comments and Marc also on this call, the challenge for us is we have a broad portfolio of very attractive projects. Of course, to get to the portfolio, they all need to have attractive rates of return above 20%. And then as an Executive Committee, we just need to design -- decide where to draw the line. So all in all, I mean to answer your question is we will continue to invest because this is a growth driver and we will be in line with what we have guided for CapEx, let's say, in the high single digits in the midterm. And then in the short term, as you have seen this year, it's a little bit higher.

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [30]

--------------------------------------------------------------------------------

To give you a flavor about the -- what it entails those costs in our overall Ibex campus if we can call it like this. By end of 2020, there will be 500 FTEs. That goes with training and cost. One more question. Who has the prima or the privilege?

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The next question comes from the line of Laura Lopez Pineda, Baader Bank.

--------------------------------------------------------------------------------

Laura Lopez Pineda, Baader-Helvea Equity Research - Analyst [32]

--------------------------------------------------------------------------------

So the last question from my side or maybe two. I will be interested in knowing in which specific sectors are you seeing a start of a recovery in the LSI business? So hearing from other chemical companies, they are actually not seeing any recoveries. I will be interesting -- interested there to see if it's in -- more in electronics or in general or more in the agro space, which will maybe make a little bit more sense? But in general, just to compare also with other peers are actually a little bit or continue to be more cautious in the second half. And then secondly, you also mentioned some restocking in Nutrition in 2018, as one of the reasons for the weakness in the first half. So how do you think inventory levels are at the moment? And do you expect this to recover already in the second half that demand picks up again?

--------------------------------------------------------------------------------

Marc Funk, Lonza Group Ltd - CEO [33]

--------------------------------------------------------------------------------

So your first question about LSI recovery. I think that it's worth noting that professional hygiene continues to be on track and then the paint application, the industrial application and the electronics is still in a good path, and where we are cautiously optimistic is in the vitamin B3 business. The second question is about restocking in Nutrition inventory levels. Well, cyclically, this is something that we have seen in the past, but can I really know today whether this is going to happen, it is -- I know what I want, but I don't know whether I have signs that allows me to say at this stage whether there is anything that grows to that direction. I think it is too early to say on this, unfortunately.

So that will put an end to the Q&A sessions. I would like to thank you all for listening today and for your valuable contribution in our question. Along with the Investor Relation team, Rodolfo and I, we're looking forward to seeing you again in our upcoming roadshows and conferences, and in the meantime, let me wish you all a very good day. Goodbye.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

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