Lonza Group AG

SIX:LONN

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Lonza's Q1 2019 conference call and live webcast. I'm Sherry, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Marc Funk, CEO of Lonza. Please go ahead, sir.

[Marc Funk, Chief Executive Officer]

Good morning and good afternoon, depending on your location today, and welcome to Lonza's Business Update for Q1 2019. I'm Marc Funk, the CEO of Lonza Group. And joining me on the call today is Lonza's CFO, Mr. Rodolfo Savitzky. Before I provide the details of our performance in the last 3 months, I wanted to share my own view on the Lonza business. I'm confident about our prospects and opportunities, and I believe we have the capability and commitment across our workforce to deliver on our potential.Turning to my own role as CEO. My focus is to develop a strategy, structure and culture to ensure we are the partner of choice for the health care industry. I want to be clear on our duty of care to our investors. I hold in my sight our long-term aspiration to be a market leader and partner of choice globally. I'm also resolute that I must be realistic in sharing our challenges and how we approach them to ensure our continued success. It's important that I exercise a level of judgment and prudence in my outlook. To me, this is critical part of being an accountable leader.Moving on to our agenda for today. I want to provide an overview of the wider business before looking at each segment in turn. I will then touch on the 2019 outlook and midterm guidance 2022 before opening the call to questions.Let's start with the corporate overview. Before sharing the detail, I will summarize Q1 by saying that, on balance, the company, as a whole, showed solid performance. These results mean we are able to maintain our outlook for 2019. We achieved the results by a higher-than-expected performance in our Pharma Biotech & Nutrition segment balanced against a lower-than-expected performance in Specialty Ingredients.Pharma Biotech & Nutrition continued to perform strongly across all technologies. We are delivering on the execution of all announced investment projects, and we see continued customer interest in our offerings based on concrete market demand. The segment also saw increasing demand in nutrition and specialty polymers and dosage form businesses.Turning to Specialty Ingredients segment, LSI, you will see that we have continued to face challenges. When we provided our outlook 2019, we factored in a level of uncertainty in LSI based on the headwinds and performance in 2018. Our cautious view has proven to be correct. It has become key that headwinds are continuing. They must be navigated by our segment as well as the wider industry.So we see that 2 segments in our company are currently moving at different paces. We have been working to review Lonza's internal structure to improve efficiencies and synergies with our segments. We have moved our Nutrition business out of Specialty Ingredients and into the Pharma & Biotech segment. The new structure allows each segment to function independently of the other without crossover, competition or customer confusion. It will drive the differentiated offering to support healthy living and to fully serve the need of patients and customer -- consumers. Our revised segment alignment will allow LSI to focus on Microbial Control and on fixing global supply chain and operational challenges.I have also dedicated my time to setting robust performance measures that will help to make the LSI businesses more efficient and cost-effective. Alongside these measures, we are undertaking an accelerated review of our portfolio. You can expect further details to be announced in the second half of 2019. We have already touched on aligning the scope of our segments. Here, I wanted to share with you the detail of our new organizational structure. The Consumer Health business was formerly part of LSI. On one side, it combined offerings from nutritional supplements and functional foods. On the other side, it combined personal and home care preservatives and hygiene solutions. Each of these were separated from 1st March 2019.Consumer Health & Nutrition moved to our Pharma & Biotech segment. The Consumer Product Ingredients business remained in LSI. The alignment means that the business is well-positioned to create new solutions in food-pharma conversions and in Microbial Control, LSI's area of expertise. Bringing Nutrition into Pharma & Biotech has already delivered synergies. It is well-timed as prescriptive and preventive health care move closer together in the market. Our offering in LPBN will be strengthened by our technology and innovation alongside our regulatory and scientific expertise. We are set to gain greater benefit from technological overlaps and knowledge transfer between Pharma and Nutrition. This advantage is further supported by having Capsugel fully integrated within the segment.For LSI, the alignment enables a more cohesive supply chain and improved asset utilization. It allows the business to focus on operational excellence, supported by an integrated global asset strategy. Gaining operational efficiency and acting on a common technology platform will strengthen our competitive Microbial Control solution in LSI. This alignment is the first of a series of changes to ensure the business can capitalize on its strong