Lonza Group AG

SIX:LONN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning or good afternoon. Welcome to Lonza's Q1 2018 Qualitative Business Update Conference Call and Live Webcast. I'm Alice, 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. Richard Ridinger, CEO of Lonza. Please go ahead, sir.

[Richard Ridinger, Chief Executive Officer]

Ladies and gentlemen, good morning and good afternoon. We've just now come back from our annual general meeting. And we want to thank you all for joining now our conference call on Lonza's first 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. As you already read today news release, we've had a positive start to the year, so far, especially for our business along the health care continuum for pharma and for -- and, of course, also for the pharma Capsugel businesses, which are a part of it.Let's take a look at the highlights now on Slide 4. I'm pleased to report that Pharma & Biotech's momentum is continuing to be strong with high demand for all of our pharma offerings. In Pharma & Biotech, both the biologics and the small molecules businesses are growth drivers with ongoing demand for clinical and commercial offerings.On the Specialty Ingredients side, the growth drivers have been the Consumer Health and Nutrition businesses, including the pharma Capsugel offerings as well as the composite materials business, in what we call now Consumer & Resources Protection.The seasonal and cyclical businesses is that the agro, woods and water product portfolios had a softer start. The legacy Capsugel businesses have been performing well following the steady progress we have made on our business integration this year. Functional integration is mostly completed, and both IT integration and enterprise results planning integration are progressing as planned, as we speak.Our combined offerings in Consumer Health and Nutrition are attracting customers' interests already since a while. And first synergies are already materializing as we bring together our active pharmaceutical ingredients and delivery systems in our Pharma & Biotech small molecules business.So we are right on track to achieve positive half-year results when we do report numbers on the 25th of July 2018.Here are a couple of highlights, so far, this year. You can see in the picture on the slides of our new Pearland facility in Houston, Texas. We are proud to say that it's the world's largest dedicated cell-and-gene therapy facility. But even more important than its size, it allows us to provide treatment or even cures for diverse medical needs of our customers' patients. That's why at our grand opening last month, one industry leader referred to our facility as a house of hope.Earlier today, we also announced our mid-scale Biologics manufacturing expansion with state-of-the-art technological advances at Lonza's Portsmouth, New Hampshire site. So we are continuing to meet our customers' future needs.Slide 6 gives more detail about the excellent performance of our Biologics business, in particular. We have had a strong demand for biological manufacturing in commercial stages and in clinical stages across all technologies and assets. Those assets include Ibex, where we see high interest with ongoing discussions. Our Hayward, California facility acquired at the end of last year is ramping up well and adding to our Slough in the U.K. offerings for clinical development and manufacturing.Overall, we have a robust customer base, and we are adding new customers throughout our network, as we speak to. We continue to invest in our business to be sure we have the footprint required to meet our clients' needs in the future and also to strengthen our offerings.We announced in February that we are implementing our business strategy to create cell-and-gene therapy centers of excellence in Houston, Portsmouth, The Netherlands and Singapore. That's because we have seen significant increase in customer demand that is outpacing the overall market growth. We are offering a fully integrated range of cell-and-gene therapy services. These services include process and analytical development, clinical product supply and commercial product supply in Pearland and Maastricht. Both Portsmouth and Singapore will serve as clinical and commercial manufacturing sites. I mentioned these examples to show how we are constantly adapting our business models and technologies in Pharma & Biotech to the ever-changing realities in the marketplace.Lonza is where the customer needs us to be. In fact, sometimes, we are even there before customers know they need us to be there. And this, we could see in live examples at the grand opening in Pearland, Texas.I also want to mention how our small molecule businesses are continuing to outperform on both the top and the bottom line. Legacy Capsugel has made solid contribution to the team's performance with newly added dosage forms and delivery system technologies. We also have now multiple synergistic project in discussion that connect the active pharmaceutical ingredient and the dosage form and delivery systems offerings or, if you want to, the API and the micronization offerings. So I think it's a very positive start, especially for those synergies in quarter 1. Overall, we are really comfortable with our pace of progress now, and we recently reviewed that.Slide 9 gives an overview of our product business in Pharma & Biotech, Pharma hard capsules and