Glanbia PLC

ISEQ:GL9

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to the Glanbia plc 2022 Full Year Results Call with Siobhan Talbot, Group Managing Director; and Mark Garvey, Group Finance Director. Today's conference is being recorded.

At this time, I would like to turn the conference over to Liam Hennigan, Secretary and Head of Investor Relations. Please go ahead.

[Liam Hennigan, Secretary and Head of IR]

Thank you, operator. Good morning, everyone, and welcome to the Glanbia Full Year 2022 Analyst Results Presentation. During today's presentation and call, the Directors may make forward-looking statements. These statements have been made by the Directors in good faith based upon the information available to them up to the time of their approval of the Glanbia plc full year 2022 preliminary financial statements and analyst presentation.

Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The Directors undertake no obligation to update any forward-looking statements made on today's call, whether as a result of new information, future events or otherwise.

I'm now handing over to Siobhan Talbot, Group Managing Director, Glanbia plc.

[Siobhan Talbot, Group Managing Director]

Good morning, everyone, and welcome to the Glanbia full year '22 results call and presentation.

On today's call, I'll outline a summary of our '22 performance and guidance for '23. I'm joined by my colleague, Mark Garvey, who will cover the '22 financial and operating results. I'll then return to outline some of the strategic highlights after which, we'd be very happy to turn the call over to yourselves for questions. '22 has been an important year from both the performance and strategic perspective for the group.

Strategically, we completed a very thorough planning process, we evaluated strategic options, and we reaffirmed the strategic growth opportunity of our current business model. We're now very focused on driving growth in our better nutrition growth platforms of Glanbia Nutritionals, Nutritional Solutions and GPN.

We set out clear targets to [subscribe momentum] period to 2025. In terms of performance, 2022 was all about navigating inflation by staying close to our consumers and customers and, of course, optimizing margins. The scale of inflation across both GPN and Nutritional Solutions was very significant.

And our mitigation strategy was grounded in both the phased approach to pricing, where overall prices were raised by 19.7%, and also a strong drive to maximize operating efficiencies. We sustained key levels of investments for future growth and ultimately delivered margins in both growth platforms broadly in line with '21 levels. The platform synergies across the group worked well for us in '22, driving performance.

And ultimately, the teams delivered strong revenue growth and adjusted EPS that reflects our highest earnings level and the strengthening of our balance sheet, which gives us great opportunity to fund future growth. In recent years, we've deployed capital to our growth opportunities, expanded our innovation capabilities and continue to invest in hiring and developing our great talent, which is so key to our future growth.

Our overall ESG agenda, which I'll touch on later, is increasingly embedded into our everyday ways of working. So the investment case for Glanbia is now very clear: Our business is very closely aligned to powerful consumer trends. We've evolved and simplified our organization, our strategy and our structure. As our markets environment has altered, so have we. There is an incredibly strong clear threat of nutrition in Glanbia that was grounded in dairy protein, but now evolved to so much more.

That more now means that we have attractive global positions in growing nutrition categories. In Glanbia, we match those consumer trends with our capabilities; we define the markets where we can best deploy our strengths, they're large, they're growing, and we're very clear on our areas of focus within them.

We have a strong culture and talent, we scaled the experienced efficient operations on our manufacturing footprints. We build and operate assets with best-in-class efficiency, providing security of supply and quality assurance to our customers and consumers. And of course, as Mark will speak to later, we're financially disciplined, which gives us great opportunity for future growth.

These are all barriers to entry in our categories, difficult to replicate and come from years of investment and optimization. So our strategic pillars are very clear: Leading and growing our core, optimizing our business and being disciplined financial managers. We do that through the strength of our leading global nutritional solutions business and our leading GPN global brands.

Our core today is the provision of consumer-focused differentiated functional and nutritional products across a range of science-based ingredient solutions and those leading brands. We're always navigating change as part of our DNA release.

Our markets and consumers have evolved, and we've evolved our portfolio in recent years, plus that 90% of our earnings now come from NS and GPN. Our business and operating model will continue to be refined to improve productivity and margins. And then finally to cash. A core resource of Glanbia is our financial discipline. We're focused on cash, cash conversion, capital allocation and, of course, shareholder returns.

As Mark will speak to later, in the five years to '22, we generated over €1.6 billion in cash, declared €400 million in dividends, returned €270 million buybacks and also have invested in the business and acquisitions. So the essence of the evolution of Glanbia has been to move away from commodity processing with a higher margin growing, added value daily areas of nutrition.

As I mentioned earlier that complementary threat of protein expertise runs across both businesses. Informed by increasing investment in consumer engagement, insights and our R&D, both businesses have extended significantly beyond protein, both organically and by acquisition and now serve a variety of those consumer nutrition needs across multiple occasions, formats and, of course, geographies. On this strategic journey, we have significantly evolved our operating model to best serve our customers and consumers.

We have aligned centers of excellence in areas such as financial operations, capital allocation and risk management with the business unit teams that are really driving that one phase to the customer supported by those centers of excellence. I'll speak a little bit more later through the specific strategic focus areas for GPN and Nutritional Solutions.

Our portfolio changes and focused strategic approach have served us well in navigating what has been volatile external environment in recent years, and this is ultimately reflected in our strong '22 performance. As a strategic pillar, we're always focused on simplifying our group structure and optimizing our overall margins. In '22, we completed the disposal of our 40% interest in Glanbia Ireland for €307 million.

In our mozzarella joint ventures in Ireland and the U.K., Glanbia and Leprino Foods have enjoyed many years of successful partnership, but the time is now right for us to dispose of our 50% stake in the business to Leprino Foods. This further streamlines our business model and is expected to provide capital of approximately €160 million plus a potential €25 million earn-outs to be ultimately allocated to our global growth platforms.

