Abcam PLC (ABCM) 2018 Q4 法說會逐字稿

Good morning, everyone, and welcome to Abcam's preliminary results for the 12 months completed June 2018. I'm Alan Hirzel, and I'm joined by Gavin Wood, our CFO. Today, we're going to discuss now the results from this past year, but also the outlook for and strategy for how we continue to sustain growth at Abcam.

Before getting into that, you need to read very quickly the disclaimer, which covers my comments today.

Fiscal year '18 was a continuation of a strategy for growth that began nearly 5 years ago. And I think it's fair to say that last year, we enjoyed another successful year, mainly because we did what we set out to do back then, which was focus on the needs of customers, build more of our own proprietary, unique product, now almost 45% of our revenue.

We prioritized investments in our company, both to drive growth but also to scale the operations. And we successfully added a portfolio of products through the licensing deal with Roche to bring the Spring Bioscience portfolio into Abcam. It's really an implementation of something we set out to do every year, and I think we're proud of what the team globally has been able to achieve this past year.

It starts with what drives us, and what drives us is to serve customers day after day to make sure that they achieve the results that they're setting out to do. In the case of Professor Weeraratna at The Wistar Institute, she is like hundreds of thousands of others around the world trying to see the unseeable and they need Abcam tools to do that. And if you could see the little tweet that's there, you'd see that she's talking about defending her lab in the world against cancers.

In her case, she's trying to use -- she's using our tools to help understand the cancer microenvironment and to bring treatments for patients who are suffering from melanomas. And successfully acting on thousands of small labs and orders and getting them products very swiftly every day is what makes this business successful and helps us deliver the mission of helping researchers discover more faster.

These efforts by our global team over the past year have made it possible for us to meet our targets. And performance was within range of what we had set out to do for the year, whether we're talking about total revenue growth or the very important strategic initiatives around the introduction of recombinant antibodies, immunoassays to our business.

And equally, while we're doing that, we're -- we aim to improve how we serve customers, and we measure that by transactional survey around asking whether or not someone would recommend Abcam to a friend or a colleague. And that performance metric, over the last year, we've improved by 2 points to 64%. And those things don't happen by accident. Again, I want to thank our global team and the customers for supporting what we did last year.

When we look at the goals that we set out to achieve, the very specific objectives that we set for last year, the 5 goals that we've had for the business continue to guide everything we do. And that was, through last year, across the growth initiatives, whether we're talking about antibodies for high-value research targets or research areas to gain market share or improving the amount of validation that we're providing the marketplace, or indeed, improving our digital marketing and improving how we deliver data to customers.

On all those fronts, the team achieved what we had set out for them to do and what they've set out for themselves. And on top of that, our immunoassay growth and our Abcam Inside projects also performed as we have hoped they would. So from a growth standpoint, both organically and then, as I said, in strengthening our portfolio from acquisitions, we achieved everything we had hoped to do.

To the extent there were any setbacks, it was where we fell behind our very ambitious goals to scale our business, primarily through the implementation of the ERP system. Gavin is going to come on to a little bit of detail there in a few minutes. But we've tried to do something quite challenging, which was to rapidly transform how our business operates from a systems and process standpoint. We didn't get everything done that we wanted to, that had knock-on consequences then for how quickly we can move with automation and improvements through our supply chain and our ability to go as rapidly as we would have liked in the more direct markets.

However, in terms of scaling, I think we did see real improvements in organization engagement, and that continues to be an area where we focus. And we're getting really good feedback from our employees about what we're building around the business. And certainly, we saw productivity improvements, which are helping us pay for some of the investments we're making in the business.

Delivery of our strategy over the last 5 years has given us the opportunity to grow this business on a compound annual growth rate of about 11.5%. And in any given year, these numbers bounce up and down, either our -- the other amount of investment we're making or the amount of growth that we achieve in each year. But the approach that we take to Abcam is to invest for significant and long-term growth.

And as we look at the addressable markets that we're serving and the progress we're making in gaining market share and growing this company, we can certainly see opportunities to grow Abcam at these kinds of levels for as far as the eye can see, provided we wisely invest and that we implement well. And that's how we're running the business, is to invest in that kind of sustainable, long-term growth.

How we do that, I'll come back to in a few minutes after Gavin provides some details on the fiscal year '18 performance. I'll be happy to get through some of the strategy and how we're going to deliver that sustained, long-term growth. Gavin?