Bioscience products and services. The pharma Capsugel business performed above our expectations, both versus prior year and on a run rate basis. We note that, of course, many of you remember, that we reported a not-so-strong start in 2017 of Capsugel. That's why it's so important that we mention, also on a run rate basis, we are happy with the business, which means not only versus prior year.We have a strong position in the business in specialty polymers, particularly in Asia, Europe and Brazil, and we continue to lead by innovation. Although the worker's remediation work isn't finished, the overall Bioscience business experienced positive demand in quarter 1.We continue to invest, as needed, in R&D and innovation to ensure our future growth. Our Pearland and Portsmouth investments also show that we are at the forefront of innovation, and that we are anticipating future needs and developments in Pharma & Biotech. These investments are partly counterbalanced by continued productivity improvements among our businesses with ongoing operational excellence progress.Turning now to Slide 12, you'll see, in more detail, the new reporting structure for Specialty Ingredients that reflects our market focus. Today, we'll report qualitative details within the new framework. Financial disclosure will follow, as mentioned, before with the half-year results report.Lonza Consumer Health is showing good momentum across capsules and ingredients. We had a positive start to 2018, as expected, with our nutraceutical ingredients offering and legacy Capsugel dosage forms and delivery systems for the nutrition industry as key drivers. Additional growth is expected going forward due to synergistic geographic expansion across all businesses and due to our integrated formulated solutions.High demand is continuing to benefit our leading actives in this field, and these are our own actives. Especially, you see 2 ingredient for joint health and Carnipure ingredient in sports nutrition. In quarter 1, our combined offerings certainly attracted interest, as you can see on Slide 14. More than 30 of our new dietary supplement product concept launches featured both Lonza's Specialty Ingredients and pharma Capsugel's innovative dosage forms, real synergies in the market now. In particular, demand is increasing for clean-label specialty polymer solutions. More and more customers are converging to our specialty polymer capsules, which offer those clean label benefits. And to reemphasize it, that is especially important in the Consumer Health or nutritional supplement market.Having said that, of course, the trend is also moving into the pharma market. To keep us on the cutting-edge of innovation, we announced in February that we are partnering to establish a venture capital fund for investing in Consumer Health and development startups.On the next slide, you'll see details about our Consumer & Resources Protection division. Robust demand was noted for our innovative composite materials that address unmet needs in the aerospace and electronics industries and for antimicrobial solutions in other industrial markets. As announced earlier, we are continuing to -- the restructuring of our basic materials portfolio and we are emphasizing more innovative offerings, for example, our engineered wood and agro specialties. The discontinuing non-core parts of our business, like the fertilizer business as one example -- and this allows us to focus more on value-added applications, but more discontinuations are going to happen in the near future.In the full year results in January '18, we communicated that we would begin a strategic review of the Water Care business unit, which included restructuring and business model redesign. This initiative is aimed to grow the business' top and bottom line. First fruits are expected to start materializing from late '18 into 2019. This means we have made significant progress here. The business carved out helps to ensure a full transparency, while we unlock business' inherent value as a standalone business. To aid those efforts, we've retained an investment bank to advise us on all strategic options.Looking now at our outlook on Slide 18. Our robust business momentum in quarter 1 also makes Lonza fully confident of achieving, at a minimum, the previously communicated full year guidance, which was mid-single-digit sales growth on a comparable basis, in line with the midterm guidance 2022 and 100 basis points improvement of the core EBITDA margin, in line again with the midterm guidance 2022. When we publish our half-year financial results in July, you'll note that we will be reporting on a new key performance indicator. We are replacing CORE RONOA, return on net operating assets, with return on invested capital, or ROIC, as a new KPI. And just to remind us, it's important that after big acquisition, you put the whole investment capital into consideration. The new midterm return investment -- invested capital targets or the new ROIC target will be announced at the time of the half-year results, too. In addition, we'll provide historical pro forma financial data for this ROIC metric and follow a new reporting structure in Specialty Ingredients.That's it, ladies and gentlemen. That's our story for today. And I think you'll agree, it's really a positive one. I'm sure you have many questions, and that's why we are here to give answers to them. Who would like to begin now?