We're ambitious to deploy capital across both these areas, adding to the capability, for example, we added with the acquisition of Sterling Technologies in NS in '22. Across these growth platforms, continued margin augmentation is also a key priority. In GPN, the multiyear transformation program was completed in '22, and it has outperformed its business case.

This underpins business margins as we go forward and has enhanced key skills that were an important part of the inflation mitigation program for '22. These actions plus the price realizations that we achieved led to an improving trend in GPN margins through '22 and we achieved the target of 12% EBITA margin in the second half.

In GN, across the business, operational excellence is a hallmark of all of the teams. This continued focus and improving business mix, all contributed to a '22 margin delivery in NS and GPN that was broadly in line with '21 despite the significant dilutive effect of the high dairy markets we've referenced before. Looking back in May '18, we set out financial targets for the 5-year period '18 to '22.

It's very fair to note that when setting those targets, the scale and the tenure of the global disruption that would emerge from the global pandemic was completely unforeseen. The agility and resilience of the Glanbia teams, the evolution and strength of the group, and our customer and consumer relevance of the better nutrition elements of our business really came to the fall over this period.

We're, therefore, pleased to report that at a group level, we met all of our financial targets set out at that time across earnings, cash and cash conversion, return on capital and dividend return to shareholders. We delivered this while also really having a very strategic focus and further strategic execution across the group. In November just gone, we set out our financial targets for the period '23 to '25.

Having delivered a stronger '22 than anticipated, we're pleased to reaffirm those targets from this higher base. In '23, therefore, we plan to grow adjusted EPS between 5% and 10% on a constant currency basis. We continue to optimize investments driving an operating cash flow of over 80% and are targeting a ROCE of between 10% and 13%.

With that now, I'll hand over to Mark for some further detail on '22.

[Mark Garvey, Group Finance Director]

Thanks, Siobhan. Good morning, and let me add my welcome to everyone on the call.

We are pleased to report results ahead of expectations for 2022. Revenue growth of 21.2% constant currency was driven by pricing across all of our businesses in an inflationary environment with volumes broadly in line with the prior year for the group. Adjusted earnings per share growth from continuing operations was 17.6% constant currency and ahead of expectations.

The group reported an adjusted earnings per share of just over €0.104 from continuing operations compared to €0.778 in 2021, a reported increase of 33%, impacted by a stronger dollar in 2022. Operating cash flow conversion was at 85.7% and ahead of the group's 80% target and at year-end net debt was €459 million with a net debt to adjusted EBITDA ratio of 1.12x.

During the year, the Nutritional Solutions business completed the acquisition of Sterling Technology, a U.S. bioactives company for initial consideration of $60 million. And in addition, the group's 40% interest in Glanbia Ireland was sold to Glanbia Cooperative for €307 million.

In terms of returns to shareholders, €173.5 million was returned via share buybacks and the 2022 dividend has been increased by 10%. Operationally, firstly, turning to Glanbia Performance Nutrition. Revenues were €1.6 billion for the year, representing an increase of 13.9% constant currency over the prior year.

Like-for-like branded revenues were up 14.6% with pricing up 16.7%, while volumes were down 2.1%. Pricing was driven by the execution of strategic price increases across all brands in all regions in response of inflationary trends, the most recent price increase taking effect in the fourth quarter.

Volumes were particularly strong in the global Optimum Nutrition brand, and the overall volume decline was primarily driven by the SlimFast brand, while refresh activity is in progress. Optimum Nutrition is now almost a $1 billion brand and is a priority for brand's investment and innovation.

We are pleased with the overall metric that in 2022, 85% of our portfolio in GPN delivered growth of over 20%. Through 2022, we closely monitor consumer demand and elasticity trends as we implemented a series of price increases. Overall, demand was quite resilient, in particular for our largest global Optimum Nutrition brand.

Given that the latest price increase was a double-digit increase in Q4, on some products, we will continue to monitor trends closely. EBITA in the business increased by 10.5% constant currency to €182 million, as positive pricing and GPN transformation program work to mitigate the impacts of inflation and underpin margins. GPN 2022 EBITA margins at 11.2% were marginally higher than prior year.

We anticipated a higher year-on-year cost of goods sold early in 2022, and our procurement decisions on supply aligned with our phased pricing actions with customers through the year resulted in an improving margin trend as planned, and we were pleased that the segment reported 12% EBITA margins for the second half of the year.

Looking into GPN revenue movements in more detail, you can see here that we had strong revenue growth in both the Americas, where revenues were up 12.3%; our like-for-like branded revenues, up 13.2%; and international, which was up 16.3% in constant currency.

Revenue growth in all areas was due to higher price realization and revenue growth management initiatives. In the international business, there was volume growth in all key markets with strong consumption trends in Europe, India and Oceana, in particular.

There was continued strong performance of the Optimum Nutrition brand with consumption growth in 2022 of 30.8%. In lifestyle also across zinc, Isopure and Amazing Grass, consumption was good with U.S. consumption up 13.9% last year. Headwinds in the overall diet category continued to impact SlimFast where we saw overall U.S. consumption down 17.9% in '22.

The brand refresh is currently in market, supported by new branding and pack design, creative content and innovation. Our channel mix continues to evolve positively as our reshaped operating model, particularly in North America, opens up more opportunity for our key brands.

The FDMC channel is now our largest channel and is growing strongest, reflecting the return on increased brand investment as we broaden our consumer reach and distribution in this channel. We're also gaining share online and seeing continued strong growth of 11%. Distributors, which include a significant portion of our international sales were up 16%.

We have spoken previously to the resilience and growth in powder consumption in recent years. This format is a particular strength of our brands. And in an inflationary environment, our powder products remain a relatively affordable protein source and in 2022, we had strong growth at 18% year-over-year. All formats grew, again speaking to the strength of our overall portfolio.