market position and deliver lasting value to its customers and investors.Let's now take, if you want, a closer look at the LPBN segment. First, we'll turn to the CDMO business within LPBN. You will see we have a range of activities and achievements in key areas, including mammalian and microbial, cell and gene and small molecules. Our cumulative success is these -- in these areas is largely because we preempted the movement of the market. We have capitalized on demand through a combination of constant innovation, broad technological capabilities, regulatory expertise and close customer relationship. We continue to build on our success in these areas with a focus on operational improvements. We are also pushing forward with execution on all previously announced CapEx project to our planned schedule. Our intention is to make sure that we are set up to deliver against future demand and maintain our outperformance in these important growth areas.Targeted investments in innovation and growth are already bearing fruit. Our first customer are committed for our innovative Ibex Design and Ibex Develop full service, single-site clinical offering in Visp, Switzerland. 100% of 2020 available clinical manufacturing capacity is already committed, more than 1 year before commencing operation. Shorter lead time are more typical for such project. So this high level of interest leaves us confident that we are presenting a competitive offering to the market.Turning to another major announcement within the last few weeks. We entered into a unique partnership with Chr. Hansen on a pioneering project in the microbiome space. Yes, we established a 50-50 joint venture agreement to manufacture anaerobic bacteria strains and dosage forms for therapeutic use. The initial investments of approximately EUR 45 million will be phased over a period of 3 years and is split between the 2 partners. It will be used to build and run pharma production capabilities that are cGMP compliant. The JV will operate from a new headquarters in Basel. Production facilities in Denmark and Switzerland will enable us to serve preclinical to Phase II projects. The market potential for the clinical offering alone is estimated to reach EUR 150 million to EUR 200 million by 2025. In a second stage, the JV will extend to commercial manufacturing.This partnership will mean that we are the first globally to provide a full supply chain that offers manufacturing of anaerobic bacteria strains for the therapeutic use. This end-to-end approach cements our position as a leading live biotherapeutic product, CDMO for Pharma & Biotech customers. Alongside specific investment programs, I wanted to provide a snapshot of the global breadth and value of our investments in new facilities. The point on the world map reflect our level of planned investment in new facilities, capacity expansions and technological advances. The project has imminent start dates with work initiating in either 2019 or 2020. This is when we undertake qualification, validation and other regulator- or customer-required steps to commence full manufacturing. The majority of current projects will expand our biologics capabilities with a secondary focus on small molecules. To support this planned expansions, we are also working on a recruitment plan so that our expertise expands with our operational scale. Our recruitment efforts will identify and attract the best talent with the most appropriate expertise and knowledge. This year alone, we have started a recruitment drive to hire 400 highly skilled professionals. As part of our forward planning process, we hire people before the start of operations to ensure they receive full training. It means our facilities can deliver optimal output and qualify from day 1 of operation. This high level of training is one more way in which we work to differentiate our offer against our peers and competitors.Now let's take a look at our product business within LPBN. In our products businesses, we offer research tool and biomanufacturing equipment as well as nutritional products. Turning first to Bioscience Solution. We saw increased demand based on new product launches and expanded offerings. The business performed better than the same quarter last year. Our continued focus on operational efficiencies is targeted to further increase profitability. We have integrated CHN with LPB to form Lonza Pharma Biotech & Nutrition. In doing this, we will leverage our pharmaceutical formulation and delivery sciences. It will allow us to bring innovation into our CHN ingredients and dosage forms. The alignment also enables us to bring consumer-driven insights and solutions to the LPBN portfolio. Our CHN businesses performed strongly in Q1 based on continued demand for functional food and nutritional supplements. These themes are an important part of our future commercial success. At a rapid pace, they are introducing new innovative nutritional offerings for fast-moving consumer goods market. Let's take a look at some examples of these innovations on the next slide. You will see here that we have delivered several innovative offerings to the fast-moving consumer goods market so far this year. First, we have entered into a partnership with DuPont Nutrition & Health to supply ingredients for infant formulas. Our existing expertise in Consumer Health & Nutrition means we are able to