[Operator]

[Operator Instructions] The first question comes from Matthew Weston from Crédit Suisse.

[Matthew Weston, Managing Director and Co]

Two, please, if I can. The first, about the capacity expansion in Portsmouth, can you tell us what incremental CapEx that's likely to drive, whether that's included already in what you had suggested for full year '18? And if you can also give us some indication as to how much capacity expansion the new investment is likely to bring, that would be extremely helpful. And then secondly, with respect to the legacy Capsugel business, I know you now think of it within its separate divisions, but you did make the comment that it was performing ahead of your expectations in terms of growth. Can you just give us a little bit more color as to whether that's very much a top line comment, whether that's with reference to the profitability of the Capsugel or whether it's a reference to both?

[Richard Ridinger, Chief Executive Officer]

Okay. Let me start with the Portsmouth question. And then Rodolfo, who is deeper in the numbers, will go a little bit to the Capsugel question. So a few comments about Portsmouth, I think this is a combination, this investment. First of all, Portsmouth was our first commercial mammalian site in the network. So we are doing 2 things at the same time. We are discontinuing the oldest fermentation line by the early 2020s. And at the same time, we are ramping up a more modern one with a significant, better productivity and more capacity. And I think, now, we do it, this synchronize in a way that, I think, it's perfectly supporting the stability of the business at the site and as a biopharma operation. We are not publishing exactly the capacity numbers, but it's a significant -- higher capacity for 2 reasons. I think we are investing more fermenters with the new line. And secondly, of course, this is not a line of the mid-1990s. This is a line of the -- of 2020. So we have a total different technology setup. Productivity will be higher. We are expecting also higher throughput opportunities. I think this is really state-of-the-art in a spot, which, we think, is a right spot to -- at this moment in time to our overall offer of our worldwide biologic network. I think it's a well-thought through investment. And it is included in what we guided for CapEx for 2018, absolutely. And that's why I think it's at the right time. And it's also, I think, an important message we gave also to our customers that, now, we are ready to take on the next products, which, of course, each product needs a different size of fermenters. But now, in this middle size, I think we have definitely made -- we are making a big step. I think, also, in investment, which goes to, just to mention, I think into an existing site infrastructure. So it's not -- it is not like Ibex, where we also build buildings within an existing building, so I think it's definitely one of those brownfields, which will create, I think, a very high return. I'm absolutely convinced. So this is a -- and I think it's already very easy to calculate. So it's a very positive step, but it's double, right? It's renovated -- it's renovation, but we'd use this, of course, to get a significant higher capacity at the same place.

[Rodolfo Savitzky, Chief Financial Officer]

So on the Capsugel question, Matthew, so as Richard said, the business definitely is performing in line with expectations on the top and the bottom line. These expectations we have shared at today's qualitative update, so I will not go into the numbers. But these are, pretty much, the expectations we have shared related to the Capsugel business. Now a very important clarification also made by Richard. One could argue that quarter 1 2017, we said, was a relatively soft quarter for Capsugel. So when we say it's fully in line with our expectations, we also look at the run rates that we expect for the year, where we also see a very positive outlook for the business. And I can confirm that the run rate and margins are consistent with the year projection. So all in all, good news. I can also add that the capsules -- the hard capsules is performing really well. And we have anticipated the strong growth in the dosage form and delivery systems part of the business.

[Operator]

The next question comes from Markus Gola from MainFirst Bank.

[Markus Gola, Vice President]

My first one would be a follow-up on Capsugel. Could you shed some light whether the pharma or the Consumer Health business was the factor, which was driving growth above the expectations? And my second question is on the Ibex project. I believe you had a very rough winter on the construction site, which caused, at least, some delay in January. Have you been able to catch up on the delay? And do you see some risk for the completion date of this project at the moment? And my third question, if I may, is on the cell and gene therapies. How fast do we expect this market to grow over the next 5 years? And what is the margin profile and the margin potential of this business?

[Richard Ridinger, Chief Executive Officer]