Now turning to Nutritional Solutions. Revenues for the year were €1.1 billion, an increase of 16.6% over prior year. On a like-for-like basis, excluding acquisitions, revenues were up 12.6%, constant currency. Again, pricing was the primary driver of revenue growth with pricing up 16.1%, driven primarily by higher dairy protein market prices. This pricing was offset by a volume decline of 3.5% for the year.

The dairy protein solutions business saw volumes down as it was impacted by customer inventory reductions and supply chain realignment in the second half of the year. The customized premix solutions business reported an increase in volumes for the year as it continues to expand its customer base and geographic footprint.

Nutritional Solutions increased EBITA by 13% to €128 million and EBITA margin of 11.4%, or marginally lower than prior year. The margin performance was better than expected in the context of the dilutive effect of higher dairy pricing, reflects both improved product mix and an ongoing focus on operational efficiencies in the business. U.S.

Cheese reported revenues of €2.9 billion, an increase of 27.7% constant currency over prior year, primarily due to stronger cheese markets, driving a price impact to 23.4%. Volumes were up 4.3%, primarily due to the full year benefit of the Michigan Cheese facility, which was commissioned in mid-2021. The business grew EBITA 33% constant currency to €36.8 million, driven by the incremental volumes as well as operating efficiencies.

Now looking down through the income statement, you can see reported revenues of €5.6 billion, up 21.2%, EBITA was €347 million, up 13.5% and net finance costs were €20.7 million compared to €17.5 million in the prior year, primarily due to increased average debt levels during the year and a stronger U.S. dollar to euro exchange rate.

Share of joint venture income was €15.4 million compared to €19.2 million in 2021 as the Michigan cheese operation moved from commissioning into fully operational status. In 2023, we would expect the joint venture result to be lower following the planned divestment of the group's share of Glanbia Cheese Joint Ventures.

The group's effective tax rate was 12.5% in 2022, and we expect the tax rate to be between 13.5% and 14.5% in 2023, affecting our geographic footprint and evolving regulations. Adjusted earnings per share was €1.0402, which was an increase of 17.6% in constant currency terms over the prior year. There was a net exceptional gain after tax for the year of €21.4 million.

The divestment of the group's interest in Glanbia Ireland generated an exceptional gain of €57.2 million from discontinued operations. There were exceptional charges of €43.8 million related to a noncore small bottling facility in the U.S., Aseptic Solutions, which was classified as held for sale at year-end to reduce the carrying value of certain assets to recoverable value.

A sale is expected to be concluded by the end of the first half of 2023 with anticipated proceeds of approximately $10 million. There were additional exceptional gains and charges relating to an adjustment to contingent payments, reorganization costs and pension buyout costs, netting to a gain of €2.3 million. The group had another strong year of cash generation with operating cash flow of €355 million compared to €334 million in 2021.

EBITDA conversion rate was just under 86% compared to 100% in the prior year in excess of our target of 80%. There was a working capital outflow of approximately €40 million, mostly driven by higher inventory levels, primarily due to higher pricing year-on-year. We continue to target operating cash flow conversion at 80% or higher for 2023. Return on capital employed was 11.1% for the year, an increase from 10% in 2021 and well within our target range of 10% to 13%. The balance sheet is strong and the group is well financed.

Net debt at year-end was €459 million compared to €603 million at the end of 2021. Net debt to adjusted EBITDA has reduced to 1.12x at the end of '22. The group's average interest rate for '22 was 2.3%. And interest cover remains strong at 17x and well within our covenants.

The group's debt facilities were renewed in December '22 and as a result, we have committed debt facilities of €1.2 billion with a weighted-average maturity of 5.8 years. We discussed our capital allocation framework at our recent Capital Markets event in the U.S. The group has a balanced approach to our organic M&A investments and returning capital to shareholders via dividends and share buyback activity.

In 2022, approximately €50 million was allocated to strategic capital expenditure, which included ongoing capacity enhancements and a significant IT project to support an updated HR operating model. In 2023, we expect to spend between €70 million and €80 million in capital expenditure, including strategic and business sustaining CapEx.

We continued our focus to acquisition activity in Nutritional Solutions with an additional bolt-on Sterling Technologies acquisition for $60 million plus contingent consideration. Sterling is complement to the existing ingredient technology portfolio of Nutritional Solutions, providing bioactive ingredients used in the growing immunity and gut health segments.

The Board has approved a final dividend increase of 10% for 2022, similar to the interim dividend increase. The total dividend for '22 interim and final will be €0.3221, representing a payout ratio of approximately 31% and a dividend yield of approximately 2.7%. During 2022, the group deployed €173.5 million on share buyback activity, buying back and canceling 14.9 million shares at an average price of €11.65.

And today, as a result of continued strong cash flow, we've announced a new €50 million buyback, which will commence shortly. We announced this morning that the group has entered into a nonbinding agreement with our joint venture partner, Leprino Foods, for the disposal of the group's interest in the Glanbia Cheese joint ventures in the U.K. and Ireland.

Transaction is expected to close in the first half of this year, and the group expects to receive cash proceeds in excess of €160 million, including the repayment of approximately €60 million in shareholder loans. In addition, there is a contingent consideration of up to €25 million over three years, depending on the performance of the businesses.

With completion expected in the first half of the year, the transaction is expected to be marginally dilutive to adjusted earnings per share, where we expect this to be mitigated by the share buyback program we're starting today. To close, we also announced this morning that the group is changing its presentation currency from euros to U.S. dollars. This is a logical step as our group portfolio has evolved and the significant majority of revenues and earnings are dollar-based. In addition, with the recent joint venture portfolio, changes regarding Glanbia Ireland and the Glanbia Cheese joint ventures, the concentration of activity in dollars has further increased.