develop and manufacture superior quality human milk, oligosaccharide. It is designed to improve infant digestive health by modifying gut microbiota. To meet increasing demand for all-natural ingredients, we also introduced additional naturally sourced food colorants for our plant-based polymer capsules. These new offerings have already been well received by the market. And finally, we launched a new sport nutrition ingredient based on highly active antioxidant enzymes. Alongside these projects, we are investing to expand our Greenwood site in South Carolina, U.S. This expansion will improve our delivery capability for combined capsule and ingredient production and finished dosage form development.Let's now turn our attention to the LSI segment. LSI performed below expectations. As you will have seen in our full year 2018 results from January, we rightly anticipated ongoing headwinds in 2019. However, the headwinds have been ongoing and our Chemical businesses have not performed as targeted. We have been focusing on countermeasures to improve the bottom line and increase business efficiency across the segment. That approach was particularly important because of the unforeseen strengths of the industry headwinds affecting our peers and us. We should also note that there has been other disruptions. For example, the recent explosion in Xiangshui, the Chinese chemical park, resulted in an industry shutdown in this area. To make we are in good shape to meet this challenge, we have set robust performance measures that will help to make the businesses more efficient and cost-effective. We have also begun to consider operational efficiency measures. This will help mitigate the impact of supply chain disruptions and raw material price increases in some Specialty Ingredients businesses. The measures are ongoing, and we expect a slight recovery for this business in the second half 2019. Challenges exist across the portfolio, and the cyclical nature of this business means it is a challenge to make predictions. In aligning our segments, one objective was to ensure that each can focus on its own operational excellence and develop an integrated global asset strategy. The intention for LSI is to enable a more cohesive supply chain and improved asset utilization. We also aim to open up new market opportunities, enable faster innovations through synergies across R&D and commercial functions by concentrating on Microbial Control. However, we have not yet had time to measure how the newly aligned LSI structure will impact our top line. We continue to strengthen our high-value offers in Microbial Control. At the same time, we are dealing with the headwinds through profitability measures, as announced. For the time being, we take a cautious view on the business recovery.As I close my comments on individual segment performance, I would like to turn to the outlook for 2019 and the midterm guidance 2022. The challenges is the clinical businesses in LSI are balanced by the outperformance of LPBN segment. This means we have successfully struck an equilibrium. It allows us to confirm the outlook 2019 announced earlier this year. Looking at the detail, we can confirm mid to high single-digit sales growth and a sustained high CORE EBITDA margin level in 2019. To preempt any questions around the margin, we are targeting a CORE EBITDA margin around 27.3% for the full year 2019. This is the same as in 2018. We have accounted for the uncertainties in the LSI business as we confirm our outlook. As you saw in our news release today, we can confirm our midterm guidance for 2022, which was recently adjusted after our disposal of Water Care business. The adjustment also reflects our strategic focus on continued growth. Our core health care businesses are critically important to our current and future success. This will remain an area of continued investment to accelerate growth. As I mentioned before, the business is now turning its focus to a full and detailed portfolio review. Our intention is to ensure that capital is allocated in business critical areas that facilitate innovation and growth. This is the best way to serve our customers and their patient and consumers. We will update you on progress with our portfolio review in the second half of 2019. As I draw to a conclusion, I would like to summarize some of those key points coming out of the presentation. The business continues to make strategic investment in the LPBN segments to ensure it continues to outperform and maintain momentum around its growth trajectory. At the same time, we are taking measures to ensure that LSI can manage its headwinds with improved levels of efficiency. Across both segments, we are working hard to foster a culture of performance, to ensure that we deliver against our financial targets and strategic priorities. Ultimately, any work to enhance our own capability will also improve the way in which we help our customers to serve and support their patients and consumers. Our purpose is to contribute to a healthier living and deliver leading molecular manufacturing technologies to serve the life science industry. I look forward to sharing the results of our endeavors with the half year results in July. Now I would like to turn to the Q&A session. It is important for me to take time to listen as I establish myself in my role. Who would like to ask the first question?