Thanks, Alan. Good morning, everyone. I'm going to take us through the financial results before Alan comes on to the strategic update.

In summary, we've delivered another solid financial year at Abcam. On a constant currency basis, total revenue is up by 10.7%, and Catalogue revenue was up by 10.2%, continues our multiyear profile well ahead of market growth rates of around about 4%.

As you will know, the sterling strengthened against the dollar during the year, and the results are reported, growth rates a little lower than our constant currency growth rates at 7.4% for total revenue and 7.1% for Catalogue revenue. Our gross margin to the year was broadly in line with last year, around about 69.9%. Within that, we saw some favorable mix on product, but that was offset by some regional mix on the Catalogue and also by the strong CP&L growth that we saw in the year.

Adjusted EBITDA increased by 20% to GBP 88.3 million. That's an adjusted EBITDA margin of about 38% compared with 34% last year. The expansion was in line with the guidance we gave at the start of the year for 300 to 400 basis points improvement, largely driven by the roll-off of prior year FX hedges, and we'll have a little look at that in more detail later.

Our adjusted diluted earnings per share increased by over 27% to 32.4p per share. And the board proposed a final dividend of 8.58p, which, if approved by the shareholders at the AGM, will take our total annual dividend for the year to 12p a share, an increase of about 18%.

In terms of revenue by product, pleased to report another year of double-digit Catalogue growth as well as the strong increase in our CP&L revenues, which were up 17% on a constant currency basis. That reflects the continued progress that we're making in this area and the focus we're giving it. It's important to note that the majority of the growth in our CP&L revenue was from Abcam Inside projects and also the IVD and IHC products.

Total primary and secondary antibodies were up about by 8.4% in constant currency, just over 1/4 of these product categories are made up of recombinant antibodies, which grew by over 22%.

Turning to the other Catalogue product revenue, which includes kits and assays and proteins and other RUO products. It's a fairly diverse portfolio, and it grew by 18.4% constant currency. A significant and strategically important component of this line is our growing range of immunoassays. These increased by over 25% to GBP 15 million.

Continue to exceed underlying market growth rates across some the regions in which we trade. Our biggest region is Americas, which grew by 8%, in line with last year and roughly double what the market growth rate is there. Our growth in EMEA was a little higher than last year at 7.7% and reflects a generally stable environment for life sciences funding in Europe. China continues to perform very well and growing 26% in the year.

As we've said in previous presentations, Japan continues to be a difficult market. And against a strong comparator last year, the second half has proved more volatile. Full year, we grew 1%. We believe, overall, that market is flat to declining and we can closely have an improved performance here in the year ahead.

Meanwhile, the rest of Asia Pacific continue to deliver mid-double-digit growth, slightly higher than previous years as we continue to build out our direct presence in countries like Singapore, Australia and New Zealand.

In terms of adjusted EBITDA, you'll see that we continue to invest heavily in the business. That impact to that incremental spend has been offset by the roll-off of last year's hedges, and this slide show to set that out visually. If we start with last year's adjusted EBITDA of GBP 73.3 million, in FY '18, we generated incremental gross profit of around GBP 15.5 million.

That said, we're investing heavily over the last couple of years to broaden our product range and scale our business. And the main areas of spend are set out here. To invest in our research and development organization, with particular focus last year on building out AxioMx and our immunoassays and our FirePlex capabilities. We're also broadening Abcam's offering as a development and supply partner in diagnostic and therapeutic markets. And over the last 12 months, we've invested in our global Abcam Inside team to support the more sophisticated sales cycles associated with those products.

At the same time, we continue to scale Abcam's operational capabilities through investments in our global teams and locations to equip them to support continued top line growth. And finally, the increase in revenue has led to some increase in volume-driven costs, particularly in supply chain and manufacturing. Taken together, it represents an incremental GBP 11.5 million of investment in Abcam.

Offsetting these, the impact of investments, was a benefit of the change in our hedging positions year-over-year and certain onetime items, such as historic R&D tax credit claim. And as a result of these movements, you can see we bridged back to the adjusted EBITDA of GBP 88.3 million, which you saw in my first slide.

Turning now to cash flow. We continue to be highly cash-generative. Operating cash flows before working capital movements increased by about 13% to GBP 81 million in the year. We're investing this cash back into the business to support our long-term growth ambitions. This year saw a particularly heavy investment in 2 major projects, namely, our ERP program and also our new headquarters, which together total around about GBP 30 million in cash.