Yes. Let's start from the -- with the last first, cell and gene therapy. I think it will grow, if we say, maybe, there is a roughly high single-digit growth rate in Biologics. This will be a strong double-digit growth in the market. Of course, as I always say, mathematically, if the base is lower, you can always grow by a higher percentage rate. But yes, I'm talking about the overall market. But I tell you, I think even this opening event made be extremely positive. If I'm -- seeing the immediate customer interest at this event was, for me, even unexpected. So it's definitely a market, and when sometimes I'm asked, where you are investing in -- also in R&D, and you think this is one, not the only, but one strong focus because we think that the next years and the -- as we always said, I think -- and I was at roadshows in the last 2 years, I said in the 2020s, this is coming big times. I have big expectation on this. That's why I'm totally happy. And as you know, just for -- just now the curiosity, it is in Texas and the Texas politicians said it's so big because it's in Texas. In Texas, everything needs to be big. It's really quite an impressive thing. And unfortunately, not so many of you are participating, but there are a lot of opinion leaders customers, and it was really a great event, and I'm extremely bullish on that. But of course, it's an emerging business, has its critical-size margin. Margins are not any different from the Biologics, which are currently the most dominant ones in the portfolio, I think. We do not expect anything different. And I think we are happy with the margins in Biologics, as we speak. Ibex, fair point, yes. We had -- we see winter weather, some challenges, not only the cold, although the stormy weather. When you create an infrastructure, it has been, I think with special efforts, we are about to get back on track, if it comes to the times -- to the timing of the project. So our engineers don't expect that this will have an overall impact on the total one. They have done special efforts to get back on schedule, but we had -- yes, it's true in the first quarter, we had some challenges when the cold and windy winter weather was kicking in. And now with special efforts, we want to get back on the schedule. And we are already on a very good way, I think. At least, when I'm in [indiscernible] I see the building growing every time at big time. I think it's impressive. And hopefully, many of you come to the capital market day, then you will see it's even in a more impressive shape. Capsugel and the different segments, what I can tell you is all across the board. It's strong -- especially strong in the dosage forms and delivery forms. I think dosage -- these -- the delivery forms, I think this was extremely strong. And what I said already in my presentation, it's -- what was new for me also now in the first quarter or after the first quarter, but that in this part, the synergies with the small molecules are starting to kick in with the first projects. And I think this is something, which makes me feeling positive. But it was, the other -- let's say, the others were strong capsules, but what Rodolfo said, we are happy with the run rate. If you recall what we said last year that the pharma capsules will be the slowest growth, Nutrition was going stronger. I think it's definitely, after a very good last year there, again, growing. And the strongest course is with the dosage forms and delivery systems. This is what we can see, absolutely in line with our forecast.

[Operator]

The next question comes from James Quigley from JPMorgan.

[James Patrick Quigley, Analyst]

Firstly, on the phasing between half 1 and half 2. So excluding the consolidation impact from Capsugel in the first half, how should we think about the underlying growth rates? So first half '17 was a very tough comp, always a very tough comp. So should we expect Pharma & Biotech growth to be faster in the second half compared to the first half? Then secondly, in the small molecules, on the dosage for synergies, I think with the Q3 update, you said you had one asset. You're talking about you're -- you've seen a lot of investment here. How many assets do you have now, whether it's the joint offering? And has your view started to change that the majority of the revenue synergies will come from the consumer side now that you've seen a ramp -- or a potential ramp-up here? And then, if I could just sneak in. About a year ago, you mentioned that the whole of the noncore specialty chemicals businesses, so Coatings, Agro as well as Water, were under strategic review. Does the announcement today of -- around the water business and retaining an investment bank, does that mean that the other parts of specialty are going to remain in the group? Or is that review still ongoing?

[Richard Ridinger, Chief Executive Officer]

I think maybe I start to the last first. Yes, of course, the announcement of today means that we are terribly exploring all opportunities, which is also including the sales force. But I think, at this moment in time, of course, many people are then interested how fast and to what -- and so on, but this is a start of a process. But it's a start of a process. But the start of the process doesn't mean that everything now goes automatically. I think I have my expectations. And if they are not met, I think we will take different decisions. If they are met, I think we will definitely start to change all the portfolio according to our strategy. For the rest, it's what I said before -- and we will, a little bit more, elaborate in the capital market day. But what I can say right now, I think it's a step-by-step pruning of the portfolio. I think I don't see -- I think water is something, which is the kind of a standalone business. We have made significant efforts to bring it into a shape that we can see better what is it really alone and not having a crossover in -- with other businesses in assets -- in business side. And so now, what -- we see it very clear. This is what we've said earlier, all the business, which -- where we can do this, I think, at a -- in a reasonable period of time. It's not the same with the other businesses, which are heavily, if you want, so entrenched into small molecule business. So I thought, those things just maybe -- if it's just a small loop, at least -- if this -- yes. but I want to just mention is from a historical perspective, and Lonza is not an exception, our core active and small molecules active by coming out of the same source. So that means, at least, in Lonza, which is not as big as pharma, I think, predecessor of Novartis, where there's -- they -- was carved out into Syngenta. This is not in Lonza, but we still are using the same basic streams of chemicals, which go into 2 parts. This is a little bit more tricky. And that's why we are not focusing this in the first place. But this needs a little bit more explanation. And I think, as we are not doing anything in this respect anyway for the next quarters, stay tuned. We will talk about it in the capital market day. For water, it's clear. We have started the process. Yes, I think, this is what you can read out of this. But no further comment at this time, I think. It's so new, and I think it's a start. And we will definitely comment if it comes to the end. So -- and then on the small molecules, maybe let me try to recap. And if it's -- if I do not to catch everything, please come back again. What we saw, the synergies between active and the delivery forms. Yes, we are begin. And I think we are expecting, for us, real synergies in sales to start now already in the Consumer Health and Nutrition part. But here, I have also to clarify a few things because in this market, and I have logged in the fast-moving consumer good supply for a decade, so I know quite well how this market works. If you launch today, it is not you are -- it's not a pharma contract of CMO where you have a contract start, you make the engineering and the validation batches and you -- and then you are ramping up extremely fast. Here, you penetrate with new offerings of world market. You have launched in year 1. And somewhere between year 2 and 4 the sales are ramping up. So -- and this can be in year 2. It can be in year 4. It can be in year 3. This is my experience after many years. I've even made, in my last job, statistics about it. This is the reality, and this is what we are preparing now. So I'm confident because I get the feedback from the market. And now the small molecules, now we are getting the same. Of course, it takes a little bit longer, but [indiscernible] to really get the people together. And this was done in quarter 4 last year. Now they have worked hard for a quarter. Here, we have -- if you ask a little bit about the acid base, the small molecules, still from an API perspective, we have 2 assets in China and Switzerland, Switzerland being the biggest one. In the -- in this -- from track formulation and the delivery forms and -- this is where we have quite, at this small -- quite a network of 6, if I'm not mistaken, different sites. And many of these sites -- and all of these sites will present a different technology. Here, I think the task of the team going forward is to form a very striking organization, which combines at the best for the customer, all these different fantastic technologies to get the best delivery form for an active ingredient. And we are -- as we speak, the teams are working on this heavily. I was even positive how many projects they have identified with customers, combining API and the delivery form and dosage systems. And here, I think it's much more to getting aligned all the different technologies to always come to the best solution. This is what we are doing right now. Then Rodolfo will talk a little bit about the H1, H2.