The change, which will be effective from January 1, 2023, and will reduce volatility between constant currency and reported performance being more closely aligned with the asset base of the group. We expect to issue historical data in U.S. dollars by the end of March.

And with that, let me hand it back to Siobhan.

[Siobhan Talbot, Group Managing Director]

Thank you, Mark.

The purpose of Glanbia in delivering better nutrition, as we had recently outlined in our Capital Markets event, goes to the heart of a key societal needs. As we all know, the need for better nutrition in support of a healthy active lifestyle was never clearer than in the post-COVID world. There are many global challenges, the increased prevalence of noncommunicable diseases, the challenge of global obesity, the personal and societal class to poor nutrition. The need to address these challenges continues to grow, and of course, consumers are responding.

This response is driving key trends in Consumer Nutrition. Individuals and governments recognize that ultimately prevention is so much better than medication. Consumers are taking more control of their total health and well-being. As consumers, we want authenticity. We want ingredients and brands that meet our needs.

We want to understand the ingredients we consume. We want convenience with our compromising taste, functionality or nutritional content. As consumers, we support authenticity, functionality sustainability. The Glanbia portfolio is completely aligned to these trends. We serve a number of key categories, but our three top nutrition categories represent an addressable market of almost $100 billion with average growth rates in that mid-single digits.

In Glanbia Performance Nutrition and Glanbia Nutritional Ingredients, we have built leadership positions that are difficult to replicate. We have the number one brand in sports nutrition with Optimum Nutrition, which is approaching $1 billion in revenue and well north of that amount of retail sales value.

In ingredients, our protein business is built upon our innovative waste solutions, where we are number one scale in the U.S. Our custom premix solutions business is built on our micronutrient expertise where we're number two globally. GPN has very clear strategic priorities.

We will drive the global scale and reach of ON. We broadened and deepened the availability of our lifestyle nutrition brands in North America. We will grow with the focus on ON in key international markets. And as a key growth channel for our consumers, we'll refine and grow our e-commerce capabilities. In '22, all of these priorities were on track.

As Mark has outlined, the global performance of the ON brand continues to grow, supported by brand investments, clear execution and a strong and reframed operating model post the transformation program. ON grew like-for-like revenues by 24% last year with also very strong consumption. Brands such as Isopure continue to also grow strongly, and our healthy lifestyle brand portfolio overall grew like-for-like revenue by 25%. We have more to do with SlimFast with the execution of the brand refresh is in market. And as we said in November, we expect to see those results later in '23.

As Mark has outlined, with growth in '22 in both Americas and the international region, we grew across all channels and indeed, across all formats. As the number one sports global nutrition business, we have a really strong brand platform in GPN.

The business is now scaled at €1.6 billion, and we're really ambitious to continue to drive growth, particularly for ON, which is clearly the biggest brand. It's growing fastest and has the greatest potential for future growth momentum. The momentum of ON makes it the number one brand in 18 countries, including the U.S.

As a mainstream brand, this is now scale, and online and FDMC channels is growing strongly in those channels, and they will be a key driver of future growth. The remaining brand portfolio is highly complementary to ON, and with 85% of our portfolio growing by over 20% in 2022, we will deploy the skills that fuels the momentum of ON to our other brands. At our recent Capital Markets event, we showcased the strength of the ON brand specifically. In recent years, we significantly upweighted both our investment in consumer analyticals and our brand investments. We've engaged with consumers and navigated a period of unprecedented inflation through a measured phased approach to pricing.

This has delivered significant pricing growth in '22, but also sustained volume with overall global volume growth for the brand of 5%, while we had 19% pricing growth. ON has grown by 45% since 2019. It is built on authenticity and trust, and we'll continue to innovate and broaden and deepen our global distribution and consumer reach and relevance of this brand for a wider range of consumers. It's also important to speak about the ON consumer in the context of the economic climate we see today. Our products, at their essence, are affordable for consumers.

Our consumers typically have 19% higher income, spends 28% more on sports nutrition and work out 80% more often. This is an essential spend as part of their lifestyle. So our strategic priorities for '23 remain the same as those set out at our Capital Markets Day in November. We're ambitious for growth and can build on the momentum of GPN in recent years. In '23, we plan to deliver revenue growth of between 5% and 7%, which will be pricing driven.

We've upweighted our margin guidance as we're now seeing a declining trend in key dairy pricing and we'd expect to see that coming through in the second half of this year based on our procurement profile. That will deliver an EBITA margin of over 12.5% for the year with an improving trend as we go through the second half. Likewise, in Nutritional Solutions, we have clear priorities.

As I mentioned earlier, we are a leader in both custom premix solutions and protein solutions, with these businesses growing like-for-like by 3.6% and almost 21%, respectively, for '22. We will continue to expand our expertise in these -- in both these and other complementary areas, both organically and by acquisition.

Nutritional Solutions is a great platform for acquisitions. Our operating model and our capabilities are scalable, and our recent complementary acquisitions are performing well, including Sterling Technology, an immunity solutions provider just completed early this year.

Our Nutritional Solutions platform, as a scale business, has grown -- grew by almost 17% last year. We play into many growing categories from early life nutrition to supplementation to general food and beverage. And these categories have driven growth in volumes over the last four years of almost 5%.

Our competitive advantage is clear, we have a unique access to ingredients, particularly in dairy protein and micronutrients. We have invested in talent and innovation to drive very strong customer collaboration and accelerated development potential across our global network. We can be that complete bridge for our customers across the supply chain, where we have strong operational execution and supply chain expertise. All of these capabilities have driven sustained momentum in recent years in Nutritional Solutions. As outlined, both areas have grown strongly with a 4-year CAGR in premix of 14.6% and in protein of 15.1%.