[Operator]

[Operator Instructions] First question comes from the line of Daniel Buchta from Vontobel.

[Daniel Buchta, Research Analyst]

The first one on the hard capsule business. I mean here, you were giving some wordings that you had strong growth in EMEA, in Japan and other regions but you were mentioning that North America is slightly down. Maybe you can give an indication of what that means in terms of organic growth for the business, which was acquired, this Capsugel, and is organic growth in the mid-single-digit plus range, roughly in that magnitude. The second question on your portfolio review. I mean obviously, I understand that you're not done with that yet. But just to understand, is there any reason why some businesses in LSI could not be disposed, say, for technical reasons or because they are so integrated into your Visp site? Is there such a burden or problem that you cannot sell some businesses? Or is that -- are you fully flexible in that regard on portfolio review?And the last one, you were mentioning the measures in Specialty Ingredients on the operational side but also on the cost side. Could you be a bit more precise in terms of cost savings you may potentially expect and how you intend to improve the operational measures you are implementing and so on and so forth?

[Marc Funk, Chief Executive Officer]

Thank you for your questions. I will answer chronologically based on your 3 question, one after the other. So to your first question about the hard capsule growth, yes, what you have said about our summary is correct. But I can tell you that in terms of the commitment of the growth performance when we said mid-single-digit growth, we can confirm this.On the portfolio review, the -- in this world, everything is possible. I would not say that there are unsurpassable things that cannot be foreseen, but we have to be prudent, as I said in the beginning. Portfolio review means, first and foremost, a lot of depths of all the different project that we have, things that we can see. Lonza, as you know, is a company that is not 50 years old but slightly more. And to that extent, when we do portfolio review, those things take time. And as I mentioned earlier this year, the focus now is much more to make sure to make the organization in LSI focused on their business as they have it, to make supply chain better and to have their overall operation focused in view of the challenges that exist since 2018.And then your last question about the profitability measure for LSI, let me first tell you that we started already those different measures end of 2018, and this is ongoing. And here, we have done operational efficiencies in our network. We have done cost control but here, not just in LSI but also in corporate. And important to say that we have looked at alternative supplies of some of our materials and have done some vertical integration of some of the material that need to be done to generate the output in some of our site, including in Visp. And the last point is linked around some pass-through costs that we have given to some of our customer, for example, in professional hygiene.

[Operator]

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

[Matthew Weston, Managing Director and Co]

A couple of questions if I can, please. The first is about the chem park explosion in Yancheng. Marc, could you please explain a little bit more in detail what the implications are for Lonza? Is it that some of your businesses within LS&I are struggling for feedstocks for the business? And if so, what's your assumption as to when that will be back on track? Or is it that there is actually some direct implications for Lonza's chem parks in the province in terms of environmental inspection? I believe -- I think you have an antimicrobial plant also in Jiangsu. And then secondly, Marc, following already from the previous question with respect to the portfolio review, I was very taken by your statement in your opening sentence that you want to ensure in your role as the new CEO that Lonza is the partner of choice for the health care industry. Well, within LS&I, you have quite a lot of customers who aren't within health care. So are you telling us that it's less relevant to the Lonza business going forward, or just that over time, you will try and redirect LSI more towards the Healthcare Continuum?

[Marc Funk, Chief Executive Officer]

Thank you for your question. I'll go chronologically to your question 1, 2 and 3.In relation to the chem park explosion in Xiangshui, it is relevant and impacted our benzisothiazolin, acronym BIT. That affected our overall supply of our product. And it's important that it accounts for different product, biocides used as preservatives in the paint and coatings, crop protection and household product. So this accounts for these kind of businesses. But the explosion that took place there did certainly impact our agro customer. And also, it's important to say that this impact of -- in our business is continuing certainly in H2. I have read with interest a report issued I think yesterday by MainFirst, where they said that it will impact us by around 100 million of negative impact on sales. I would say it's a bit aggressive. Your second question, did this explosion in Xiangshui impacted our own assets in this area of the world? The answer is no. Your second -- your third question, sorry. I wouldn't go too much about the exegesis of what I said in my introduction, neither about the portfolio review. What I say and I will continue to say is that doing the Healthcare Continuum is -- and its acceleration does not mean that it is at the expense of the business in LSI's. Let's not forget we are one company, and my duty as CEO is to make sure that both businesses perform.