[Rodolfo Savitzky, Chief Financial Officer]

Yes. So James, recall, when we talk about 2017, what we said, in general, that the -- let's say, the discrepancy in the growth rates was more related, not necessarily, to the sales run rate in 2017 but onto the base in 2016. So considering that 2017 is more of a standard year, what I can say is that what we will see is relatively even growth, or at least, this is our forecast today, in the first half and second half. We have commented. of course, that in all of the cyclical business, the start was a little slower in the numbers. And we have a strong momentum. It was also commented in the health care continuum. We will see an uptick in the cyclical business, particularly -- or we expect to see an uptick in the cyclical business in the second half. But again, overall, we see even growth first half and second half.

[Richard Ridinger, Chief Executive Officer]

Maybe one good news I can really say. I think if you recall, somewhere, call it a year ago, and we had extremely bullish growth, extremely -- was not -- of course, it was extremely bullish growth. So especially in Biologics, I think the hurdle was high. And if you say it's positive, then we definitely over this high hurdle by this year. This is not to forget, I think that's why I'm really happy. I think it was -- we raised the bar so high, then -- now we are even saying, even -- versus this high biologic bar, the momentum is good.

[Operator]

The next question comes from Patrick Rafaisz from UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

The first is a follow-up on Portsmouth and the mid-scale expansion. Is that in anticipation of new businesses? Or do you already have, as another example, or the committed business here for 2020 and beyond, when these capacities are available? Then secondly, Specialty Ingredients, you mentioned a somewhat softer start in woods, ag and water based on a cyclical improvement in the second half. Do you think you can recapture the lost business here in Q1 in the coming quarters? Or will we still see a delta for the full year versus 2017? And then lastly, maybe you could provide us with a small preview on the ROIC targets. Clearly, we'll get the details with H1. But with that now part of your long-term incentive scheme, do you foresee any changes in how you steer the business with this new incentive, in particular, with regards to capital allocation?

[Richard Ridinger, Chief Executive Officer]