At our recent Capital Markets event, again, we set out the ambitions for NS over that period '23 to '25. And today, we're reaffirming those ambitions. We recognize there are some very near-term customer inventory rebalancing trends, which will reduce volumes in the first half of '23. But we expect that to normalize in the second part of the year and therefore sustained volumes in '23 at that '22 level. Unsurprisingly, the declining dairy market trend that will help increase margins in GPN at the second half of '23, will reduce revenue in Nutritional Solutions over the year.

But overall, we expect margin improvement on '22 levels and we expect it to be in the range of 12% to 13% with earnings broadly in line with the prior year. Margins will be improved by an improving business mix, continued operational efficiencies and of course, the reversal of that '22 dilutive effect of high dairy markets that we've referenced.

In Glanbia, our ESG agenda sits at the core of our strategy and operations, and has for many years. We have made significant strides in this area in recent years. In '22, we upweighted our emissions reductions targets and are now targeting a 50% reduction in Scope 1 and 2 emissions by 2030.

That's consistent with the 1.5-degree Celsius road map. We've also set clear targets on water usage, waste reduction and packaging recyclability. Our overall culture is strong in Glanbia and the cultural diversity, equity and inclusion is now increasingly embedded across the business. It's a journey. We have more to do.

We are pleased to see an increasing level of female participation, both at Board and management levels. Health and safety has always been a hallmark of the group, and it's a really important part of our culture. We're very pleased to see continued great progress in '22 with our incident rates well below industry benchmarks. As an organization to maintain focus on the totality of the ESG agenda, it is now fully linked into our remuneration framework. Turning then specifically to '23.

This chart brings together a summary of the component parts of our guidance. We remain confident in delivering the financial ambition outlined in our Capital Market event in November for that period '23 to '25. For '23, specifically, based on the current market environment and our expectations for the remainder of the year, our overall expectation is to deliver between 5% and 10% adjusted earnings per share growth in '23 on a constant currency basis.

Within this overall picture, we expect GPN revenue to grow between 5% and 7%, again constant currency, and full year margins of over 12.5%. GPN revenue will be primarily driven by pricing, and we'll continue to closely monitor consumer demand and customer inventory levels.

In NS, as I've referenced, that decline in dairy revenue will lower like-for-like revenue in the year, with volumes expected to be broadly in line with full year '22. Our margins, as I've referenced, will be between 12% and 13%. Group EBITA growth for '23 is expected to be largely driven by growth in GPN earnings. GN, NS and U.S. cheese will be broadly in line with '22, and the performance of joint ventures will be somewhat reduced as Mark referenced on the disposal of the Glanbia Cheese JVs.

We continue to target our cash conversion of over 20% and the return on capital metrics previously outlined. So finally then, Glanbia, as an organization, has changed enormously since 2018 when we set out our prior targets. We've done a lot of work in evolving and simplifying our organization, our strategy and our structure. The market has altered and so too has Glanbia. Our customers and consumers are our key foundation, and we will continue to work at building trust and relevance as our markets change.

As we've evolved our strategy, we've invested to enable its execution. We have superb teams, a great blend of experience and new talent. We are curious, we're innovative by nature and we have and will continue to invest in areas that keep us front of minds for customers and consumers across all elements of the supply chain. We will always be evolving and reshaping and we'll always challenge ourselves to find better ways to meet those consumer and customer needs. Our business is unique.

The capabilities and teams we've built are unique. And from this, we believe we have a really strong base to drive sustainable future growth for both 2023 and the years ahead. Thank you very much.

And with that, operator, we'd be very happy to take any questions.

[Operator]

[Operator Instructions] Our first question comes from Alex Sloane from Barclays. Alex, please go ahead.

[Alex Sloane, Barclays]

Hi. Good morning, Siobhan, Mark and Liam. Thanks for taking the question. I've got a couple, if that's all right. Just firstly, on cash flow, really strong performance in '22 with net debt coming in a fair bit below consensus. I know there's been a lot of progress on working capital management in recent years. Is there any timing benefits to cash flow in the second half? Or is that net debt number a reasonably good basis to build from going forward? And then just in GPN, could you maybe talk about the competitive environment in GPN in the context of those easing way input costs? And also, how customer inventory level was looking in GPN across your key geographies and customer channels? Thanks.

[Mark Garvey, Group Finance Director]

From a cash flow perspective, you're right, we're very pleased, in fact, with where the results came in for the year, we do have strong working capital management in terms of what we're doing across the board. It was a challenging year for working capital with inventory, in particular. We did see that increased because of primarily two things. I suppose supply chain management and also just pricing increases. We began to mitigate that more towards the end of the year.

So therefore, we are pleased with that. But overall, in terms of timing, there are some things back and forth, but nothing significant. So from a debt perspective, you have a base that you can build on there.

[Siobhan Talbot, Group Managing Director]

Thank you, Alex. In relation to GPN, first comment I would make in terms of the direction of travel of phase that we're really not going to see that until the second half of '23. So in that context, we're not seeing any particular competitive activity at this point in time. The market is very much as it would normally be in terms of activity that would normally be happening in the first half of the year. So we'll see how that evolves through the latter part of the year ahead.

Customer inventory levels, they can ebb and flow as we've seen. I mean we've seen a little bit of customers reducing their inventory more as a '23 piece, nothing that would concern us there. I think the market inventories are probably pretty solid at this point in time.

[Alex Sloane, Barclays]

It's helpful. Thank you.

[Siobhan Talbot, Group Managing Director]

Thank you.

[Operator]

Thank you. Our next question comes from Lauren Molyneux from Citi. Lauren, please go ahead.