[Operator]

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

[James Patrick Quigley, Analyst]

On the clinical biologics capacity, that seems to be going very strong. As you mentioned, 100% of the available 2020 capacity is filled up. Does that mean -- or given that it's filled up so quickly, do you now have to sort of invest further in the clinical capacity? Or will this already be covered by other investments, like the continuous manufacturing investment in Slough? Then secondly, sort of related to that, one of your competitors has suggested DOs of single-use technology and continuous manufacturing of between 30 and 50 grams per liter. Do you feel you could achieve similar yields like this? And then more generally with continuous manufacturing, is it just Slough that you're looking at for the moment? Or could this roll out across further plants? And then finally, in gene therapy, there's been a couple of sort of fairly high profile deals announced recently. Can you just remind us where you're differentiated across the market, what areas you are -- you feel that you're leading in, what areas you feel you need to boost in and what the Cocoon assets could add in the future?

[Marc Funk, Chief Executive Officer]

Thank you for your questions. I'll answer to your questions in the chronological order. The first question is our utilizations of our new capacity in 2020 around the Ibex Design and Develop has been already booked. Will we invest further in the Ibex D, D? Let's not forget that the investment is ongoing and that there will be in those overall program that we have announced last year that the capacity will, of course, increase in 2021 and 2022 so that the overall investment is still full up and running so that there is additional capacity available, of course, and especially also for 2021 and further. You may also note in the chart where we show the different investments that we are investing in Slough. That means that additional capabilities in the development work in mammalian biologics is also available there. Identically, we are doing it in Hayward, California. Third thing, that around this, we are also investing will start -- as announced last year in China, and capabilities will start also in 2020 there. To your second question, single-use technology, 20 grams per liter, I have read it.

[James Patrick Quigley, Analyst]

You just gave the answer.

[Marc Funk, Chief Executive Officer]

Let's be serious on this part. Our strategy in the disposal technology and the yield per se is not our finality, not in Lonza. We have communicated this last year already in Capital Market Day and in other various occasions. Our goal in those critical areas of development is to make sure that we lead in the fastest time to market. To make sure that in the clinical development you bring the right quantity of vials to the client in the right time as fast as possible, this is something that is of paramount importance to us as we read the customers, as we anticipate what they want. And this, for us, is important. The second thing when we talk about yield, let's not forget, and this will keep us busy not just Lonza but in the whole industry, is the downstream. What's the point to have fantastic yields if there are no improvements in harvesting those molecules in the most investment -- in the most important and innovative way. This is something that is equally important, where strategically, we focus also our importance. To your third question, what is our -- what are our differentiating factors or elements in gene therapy? Historically, we started in 12 -- 20 -- in 2012. And to that extent, we gained quite substantial[Audio Gap] in manufacturing that gives us a competitive advantage. The second thing is that we have, as the outcome of this, quite a lot of traction to bring possibly BLAs in our pipeline. The second point or I would -- the second point is that we are geographically very global, U.S., Europe, Asia. The third point you mentioned it is our very innovative and quite forward-looking program around the Cocoon where I'm sure you have read that this will go now into clinical trial program with -- in collaboration between Lonza and the Sheba Hospital in Tel Aviv.

[Operator]

Next question comes from the line of Laura Lopez, Baader Bank.

[Laura Lopez Pineda, Analyst]

Just a follow-up on the cell and gene therapy question. So in your presentation, you also mentioned that you have the aim to enhance the profitability in that part of the business. Is this just something normal? Or do you also see that there's -- of course, there's competition setting up but that you need also to improve your cost curve in a way? Or is this just a preparation to keep being a leader in that market? So that would be interesting to know.And then maybe with the JV with Chr. Hansen, thanks for all of the details there. And when do you think we can expect to see first products being delivered from that JV? That's all.