Yes. Let's start with Portsmouth. Again, yes -- I think as I said before, yes, we see here -- I think, we have in our market segmentation, we see definitely in this space a very high demand going forward. I think it has been -- and this is also confirmed by the fact that yes, we are already getting these contracts into this space. I think it's not -- this will, when it's completed, immediately [ have tac ] transfers while the old asset is still running. And we are [ tac ] transferring already existing contracts into these new assets. And our teams are extremely confident that in a very overseeable period of time over the next quarters, this will be, I think, significantly felt when we are starting, I think, the mechanical completion and the validation, which is, of course, CGMP. I think that's important. So I think here, absolutely. And of course, as I said before, it's a fantastic opportunity because we had to do it anyhow. I think it was on our CapEx agenda to replace now a 23-year-old biological assets. We had to do it. It was on our long-term investment plan. And now we are taking advantage and getting for, if you want so, an old car, a brand-new car. It's a total different performance. Please excuse my comparison. But yes, if we come to the seasonal and cyclical businesses, I think it's a little bit different. Some things are just like -- wood in North America, I was in New York and the weather in the first 4 months was, in the East Coast, quite miserable. Different in Europe. But of course, we are still more loaded in the U.S. with this business. It was seasonally just not good because it was not good rather for a seasonal business. I think it definitely can come back. In our CORE -- in the part of our CORE is also the animal feeds. There were stuff we have definitely won. If you want to extend that product, I would even put, say, commodity in this portfolio, which is -- and the right timing between animal feed business. And this was last year at its highest. And this year, the commodity cycle is going a little bit in the lower end. It was clear to us, it went that it would come -- it came in quarter 1. And of course, as usual, in those businesses, now we are expecting, for example, already as we speak, that volumes are coming back in this business, which is a typical pattern in this business. How much this will lead, that we will get everything? We need to see it. But you should -- I think we are not negative on that. Of course, it will be -- we will need more probably on some of the businesses, which a whole 4 quarters to get back and not only 2 quarters. But this, to a certain extent, was expected. But to a certain extent, you cannot really foresee in the first quarter, even in January, how the next 4 -- 3, 4 months are going to really to be in the market. That's something which is in the name of the game of those businesses, nothing fundamental. It's just as those businesses are. And Rodolfo, on the ROIC? What the...

[Rodolfo Savitzky, Chief Financial Officer]

Well, the -- I think there's 2 parts to the question. The first part is if you could -- if you can get a preview. And then unfortunately, we cannot give a preview at this stage. But I think what is more important probably is the second part of the question, whether this will change, in any way, the way we steer the businesses. And the answer is absolutely not. I think, of course, our main priority is to create value. We want to make sure that we obtain a return on our full investment. And this has been the case before with CORE RONOA. And it will be the case now with ROIC. Of course, internally, as management, we are -- we're monitoring all the relevant KPIs, so this is the case. But we want to, let's put it like this, come up with a KPI externally that gives the transparency on how we perform on the full capital invested. And therefore, the change from CORE RONOA to ROIC. But this, in no way, changes the way we have been steering the business.

[Richard Ridinger, Chief Executive Officer]

So independent, which return on invested capital, rather it's only the operating assets or the total, including the goodwill and investment, our strong goal is every year to have a KPI improvement. Of course, why we changed it? I think many of you know, but just to repeat, as to clarify it again, in the space between 2012 and 2016, '17, CORE RONOA was a good measurement because at this moment in time, no big acquisitions were in sight. And we needed to get a much better return on the CapEx. And that's where the capital because it was extremely bad in 2011, '12, and this is why we focused on that, and we made tremendous progress. But it is a fair point for many investors, the feedback that after the Capsugel acquisition, I think this might not be the appropriate one because now, you have a lot of goodwill on the balance sheet. You need to get a return on the goodwill, as well. So I think, for us, it's now only a fair measurement for the management to say, I think, now, put more the harder KPIs in place, which was -- maybe is now the right measurement at this moment. And this is what we are doing now, but that there is an improvement to come every year, there is no doubt. Otherwise, we are not meeting our targets.

[Operator]

The next question comes from Laura Lopez Pineda from Baader Bank.

[Holger Blum]

For my first question, it's also on an expansion project. So a couple of days ago, you announced also the expansion of your facility in Greenwood, which is supplying your Health and Nutrition business. Can you give us a little bit more details about this expansion project, how much full the capacity increase and for which product is this capacity needed? Is it for empty capsules? Because I think there, you also manufacture these. Secondly, on the agro business, today, on the press release, you mentioned that the white biotech innovation portfolio is performing strongly, while the cyclical commodity is -- it was already discussed during the call, and was weak to -- also to seasonality. So can you maybe give us kind of an indication of the split of the current portfolio? How much of the agro business is still being directed to the commodity market? And how much is more specialty? And lastly, a general question on the market. So pricing pressure in the pharma industry is strong and continues to be. So do you see this as an advantage for Lonza on the CMO market? Or do you believe that with time, this will also introduce pricing pressure for you?