[Lauren Molyneux, Citi]

Hi. Thanks for taking my question. I just had a couple. The first one on your GPN guidance. Obviously, you're guiding to that 12.5% margin for this year. I was wondering if you could help understand, as I understand the details in the bridge here, what are you assuming happens with price and volume in order to get to that 12.5%? What do you assume in terms of the stickiness of pricing and whether you have to reinvest behind pricing in H2?

And also, just coming back to that point on whey input cost inflation. Can you give us an idea of kind of the magnitude of that whey inflation and how that evolves? And also whether you need that whey inflation to come down, obviously, in order to meet that 12.5% target that you have? And then the second question would be on Nutritional Solutions and the destocking point that you make. Obviously, this looks like it was a slightly bigger headwind view in Q4 than maybe you initially expected.

But can you talk a bit about the kind of development of customer behavior? Obviously, that's something you're expecting in H1 to continue. But how much visibility do you have into the channel and kind of -- and what magnitude of unwind of inventories should be expected in H1? Thank you.

[Mark Garvey, Group Finance Director]

Hi, Lauren. How're you? Just in terms of your questions, and I don't get everything, I apologize. There was a lot in there. But firstly, from the GPN margin perspective, that we do expect, as you said, 12.5% plus for the year. And that obviously is a guide we put out with confidence based on how we're seeing things evolve.

First, we've taken significant price increases over the last year. The last one was done in October. We expect that to be sticky, and we expect that to be in the market for the coming year. We do expect to see some benefit coming through the second half on sort of input costs, particularly on whey. We wouldn't expect to see that in the first half because that's pretty much locked in based on how the markets evolved over the last number of months, but we will see some of that benefit coming in.

That certainly is helping in terms of our view on 12.5%. Now to call that more than that at this point is quite difficult. I mean the markets are moving. They're certainly coming down at the moment, and we'll take our procurement decisions, I suppose, in a measured way over the next number of months as we evolve into that. So I guess by the time we come out of the first quarter, we'll have more visibility into the second half, but that's our current view.

In terms of Nutritional Solutions, yes, we are seeing. We had seen some destocking happening in not only the protein solutions side of the business, but also on the premix side of the business. And that is, I think, a reaction that we're seeing across the ingredients space, as a lot of companies now react to maybe a more favorable supply chain environment where they can have reduced inventories.

But our customers are telling us that demand out there is quite robust. So from that perspective, we would say that we are comfortable enough that as this stabilizes over the first half, that we'll see that basically come back to a normal level in the second half of the year at this point.

[Lauren Molyneux, Citi]

Great. Thank you.

[Operator]

Thank you. Our next question comes from Jason Molins from Goodbody. Jason, please go ahead.

[Jason Molins, Goodbody]

Hi, good morning. Well done first, on a good set of numbers there. Just really trying to unpack the volume performance that you delivered, particularly in the GPN business and maybe some softer trends seen in Q4. Can you maybe just talk about how that manifested itself versus your expectations? And then just really in terms of the international business, that's actually being quite strong for you. So maybe a bit of color on the key drivers there.

And then in terms of marketing investment that you're thinking for the year ahead, how should we think about that as a percentage of sales? And how will that trend? Or what are your expectations, how that trends as the year unfolds given the whey price backdrop that you've mentioned starting to help as the year progresses? Thank you.

[Siobhan Talbot, Group Managing Director]

Thanks, Jason. Happy to give you color indeed, on Q4. And really the driver of the volume decline in Q4 actually was SlimFast. That wasn't a surprise to us. As we referenced at the Capital Markets event, we're doing a lot with the brand refresh, but we really don't see that brand gaining track until the latter part of '23, and we factor that into all our views for '23.

In fact, if you look at our core brand, Optimum Nutrition in Q4, it had very good volume growth and very good pricing growth. So you might remember that we referenced globally ON. I think in Q3, we had 5% volume, almost 20% price. In fact, that was the same statistic when you look at the full year. So still very good volume momentum sustaining both from a revenue perspective, but indeed also from a consumption perspective for ON.

So SlimFast was the one bringing it back, but that's very much a hand. And it wasn't a surprise, in truth, to us as we move through Q4. Internationally, yes, pleased to see that business. Again, took a lot of pricing action internationally in response to the inflation trends that we've seen. A lot of good work being done by the teams right across the regions.

Very much an ON focused as we've spoken to internationally as well. We can really leverage that strength of the brand that we have and take us across different geographies. It travels well, as we know. Pleased with that overall. And then in terms of marketing.

Yes, one of the things we did, and you might remember, that we particularly upweighted marketing in the back end of '21, in fact, as we were coming through into that inflationary environment, working to stay very close to our consumers. And we continue to invest in our brands through that '22 period. In fact, I would think we would probably upweight our investment again, as we look into '23, particularly across the core brands.

We'll be spending some investment on SlimFast as we move through the year, but particularly a focus in ON as you would expect. So again, that will be part of the equation as we look at some of the tailwinds and changing environment for cost of goods, managing that overall piece within the margin growth will, I would expect at this point, be an increased level of brand investment.

[Jason Molins, Goodbody]

Thank you.

[Siobhan Talbot, Group Managing Director]

Thank you.

[Operator]

Thank you. Our next question comes from Rashad Kawan from Morgan Stanley. Rashad, please go ahead.

[Rashad Kawan, Morgan Stanley]

Hi. Thanks Siobhan, Mark and Liam for taking my questions. Good morning. A couple for me. The first one, how should we think about your midterm outlook in the context of the '23 guide? I mean you're expecting 12.5% plus for GPN and NS somewhere around the 12% to 13% range for margins, both within the 12% plus of your midterm guide. Is the midterm guide overly conservative at this point, particularly at the margin end? And then my second question on SlimFast.