[Marc Funk, Chief Executive Officer]

Thank you for your questions. When it comes to profitability in the cell and gene therapy, first, I would like to reiterate that the demand in this fascinating business is gaining in acceleration. We have been in this -- in the cell therapy business since 2006. And since, it has stagnated a bit but -- in the early days, but now it goes at an accelerated pace. This being said, in the -- in our quest to make this more profitable, it has to be understood, particularly in the cell therapy that most of the manufacturing processes are very much labor-intensive, which means 2 things: one, that it is naturally more subject to quality deviation; and, on the other side, of course, goes with much higher cost. And here, we have sets of programs. Some of them are more in the long terms, on how to make sure that we manufacture in a way that is more cost-efficient. For example, instead of having stacks going into the 3D, those are long-term programs, but we start to see some of our customers going on into the 3D bioreactor manufacturing, which, of course, this is an overall trend where we have differentiated offerings. And we believe that this, in the coming years, will help us to have a better cost of goods. The other point to mention around this is also around the regulatory framework. And here, there were many discussions about how to best operate suites based on certain uncertainties on how to operate multiproduct -- or one product in one suite versus multiple product in one suite. Those big discussions that took place, certainly Lonza but also probably with the other colleagues or people who are involved in that space, there start to be a little bit more clarity around this in a constructive way, I should say. And this is certainly encouraging. Then going into the Chr. Hansen question, we -- since the announcement of our joint venture -- or maybe no. To start with, already before, both companies have already some customers around. And then the -- we had, of course, the announcement. We put everything together. And since then, we had interesting requests that make us believe that this is going to be very promising. And it is clear that we will start to be operational end of '19, early '20. And then we will start to see already some work to be generated and bearing revenues.

[Operator]

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

[Patrick Rafaisz, Director and Chemical Research Analyst]

I have 3 questions please and 2 follow-ups. First on the Chr. Hansen JV, can you walk us in a bit more detail through the business plan here? You mentioned these addressable market numbers [ 4 25 and 35 ], I think. And how much of that total markets would you expect Lonza to capture in terms of market share? And do you think, in these assumptions, that the share of CDMO services within the whole biotherapeutic space will be similar to biopharma currently? Or do you assume there will be a difference? That's the first question. The second one, follow-up on cell therapy. Could you give us an indication or quantify a bit where Lonza stands currently? We've seen the number from Paragon 200 million in 2019, doubling from last year when they generated 100 million; Brammer with 250 million of sales. Are you in that ballpark as well? So around 100 million last year, growing strongly in 2019? Or are you different? And the third question on the split of the Consumer Health business into the Consumer Health & Nutrition and Consumer Product Ingredients. These 2 subsegments, can you shed some light on how they are performing currently in terms of top line and profitability when compared to each other? And how does that compare to, let's say, the last 2 years?

[Marc Funk, Chief Executive Officer]

Thank you for your questions. I will answer to your question in the same chronological order.What is our view of our ability in this joint venture to capture the clinical trials in the coming -- in the near future, it's very difficult to answer these questions as we start. But what -- where we are very confident is there is no other offering today offering end-to-end offering in the microbiome space where one can manufacture anaerobic bacterias embedded in finished dosage form in dedicated specialized capsules. And this will certainly trigger not just certain clinical ongoing trials going on come to us. We have seen this already post announcement. But what I think is more interesting is because today, there is an offer end-to-end, which did not exist, it will help and encourage VC funds to put some more investment. Because when we talk to the VC funds in the previous times and that led us to make that joint venture, they said they would like to invest more in the microbiome but nobody can manufacture it. So basically, it is this JV that will -- that's our aim, help and catalyze demand, understanding that this is, of course, an area that is completely new. And the sub-question that you had around this is, is this going to be a similar pattern than the biopharma of the 1990s? Certainly, certainly. Your second question, are we worse, are we as good, are we better than the competitors that you mentioned? I will not necessarily give you an answer that will give you a very good clarity in terms of the numbers. But I can tell you that I'm happy. Your third question about the split between Consumer Health and Consumer Protection, the margins are different. Of course, as you know, the Nutrition part has the nutrition part of Capsugel that is more profitable, and the Consumer Resource Protection is less profitable. Maybe, maybe, maybe my excellent colleague, Mr. Rodolfo Savitzky, would like to add something to my luminary answer.