Other cash outflows include the first tranche for our Spring Bio consideration, investment in stock to improve the availability of our top-selling products, as well as the dividend payment to shareholders of around GBP 20 million. We closed the year with a net cash position of around about GBP 90 million.

Mentioned on the previous slide, we continue to use our cash to invest in the infrastructure and we need to support our long-term growth. A significant part of that investment is related to the upgrade of global IT systems through Oracle Cloud ERP. When we set out on our ERP program and the associated business transformation, we had 4 main areas of focus: customer contact, HR, finance, supply chain and manufacturing.

To date, we've successfully completed much of what we wanted to achieve in human resources and customer contact and have been working towards a single deployment of the remaining modules during the year. However, to learn more about the maturity of parts of the system and the complexity of the single global deployment, we conclude this approach is too risky to our business and to our customers.

As a result, we've revised our approach and we'll now complete the remainder of the program in a series of smaller but more frequent implementations. This approach has the added advantage around greater investment and focus on other IT projects, including data analytics in our website as well as our operations in China. But as a consequence of the change in approach, this program will take longer and cost more than we guided to this time last year.

In the coming year, we're going to focus on implementing the Oracle Fusion finance modules. And once completed, we'll have substantially concluded 3 of the 4 major objective of the program. In financial '18, we spent nearly GBP 24 million in the projects. And for modeling purposes, we expect program costs in FY '19 of around GBP 16 million, which approximately is 3/4 of the CapEx.

The construction of our new headquarters at the Cambridge Biomedical Campus is well advanced, and we expect to move in the first quarter of calendar year 2019. Build and fit-out costs are broadly in line with those previously guided at a total capital cost of approximately GBP 25 million. And during the year, we capitalized GBP 13.5 million of costs associated with the building.

This slide shows our CapEx-to-revenue ratio over the last few years, showing the split between our core CapEx, ERP, IT and HQ investments. From it, you can see the step-up in investment in our infrastructure over the last few years, that we created the underlying foundations of a significantly larger business. This includes not just our ERP and Cambridge HQ, but also investments in our global operations, automation and product development. We expect CapEx to have peaked in FY '18. We anticipate that FY '19 is another year of elevated investment but lower than this year, around 11% to 13% of revenue, as we complete our new headquarters and continue to invest in our ERP and other key IT systems.

As a result of this CapEx investment, we expect a modest step-up of nearly GBP 2 million of depreciation charges in FY '19, followed by a more significant step-up in FY '20 of around GBP 5 million relating to depreciation associated with ERP in HQ. It will also be impacted, as well with many others, by the changes in treatment of leases under IFRS 16. There's a number of implications for both the income statement and the balance sheet. We've provided the full details in the appendix, which is in the hard copy for those in the room and available on our website as the implication is somewhat complex.

So having concluded this overview of the results for the year, Alan is going to look now to give you the strategic update on our plan to sustain our growth going forward.

Thank you, Gavin. Our sustaining long-term growth at Abcam really comes down to 3 fundamental things that we try and do. First is strengthening the advantages we have competitively, and that means data and the insights that we get from data, making sure that we've got great data and more of it than anybody else. That we're offering terrific products and solutions to our customers, and that we're doing that with great speed.

Secondly, we have to lead and implement well. This is a company that's in constant building and change mode, and part of our success comes from being able to manage that successfully. And finally, we have to invest capital, as Gavin was just pointing out, and make sure that the resources that we're putting on into the business are done so for high return and high growth.

Of course, the way we do that, I come back to the 5 goals, is -- have been consistent. This is how we manage long-term growth. Everyone in the company knows what they're annual goals are and objectives are aligned to these things. There's work to do in every one of them, whether it's sustaining our antibody and digital leadership or expanding into markets like immunoassays or the Abcam Inside. Certainly, as we grow, we need better infrastructure to do that and it's part of investing in our capabilities, also while delivering attractive economics and looking for ways to put capital to work and acquiring other portfolios. This is how we do it. And those efforts are really helping us pursue 4 large, long-term growth opportunities to influence research outcomes and patient lives.

And for over -- almost nearly -- for nearly 20 years now, we've been a business that's been successfully building a leadership position in research use antibodies. And we're still innovating there to bring new tools, new techniques, new approaches to gain market share in RUO antibodies. And we'll continue to do so. We see growth opportunities not just for the next 5 years in our planning horizon to 2023, but well beyond that.