I know you said it's still been a drag in Q4, obviously, but are there any early signs of consumer take-up or anything you can point to with respect to the brand refresh that gives you any signs of encouragement? I mean what are you -- also, what are you assuming for the brand as part of the 5% to 7% like-for-like guide there? Thank you.

[Mark Garvey, Group Finance Director]

Hi Rashad. Good morning. How're you? At this point, we wouldn't be changing our midterm guidance. I think what we said in November was that we gave revenue guidance of 5% to 7% in GPN. We get 3% to 5% volume guidance in Nutritional Solutions. And we gave that 12%-plus margin guidance as well, obviously. And our view was that was going to be an average as we looked over the three years.

So you will have some puts and takes. As we look at this year, for example, we're now very comfortable that we are going to have 12.5% plus in Performance Nutrition. And I think we manage that as we go through the year. But if we look over the 3-year cycle, I think we're still very comfortable here with our current guidance.

And if you look at volumes, for example, this year in Nutritional Solutions, it is below our 3% to 5% midterm, but we view that as our guidance that's very comfortable for the three years, but we do have some destocking in the first half. So we are going to have some puts and takes, Rashad, as we go through that, but currently, we'll be comfortable with the midterm guidance that we outlined.

[Siobhan Talbot, Group Managing Director]

In terms of SlimFast just a few observations. I think, firstly, we remain very positive about the brand. It has very strong brand awareness. We speak a lot to our consumers. We know that a lot of consumers really want products that will assist them in that weight maintenance program.

As you know, we're broadening the consumer reach, and that's a big part of the brand refresh is making the brand through the creation -- through the new packaging appeal to a broader range of consumers. I think it is very early days. So again, as we said in November, we're very clear on our own targets that we will actually be investing behind the brand as we go through the year. I think also the context of what has happened with the SlimFast brand over recent times isn't unimportant. Really, as you might remember, we had a very strong Keto performance.

That was very much on trend through that '19 into early COVID period of 2020. And really what's happened is that, that has come off. So they -- we have lost listings on Keto specifically. The rest of the brand is actually really holding its own. So what we're driving now will be the higher protein, the ready-to-drink, that core range of SlimFast as we go through.

And we are very optimistic in our ability to do that when we speak with our retail partners and indeed our consumers. For '23, we don't -- we're not expecting any major turnaround in the brand, and that's all factored into our 5% to 7% overall for GPN. And that will be a journey as we go through the period. Clearly, as we've said, as we move out of '23 into the year, the years '24 and '25, absolutely, we would expect to see growth regain in SlimFast.

[Rashad Kawan, Morgan Stanley]

Thank you very much.

[Operator]

Thank you. Our next question comes from Karel Zoete from Kepler Cheuvreux. Karel, please go ahead.

[Karel Zoete, Kepler Cheuvreux]

Yes, good morning. Thanks for taking the questions. I have a couple of questions. The first one is on the formats within GPN. You show that powders are doing really, really well, but ready-to-drink and ready-to-eat is just growing 2%, 3%. Where is that is obviously a big strategic focus for some time? What's hindering growth last year in these formats?

Is it the price proposition? Is it the innovation agenda? And then a question on GPN as well. The progress with the strategic agenda regarding your direct-to-consumer model outside the U.S., growth has been 6% last year. Yes, so can you speak about what progress you've made and where we stand today?

And the last one is on the exceptionals. You highlight a write-off on Aseptic Solutions business, I think you bought for about €60 million decades ago. Did I hear right, you expect procedures around €10 million? And on level up, the benefit, does that mean that the earn-out conditions are unlikely to be met? Or why was there a benefit to level up? Thank you.

[Mark Garvey, Group Finance Director]

There's a few things there, again. If I don't get to everything, make sure you remind me, but the first one was on the formats. Again, from a sports nutrition and lifestyle perspective, we are very comfortable actually with the progress we're making on ready-to-eat and ready-to-drink. The reason why they will be lower is SlimFast, of course, is impacting those numbers on a like-for-like basis. So, yes.

When we look at that, that's really is what's causing us. So your question is a valid one. The innovations are actually doing really well. The Amino Energy is sparkling, the protein shakes, et cetera, and Optimum Nutrition have been doing very, very well. On the direct-to-consumer model, the value and fit business actually did quite well last year.

So again, making good progress there. Obviously, we're integrating level up with that over the last year as well. So comfortable enough of the progress actually, we're making in direct-to-consumer and the technology we've put in there, again, working really well also. And then the two questions you asked on Aseptic Solutions, level up specifically. So yes, Aseptic Solutions is really a noncore business within Nutritional Solutions, a small bottling facility over in California.

Yes, we'll be selling that for approximately $10 million, is what we expect to see. And that's why, of course, we have that adjustment in exceptional items. But again, it's noncore. We don't want to be spending any more management time on that, and we're really organizing that to be moved out of the group. And then on level up, again, your point is valid there.

We did have a gain coming through contingency there -- on the contingent payment there because we won't in fact, have to make that payment based on performance criteria. I mean that was really how we did the deal, Karel, to make sure that we're not going to overpay based on what may have been the expectations originally versus what we felt for the real expectations. So we won't have to make those contingent payments, and we think that that's appropriate. So that's why you see that gain coming through on the exceptionalize charge.

[Karel Zoete, Kepler Cheuvreux]

Great. Thank you. That's clear.

[Operator]

Thank you. Our next question comes from Faham Baig from Credit Suisse. Faham, please go ahead.

[Faham Baig, Credit Suisse]

Thanks for the questions. Two from me as well. The theme across consumer for at least, the past year. But on sports nutrition specifically, how does your pricing compare by the market and peers? And the second question is Nutritional Solutions where you're looking to scale out through M&A. I guess that's also a theme across the broader ingredient sector. How do you see competition for the assets that you're looking at, and then thereby the potential multiples you're looking to pay? Thanks.