[Rodolfo Savitzky, Chief Financial Officer]

Yes. So Patrick, also I think part of your question was related to CPI, Consumer Product Ingredients, is that right or?

[Patrick Rafaisz, Director and Chemical Research Analyst]

Yes, absolutely.

[Marc Funk, Chief Executive Officer]

Okay.

[Rodolfo Savitzky, Chief Financial Officer]

Look, what we see in that portfolio is the Consumer Product Ingredient portfolio in itself, it's a fragmented portfolio. In there, we have some preservatives for personal care products, we have hygiene and we have also ingredients for CPI's health care. What we see is a positive development in hygiene and a bit of headwind also affecting, for many reasons we discussed before, the preservatives in that part of the portfolio. Consumer Health & Nutrition, on the other hand, we see strong demand for our nutritional [indiscernible] supplements. You see 2 for joint pain, of course, has very positive momentum. And as Marc referenced before in terms of the capsule business, we foresee that, overall, we will beat the target of mid-single-digit growth for the overall capsule business. So I would say the momentum is, at this stage, slightly different. CHN is in a positive trend, I would say, in general. And CPI, for the many reasons we discussed before, also affected by some headwinds with the exception of hygiene, where we have the strong position. And here, we see good growth.

[Operator]

Next question comes from the line of Carla Bänziger, Vontobel Asset Management.

[Carla Bänziger, Analyst]

I have 2 questions remaining. So one is on the guidance. What would happen if -- so you clearly stated that the guidance includes that you expect an improvement in -- a slight improvement in the second half in the LSI business. Would you need to lower the guidance if it would remain the same or only if it would be worse? And the second question is around the Nutrition split into -- so what is exactly moving into the LPBN segments? Because I understood in our last meeting that, for example, the whole Niacin will maybe remain in the Consumer & Resources Protection part -- in the LSI business. Can you just clarify this please?

[Marc Funk, Chief Executive Officer]

Yes. So on your first questions about the guidance, there is no change to what I have said. I cannot elaborate on anything further. I have said in the beginning that it is my duty to be also prudent and understanding that we have to be balanced. We live in a world -- especially in the LSI business that has its uncertainties. And I am only 1 day before [ Foreign Language ] and we still have many, many days to move on in 2019. In certainty as part of our business more, I can really not say. I wish I could, but I really can't. On the Nutrition split, you are correct that this is what we said in the previous meeting, and it is also correct that this is unchanged today. So yes, the Niacin, the B3 is part of LSI.

[Rodolfo Savitzky, Chief Financial Officer]

Maybe, Carla, just to complement Marc's comment on the guidance. Of course, what we take here into consideration is a reasonable scenario of what we see for the year, also for the LSI business. And based on that, we definitely control the guidance. All the information that we know today is incorporated in the numbers.

[Carla Bänziger, Analyst]

Can you maybe go a bit closer to the microphone, Rodolfo? I couldn't understand you properly, sorry.

[Rodolfo Savitzky, Chief Financial Officer]

So what I'm saying is -- I guess what you alluded is whether we have some optimistic assumptions for the second half. And I would say, just underscoring what Marc said, all reasonable assumptions for the year are incorporated in our forecast, and we confirm the outlook or the guidance that we have been giving.

[Operator]

Next question comes from the line of Peter Welford from Jefferies.

[Peter James Welford, Senior Equity Analyst]

Three brief questions please. Firstly, just on the margin. I'm sorry about this. Maybe this one for Rodolfo. But I think you said the core margin is around 27.3%, to be clear, as in 2018. Just to clarify on that though. So IFRS 16 is anticipated to have, I think, around a 60 basis points impact on margin year-on-year. Are we, therefore, saying that, that -- it's essentially saying that the margin will be the same on a like-for-like basis? Or are you saying including IFRS 16, we should be assuming that there is a 27.3% margin again in 2019? Secondly then, just with regards to the portfolio review in LSI. Just to understand, I think there were a lot of steps taken around this, in particular, around the time that the Swiss franc moves to really better integrate a lot of operations in this to essentially avoid issues with the Swiss franc volatility in the future. And it did -- should we, therefore, take that any potential disposals are going to have to be thought out with avoiding dis-synergies? Or is essentially everything on the table now and you're not so worried anymore about the integration of this site?And then thirdly, just on Ibex. I think you said in the past, that once you have a good visibility on utilization of the first building, then you start breaking ground and planning for a third building within that site. Are we already in that stage? And should we anticipate, potentially, a third building to begin construction? Or do we have to still wait for more visibility, I guess, on the Develop parts and Dedicate parts of the business further?