On top of that, over the last 5 years, we've been planting the seeds for other avenues of future growth. Immunoassays, where we're growing at over 25% this past year, but on a small, small base, roughly GBP 15 million. We know taking antibodies that we've spent so much time to work on with our researchers and make comparison and protocols and assays out of those is helping us grow in that market. But it's early days.

In China, again, we probably made the most progress of the new 3 areas in China. But there's still a lot more to go for, and I'm going to come back to that in a minute.

And finally, probably the least well developed in terms of where we are, but an outlook that we're very excited about, is in the Abcam Inside customer products and licensing. So this is not just a 1-year guidance or a 5-year guidance, these are things that we're building for the next 15 to 20 years on top of what's made it successful so far.

And of course, you have to trust us and believe in our ability to translate those kinds of opportunities into commercial ones. And we do that by knowing, I guess, a little bit about how to gain market share in large markets. These are GBP 8 billion of addressable markets for us. Most of our business, GBP 216 million, is in the research use only tools in -- where there's still an attractive business. It's a 4% global growth market. We've got a significant amount of strength in primary antibodies, and we see opportunities to grow there everywhere we look. And I'll come on to more of that in a minute, and then I'll come back to the diagnostic and therapeutics where at GBP 15 million, it's -- as I said, it's very early days.

The $3 billion proteomic research tools area is, as I've said, an area where we continue to focus on gaining share. Right now, our primary antibody market position is about 23% market share. And when we break that down and we look at all the little slivers of opportunity that are there, we know how to pick attractive places to innovate and to market and continue to gain share there, so we haven't given up on the research use of primary antibodies.

On top of that, there's everything else that we're addressing, and each of those is about $400 million to $500 million in market opportunity and we have small shares in all of this. The reason why we're most aggressively going after kits and assays right now is we have the critical know-how and capabilities to build out a product portfolio there. We're almost halfway through the effort of building the products we need to address that market. In some of these other areas, we're more reliant on the OEM model or we're in the very early stages of developing our own product lines. But we're excited about the opportunities to gain share there.

Of course, as you've heard, we are investing in this business to gain share. And some of the areas where we're investing in this product portfolio to address the research use only proteomic side of that chart is in recombinant antibodies. We have now over 12,000 recombinant antibodies, and we're busy making those from scratch. We're converting hybridomas. We're licensing some in. It's an important advance because researchers know when they buy a recombinant antibody, they're getting something that's going to perform the same way over and over again, and that's a critical part of gaining market share. We're making over 1,000 a year of these recombinant antibodies, and our number revenue growth since fiscal year '14 is 3x through last year.

Validation is also critically important. We spent a lot of effort and time on using CRISPR as a tool to validate antibodies. It's not the only way we do it. But since we've started that program a few years ago, we now 1,500 antibodies that have been validated through knockout and there's more to come. And we signed a new partner to help supplement what we've done, and we look forward to putting more effort in that area.

Immunoassays, as I said, we're nearly halfway through building out the product portfolio of pairs that we require there. Our ability to make pairs are about a few hundred a year. And our revenue in immunoassays is growing 2.5x since fiscal year '14.

Our digital experience is an area we're having innovated and defined how life science tools can be marketed on online. It's an area where we know we need to keep pushing to stay ahead. And indeed, we are. This past year, we improved security features. There's much work to be done in personalization, and we're investing there to do so.

This year, we've set aside an additional 1% of our revenue for new project teams that are going after some of those product areas where we have lower share. And I'm not going to say a lot about those today, but it's a commitment to that long-term growth and share gain in those other tool areas. And I'll bring -- I'm sure I'll come back to that as the year progresses.

And finally, China, where our revenue has grown by 8x since fiscal year '14. We continue to invest in China. And if I can just build on that for a little bit. Our view of China is that in the time frame of 2023 to 2033, we certainly believe China's current approach to funding and its commitment to life sciences could put us in position to be the world's largest market, surpassing the United States in the next 15 years.

And when we look at our own progress over the last 5, certainly, in 2013, our position was not where we wanted to be. We've made investments there to regain the #1 position. As of the most recent data for the citations, we had 8,000 or a little over 8,000, and the #1 position in China. We're not stopping. We're putting more investment and effort into localization. We're enhancing our digital experience. And if you've been to China, you know that digital marketing in China is arguably at the leading edge worldwide right now for digital retailing. And we're certainly putting more effort into getting closer to our customers.