[Richard Ridinger, Chief Executive Officer]

So let's start from the backside pharma, yes, extremely bullish, to be very clear. I think all what we see, all indications we have, all the conducts with customer, the total movement in the markets, including all different dimensions, make us extremely positive that this is an ongoing great story. And I'll talk about years to come -- more capital market day, but as a free teaser, if you want so, I see it as absolutely positive. Greenwood investment, It's for the active ingredient part of the portfolio. Why in Greenwood? Because, yes, we are -- we have a significant capsule production in Greenwood. We have a dosage form production. We have a formulation, lipid multiparticulate production of active ingredients. And now, we are adding even active ingredients. So it's really then a synergistic center of competence for Consumer Health and Nutrition. But we are also providing still pharma capsule from that side. So I think this is why we put this into Greenwood, to have here everything, more and more together, active -- all the formulation technologies and finally, finished dosage forms based on capsules. So I think that's why -- yes?

[Laura Lopez Pineda, Analyst]

So if I understand correctly, so the capacity addition is for active ingredient production.

[Richard Ridinger, Chief Executive Officer]

Yes, active ingredients. very, very successful active ingredients. Yes, the agro, of course, we have put [ platforms ] and this is a little bit -- not -- also a lot of agro intermediates and also basic materials for the feed into our agro business. That's why, at this moment in time, this is. from a sales perspective, a bigger part than the specialties in total agro. The agro specialties, of course, are really in all dimensions, specialties in margin in all dimensions. But we have put, for a reason, also the more agro intermediates parties that are even used in other markets. And also the animal feed business, which is heavily represented by the vitamin B3 under this. And that's why, in this portfolio, it's stronger from -- has a stronger commodity part in the total portfolio. White biotech, yes, it belongs to the specialty part. We have made a move some -- couple of years ago to put our [ Cushion ] facility, I think, decommission it from a pharma perspective and focus it fully with these growth projects on white biotech, and this is working well. I think we made focus. But having said that, this white biotech is not only going into the agro market. It's as important. Also from an innovation market, again, it's also important even for the perfect [indiscernible] market. It's important for the value chain, even of dosage forms. I think we have made synergistic projects between Capsugel and Lonza, even on white biotech. So it's a bunch of exciting projects, which are not for pharma, but for the consumer health market and, partly, for the agro market. This is about white biotech and this is to the portfolio of agro at this moment.

[Operator]

The next question comes from Peter Welford from Jefferies.

[Peter James Welford, Senior Equity Analyst]

So firstly, just on cost synergies of Capsugel. I wonder if you could give us any sort of update there. I appreciate it's a relatively small number, but any sort of progress update you can give us on realizing those? And secondly, then, just on the Portsmouth expansion. Is this doing cell therapies as well as mammalian capacity? And can you confirm or say whether there will be any use of single-use bioreactors at this facility or whether it will be stainless? And then just clarifying -- a point of clarification on the nicotinates. Is this business -- that the Niacin presumably still included within the consumer health care business? So does the CRP business supply the CHD business for the niacin? Or how does the dynamics of that work?

[Richard Ridinger, Chief Executive Officer]

So let me start with the -- from the last question, then to Portsmouth and then Rodolfo takes over with the cost synergies. The biggest volume of the niacin or vitamin B3 goes with the animal feed business. In the Consumer Health business, we are also selling -- it's, but here are different grades and partly, even synergistic projects with vitamin B3. And here, it's much more in the home of the specialties world because it's not the same type and it's also not the same, even sometimes, combined application. It's one asset, but it goes into different businesses for application. And then finally, also for marketing and sales. This is how it is. Portsmouth for Cell Therapy, we have -- I know that you're aware, at the Capital Market Day 2016, we had -- we were just walking by Cell Therapy suite at this moment in time. This is, I think, on purpose. We did already an investment in Cell Therapy in Portsmouth because we wanted to make sure, and customers are reacting very positively that in the moment, products move into Phase III and here has also a possibility to become commercial even for Cell Therapy to have a commercial experience site, like Portsmouth is an extreme benefit. And the customers love it. When they go to Portsmouth, they see this is real biological stuff. And we have provided Cell Therapy capacities. And yes, extremely positive and even customers who are in Phase II and moving to Phase III, they are really happy that they have the opportunity to move to Portsmouth. So we have made an investment consciously also to take advantage of our experience we have on the commercial side also for the future Cell Therapy products. And on the single use, of course, we have published that we have, on the big end -- on the large end, 6 cubic meter fermenters, so it's not a single use in the fermenter. But there's a lot of single use in the rest of the setup of the total new asset. So it's a lot of single-use concepts. It's not a back in the fermenter because 6 cubic meter, maybe, Peter, at one moment in time, the 2 of us try to get a 2 cubic meter back out of a fermenter. You are all invited and then we see whether this is easily possible for 6 cubic meter. No, it's not, at this moment, would make sense. But around that upstream, downstream in all the fermenting, we have definitely significant single use.