[Rodolfo Savitzky, Chief Financial Officer]

So Peter, your first question, the impact of IFRS 16, we still need to finalize the overall amount that we foresee for 2019. This, of course, will be part of the H1 numbers that we report. Our internal estimates today are roughly half of what you have estimate, but again, this needs to be confirmed. On the other hand, what we do have as well in 2019 is the impact of stranded costs related to the Water Care disposal. Again, Marc mentioned productivity measures that we're taking, and one of them, of course, is to try to eliminate stranded costs. But it's unrealistic to do that all in 2019. So the short answer to your question is that what we foresee today on a much smaller level of IFRS 16, that the upside we get in the margin will compensate the negative impact of similar amount related to stranded costs. Of course, if in H1, we see that, indeed, the IFRS 16 margin improvement is higher, that could be some upside.

[Marc Funk, Chief Executive Officer]

On your second question about the portfolio review of LSI, again, I refer to my answer to the -- one of your colleague who kind of asked a similar question. Portfolio review is something that we do, will do. But again, my priority is to lead the company with 2 segment that has to perform properly in view of the different dynamics. The question of integration, disintegration, if we can call it this, post the event of the Swiss franc's volatility is not often actuality today. Your third question about Ibex. We have 2 buildings, 1 which is along the Sanofi joint venture and the other one around Ibex Design and Develop, and we are building those 2. Everything is on track, be it from an engineering perspective, being from a ramp-up perspective and commercial perspective. But at this stage, we are not contemplating to build a third building today. Now I understand, mindful of your precious time, that we have exceeded already what is available. But I'm happy to take one more question, if any.

[Operator]

The next question is from Michael Gokay, Janney Montgomery.

[Michael Gokay, Associate]

Marc, congratulations on your new role as well.

[Marc Funk, Chief Executive Officer]

Thank you.

[Michael Gokay, Associate]

My question is regarding the headcount additions of 400. Is that a 5% to 10% increase? Could you quantify that? And then lastly, on the products business. Do you want to grow that via acquisition?

[Marc Funk, Chief Executive Officer]

When you say product business, you mean product business in LPBN?

[Michael Gokay, Associate]

Yes.

[Marc Funk, Chief Executive Officer]

Okay. So the 400 people headcount -- you know how many employees we have. We have more than 14,675. So the ratio there can be found, but maybe if I go a bit more in-depth. Those 400 headcounts are new, highly qualified recruits that are dedicated to our investment project. That is, respectively, Ibex in Visp, Switzerland; Portsmouth in New Hampshire; Slough in the U.K.; Houston and a couple of others. Those are the 4 major sites where the recruits come. Part of it is on new plant and part is on existing plant, correlated with the CapEx investments that we have announced last year to grow the company for the years 2020 and further. Question number two, do we contemplate M&As in the business of the product of LPBN? First, I reiterate what we have said, together with Richard Ridinger, that in 2019, we will focus on making sure that our very material CapEx projects are following and being executed and being one company that has the mantra that if we do too much, we do nothing. So we prefer to focus on this, and we will do M&As in due time but not so much in 2019. Bolt-on acquisitions are always in the pipeline. That, we cannot exclude. But nothing transformational in 2019. Would something be in the product business? It's possible. What I would say is that I'm very pleased with the progress that the product business has done in terms of performance in the first quarter, and this gives me a good level of satisfaction and encouragement. Dear shareholders, dear analysts, thank you very much for your time. It was a pleasure for me to interact with you and give you this update for the first Q of 2019. Thank you for all your interest and participation. Goodbye, and happy holidays.

[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.