Switching to Abcam Inside and the ability to address the diagnostic and therapeutic antibodies. As I said, it's -- we're in the very early stages. The commercial team is established. We have signed up 28 agreements under the kinds of long-term, downstream revenue potential structures that we want for this business model in the past year. And as Gavin said, the revenue growth really has come from some of the products that are providing companion diagnostics, whether that's PD-L1 or some of the others that we've worked on. We got a significant amount of growth in this area from the consumption and use of those products to help patient lives, and we look forward to doing more of that.

The -- I know people want to know more about this area, but I'd just say, you have to think about the scale of the addressable markets. And we're really -- this past year was the first full year we've had all agreements in place. It's very early days. It's just an exciting opportunity and we're making good progress.

One other investment we're making in the business is in our people. It doesn't happen without a team that's motivated to drive growth. And this year, in fact, right now, we're launching globally for our team an equity share participation program for all of our employees worldwide. This is the first time in Abcam's history we've been able to offer a program for everyone to think and act like owners and to be rewarded like an owner. And we're very excited to be able to do that for everyone in the same way worldwide.

This is a program that will replace some less-flexible programs in the U.S. and the U.K. And it's a 3-year term. People are signing up for it right now. Again, I'm sure in the half year results, we'll be able to tell you more about the expected economics of that. But right now, we're just in the early stages of launch of it.

Finally, coming to the objectives for this year. As I said, the organization is guided by the 5 goals. You'll see some familiar items in terms of how we plan on sustaining antibody leadership. It's a focus on high-value research areas, validation initiative, translating into the next phase of growth for China, really investing for that kind of sustained growth in China. On top of that, continuing to extend the immunoassay range, making more of our CP&L efforts. And then launching, as I said, 1 to 2 new capability areas this year to go after some of opportunities we see.

I spend most of my time thinking about scalability and making sure that the business can more rapidly address those market opportunities in growth, and that means we've got to have the Oracle module, and the finance that Gavin was talking about goes successfully live. This equity participation scheme needs to be rolled out successfully. We have to move our headquarters successfully. And there's still a lot of gaps in the organization in IT, in supply chain, manufacturing and some other areas where we're going to still be hiring new people, while all the while looking for economic returns through productivity improvements and moving direct where we can. And we're still in the hunt for deploying cash and capital into making acquisitions, as you might expect.

And I'll turn to Gavin and let give some financial guidance for the year ahead, but look forward to catching up on questions ones he's done that.

Thanks, Alan. Let's see how these objectives translate into guidance for next year and into the medium term.

And so stretching targets for our strategic growth areas of recombinant antibodies and immunoassay products of greater than 20%, and we've also increased our target for translational Net Promoter Score to 57% to 67% as we continue to focus on customer and raising our service levels there.

Turning to our financial guidance for the year ahead. Our medium-term aspirations -- and our medium-term aspirations, our priorities to invest now to build a business that can grow revenue in the low double-digit range over the medium term. This is consistent with the ambitious goal we set out in 2016 to double the scale of the company by 2023. Since then, we've made good progress towards achieving this ambition. The revenue growth that we delivered this year and in previous years remains the measure for the continued success of the investment strategy and provides a solid foundation for us to invest going forward.

The fundamental of our business are strong and the outlook for our markets is positive, and we expect total constant currency revenue growth around 11% in financial year '19. As we look beyond 2019, we anticipate the investments we're making now in the next -- and in the next couple of years will support our ambition to maintain our low double-digit revenue growth over the medium term.

Turning to our expected margin. As Alan set out earlier, in the coming year, alongside our ongoing investments in the major capital projects, we also plan to invest in a number of strategically important areas, including R&D, China, data analytics, Abcam Inside and as well as the employee share ownership scheme that Alan has just been talking to. We look to partly fund this increased investment through continued realization of efficiencies and savings in our core business and currently anticipate the adjusted EBITDA margin in the coming year will be approximately 36%.

Now this equates an adjusted operating margin around about 33%. And we'll be focusing on this metric rather than just the EBITDA going forward because we believe it's a more insightful measure of our underlying profitability as our depreciation profile changes over the next few years. As for completeness, we've also set out at the bottom of this slide the technical guidance, what we've referred to doing this presentation, together with our expected medium-term effective tax rate of approximately 19% to 20%.