[Siobhan Talbot, Group Managing Director]

Thank you. I'll take the first question, and I'll pass the second one to Mark. Forgive me. I think you're moving in and out a little, but I think I caught the question, which was about pricing of GPN relative to our peers. I would say our approach actually, worked well within an overall market context because we took quite a phased approach. If you remember, at the back end of '21, we had the insights to see that dairy markets were rising.

So we actually started our pricing journey for a lot of our SKUs in the latter part of '21. And then move sequentially with, as Mark referenced, the largest one, in fact, just went through in the latter part of '22. The whole markets moved on pricing, and the scale of input cost was significant. Again, our procurement helped us through '22. We didn't go to the spikes that some of our competitors that possibly did.

So I would say the whole market moved actually. Clearly, across different SKUs, there will be different relativities at different points in time. The key piece for us, and I think ultimately where it all comes together, was if you take that global brand of Optimum Nutrition. Our largest brand took significant pricing through the year of 19%, and we had volume growth of 5%.

So I think what that's telling you is that the brand really had that pricing power in taking that phased approach through and investing also behind the brands, behind marketing, behind consumer relevance, using all of our activation programs that we could, so that we could keep front of mind of consumers as we were traveling through that. So I think that maintained a good relative position. Mark, pass to you.

[Mark Garvey, Group Finance Director]

To your question on M&A, I would say, firstly, our focus continues to be on Nutritional Solutions from an M&A perspective. We've been very pleased with the last four deals that we've done, which have been in a reasonably noncompetitive environment to be fair. So we've been able to buy those businesses at a reasonable multiple. I would say, for larger ingredients opportunities, there is more competition that we certainly are looking at things as well. And if we see something we're interested in, we clearly have the capacity to acquire.

So again, we're mindful of multiples. We're month of returns because we have a return on capital employed target as well, and we do things sensibly. But certainly, I would say it's more competitive in obviously an environment versus a bigger opportunity out there right now.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Cathal Kenny from Davy. Cathal, please go ahead.

[Cathal Kenny, Davy]

Good morning, and thanks for taking my questions. A couple of quick questions from my side. Firstly, on innovation. Is there an opportunity to scale up that innovation within GPN in 2023, namely on protein shakes and energy? My second question relates to just, can you clarify what the mathematical dilution was to margin within NS for 2022? Thirdly, just the outlook for working capital from a cash flow perspective in '23, Mark? And finally, on strategy. Obviously, you noted this morning announcement. Just wondering, Siobhan, is there much more to go in terms of portfolio reshaping? Thank you.

[Siobhan Talbot, Group Managing Director]

Thanks, Cathal. I'll pick up a few of the points, and I'll pass one to Mark as well. Yes, I think on GPN, we've done a lot of work in transforming GPN over recent years. I think the business is in really good shape now across a number of different dimensions, category. The brand has really -- brands like ON really holding its own within in that space, and we're very confident of that long-term category growth that, in fact, we can get across the total health and wellness space for both GPN and NS.

So I think part of the journey that we're going to travel now through '23 when we see some of those that were very severe headwinds on cost of goods alleviating, we'll be dialing off things like our brand investment like the innovation of [indiscernible]. I think the brand really has the license to travel. It's very strong, as we've said repeatedly in powders.

I think they're come into their own in recent times, not least from an affordability from a consumer perspective. They are great products that are good value. But also, as you know, we're dialing up the ready-to-drink, the things like the energy proposition. And I think we'll have really good opportunity to do more and more of that as we look forward.

In terms of Nutritional Solutions, specifically, yes, the margin dilution was over 100 basis points in terms of the dairy piece that we saw through '22. So the teams did a really good job mitigating that, both by driving better business mix, as I said, and they're a very good team of driving operational efficiencies to really focusing on margin. Strategically, I would say, Cathal, we have a really good portfolio on the business now. We really are focused down on what we call that better nutrition strategy. Both Nutritional Solutions, in particular and GPN have very strong opportunities in the categories in which we operate globally.

So I think we -- having done a lot of work at it through '22, we'd be pleased now with the overall structure we have. Our joint ventures in the U.S., very different model to what we've used in Europe historically. They really give that feedstock into that Nutritional Solutions business. So NS and GPN will be the focus for growth.

[Mark Garvey, Group Finance Director]

Yes. On working capital, again, as you saw a lot of work done last year. I'd expect it to be relatively neutral at this point, Cathal. I think we'll monitor this as we go through the year. Obviously, some of the inventory favorability will help.

So we'll get some benefit from that as well. But overall, there might be a small working capital inflow basically as we go through the year, but we have a lot to judge on that still to come.

[Cathal Kenny, Davy]

Thank you.

[Operator]

Thank you. Our final question comes from Fatma Agnès Hamdani from ODDO BHF. Fatma, please go ahead.

[Fatma Hamdani]

Yes, hello to tall. So could you give me -- give us some comments on the U.S. class action related to zinc brands and artificial sweetness? And how are you managing that? Does it affect GPN volumes today?

[Siobhan Talbot, Group Managing Director]

Thank you, Fatma. No, we would not be concerned and we obviously have a lot of expertise in terms of dealing with any issues that come up with our brands. So no, I'm not concerned. We will just handle those in the normal rhythms of the business.

[Fatma Hamdani]

Okay. Thank you.

[Siobhan Talbot, Group Managing Director]

Thank you.

[Operator]

Thank you. We currently have no further questions. So I'll now hand you back over to Siobhan Talbot for closing remarks.

[Siobhan Talbot, Group Managing Director]

This remains for me to thank you all for your time this morning. And as always, be happy to deal with any follow-up questions that you may have. So thank you, and good morning.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.