[Rodolfo Savitzky, Chief Financial Officer]

So Peter, on the synergies -- on the cost synergies, just again to remind ourselves. So we have planned for CHF 30 million operating cost synergies by year 3 and CHF 50 million tax synergies again by year 3. And what we -- and in terms of the operating synergies, half of them -- or almost half of them were related within savings as we gain economies of scale by combining the 2 businesses. The rest were more related to personnel synergies as we can move into common shared services for the 2 organizations. Now as you can imagine, for the personnel synergies, the plans are intact. We feel extremely confident, but this requires common systems and processes. So we will be realizing the savings more towards year 3. This is not happening today. Today, we're still at the stage of the setting up common systems and processes. The very positive news is in the procurement synergies. We're very confident. We're seeing very fast progress in realizing these synergies. And we will start seeing some results -- meaningful results this year. And of course, the full level of procurement synergies will materialize in year 3, as promised. Likewise, on tax, again, this is something that is intended for year 3. But a lot of these can be planned ahead based on our projections and the different tax structures in the combined company. And we also feel extremely confident to achieve these level of tax synergies by year 3. And some of them, of course, we will start seeing a little bit earlier.

[Operator]

[Operator Instructions] The next question comes from Justin Bowers, Bloomberg Intelligence.

[Justin Bowers]

And just 2 questions. One on the Portsmouth, I was just -- I just wanted to clarify whether -- it sounds like there is some expansion going on there, but from the earlier remarks, too, it sounds like there was a replacement cycle underway for some of the legacy equipment. So I just was hoping that you could clarify that. And then in terms of the expansion, is that going to be -- are those single-use -- is that single-use capacity that you're expanding? And then the second question is just around the new cell-and-gene therapy center there. And I was hoping to get a little better understanding about the long-term plan there and a little bit of elaboration on some of the services you're doing there now and then plan to do in the future. And then if you're planning on consolidating, any of the existing capabilities that you have at that center of excellence other than what you've done already?

[Richard Ridinger, Chief Executive Officer]

Yes, the first -- the last question, yes. I think the Pearland facility, this is [indiscernible] confidence and we will consolidate a lot, mainly because in the -- all clinical parts of cell and gene therapy, this will be a real center. I think it's well located in Houston. And also with all the scientific environment, which is around there, I think we feel very comfortable that this is a good place. It will be a business, which is -- what we do here is very similar to what we have done in mammalian, where we'll talk about also in September more, how we have set it up, that everybody knows what -- how our system is going to work. And here, it's the same. We have clinical -- a clinical center. We have 2 clinical centers which -- one is in the U.S, which is now Pearland close to Houston. The other is in The Netherlands. And then we are building some commercial -- a late clinical commercial center. And this is 3, Houston. We have also provided enough space that we can stay there, especially when it comes to, for example, I think which is a bigger topic for us is expanding virus production. But when it does go to Cell Therapy, we definitely -- chemical or late-stage in commercial, also in Portsmouth, as I have said before, one in Singapore. And we'll try to replicate, over time, the same in Europe because I think it's also important that we are having a shorter access to customers in Europe. And we have in Netherlands, also, a clinical center. So this is how we do it there. I think it's quite promising. I think we had a significant growth over the last years. Now we have -- we are about to really professionalize our total setup in the most important market at this moment in time. And from there, I'm quite sure, I think this will become a more prominent part of the portfolio in the next 3 to 5 -- or 2 to 5 years, I would say. Yes, again, Portsmouth, again, I think to the question, similar as we discussed before. It's a -- it has been -- we still have a running suite there, but this is outdated. It's also older technology. I think it was on our investment plan to replace. And we take this opportunity to make a step-up investment, which provides more capacity, more automation, more productivity. And we are using, as much as possible, single-use. But of course, what I said before, not on a 6 cubic meter fermenter because it's just too big for a bag. At this moment in time, you need a crane for a bag, which, in any way, you even need 2 cubic meter kind of a support. But with 6, it would just be too much. So it's -- and we did it that way because we are really convinced that it's a significant need, which we need to fulfill by doing those. So it's the part -- it's a replacement and, at the same time, an expansion.

[Operator]

That was the last question for today.

[Richard Ridinger, Chief Executive Officer]

Ladies and gentlemen, thank you very much for joining our update. It was our pleasure to discuss with you, and looking forward to discuss again with all of you end of July for our half-year results. Thank you very much.

[Rodolfo Savitzky, Chief Financial Officer]

Thank you.

[Operator]

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