So to summarize, it's been another year of solid progress for Abcam, and it's been reflected in our financial results. But more importantly, as we look forward, we see an enduring demand for our research tools and now enter the opportunities that Abcam has to shape the exciting life science space in which we operate.

We remain the global leader in research antibodies. We've got unique capabilities that we believe allow us to grow sustainably above market rates in this space. But we're also using those capabilities and our understanding of the customers' needs to expand beyond our original core business into those other attractive and related markets that Alan talk to, diagnostics and therapeutics, in particular, was the addressed biochem side.

Our process is keep investing in Abcam to ensure the organization capacity through capitalizing the opportunities that we see deliver low double-digit revenue growth and continue to help bioscience to achieve their mission faster.

And with that, I'd like to thank you for your time this morning and open it up to questions. Thank you.

James Mainwaring from Stifel. Just a couple of questions, if I may. One is on sort of the China investment. And it'll just be sort of interesting to get your view sort of on the long-term growth in terms of -- as I believe at the moment, you're also quite distributor-led in your products and whether I suppose you see a long-term opportunity to go a much more sort of direct sales approach there. As part of that, there's the U.S., China sort of war of words from trade at the moment. As I know, you manufacture a lot of your RabMabs in China. And then, I suppose, the second one is sort of looking at the Japanese and U.S. revenue growth. And I suppose if Japan, it is a sort of flat market, whether you can I suppose save operationally in particular ways just to keep the profit up there.

Maybe just jumping straight on the tariffs, just to be clear, at the moment, we don't quite have a lot of -- at the moment, we're not covered by tariffs in China or the U.S. We've done some scenario planning around what may be the implication of tariffs being applied to our products. At the moment, given the scenario planning we've done and some of the contingency or some of the changes we made to our supply chain, we don't see the tariffs. As I said, they're not on us at the moment. But if they were to be applied, would have a material impact on our revenues and margins. So with tariffs, that's one side. And in China, we are investing some money there next year. Alan touched on some of the interesting sides of the marketing approach. But you're quite right. At the moment, we do need distributors. It's not unusual in China to have a tier of distributors and another sub-tier of dealers who are actually within the sites. We've committed to getting close to our customers. And in order to do that, we've got a number of initiatives not just going direct, but other approaches that we're taking as we develop our knowledge. But I'll let Alan comment on that as well.

I'm not sure I have much more to add. I mean, I think we go with the grain of how customers want to buy in all of our markets worldwide. In China, we're operating the way that Chinese customers want to work. And if they change, then we'll change with them. I think, as I said, the most significant change going on in China is just the way in which they're adopting digital retail marketing tools in their lives generally is extraordinary. And facial recognition, mobile devices, mobile payments are much more advanced and much more widely adopted in the urban areas than you see almost anywhere else in the world. As regards to Japan, I think we've been fortunate and have done well historically in Japan despite a market that really hasn't changed in any way in the last 10 years. And we're not satisfied with the kind of growth rates we had last year, and so, as Gavin said, we're putting more effort there to return that to growth rather than thinking about cost-cutting. In the U.S. -- I think the market is buoyant in the U.S. as we've seen it. So I'm not sure. Apart from that -- and generally, worldwide, apart from Japan, I think we see very attractive dynamics for life science funding and life science research and the opportunities for growth and for our business.

Charles Weston from Berenberg. Three questions, please. First of all, on the nonprimary antibody business, outside of the immunoassay side, growth is quite strong there as well. I wonder if you could comment on what some of the key drivers there would be, please. Secondly, on the margin, you said that the regional mix was unfavorable. Is that something that's going to be sustained into the next couple of years as well? And lastly, you gave a medium-term revenue outlook, you didn't give a medium-term margin outlook. Presumably, you don't want to. But if you could give a few comments around how we could be thinking about margins going forward, that would be helpful.

So let's do it in reverse order. On the margin next year, we've guided to around about 33% operating margin -- gross profit margin on adjusted basis. I think given the investments that we're looking to make, that's probably the way to think about it the following year. Beyond that, we'll just pray it doesn't get much further out than that, but I think probably around about mid-30s, low 30s -- low to mid-30s for the next year or 2 is the way to look at operating margin as we invest heavily to sustain that growth. And then, a comment on antibodies...

Yes. I mean, if you look at the chart that Gavin presented on the split of revenue, we had GBP 42 million of revenue from other products beyond antibodies. GBP 15 million of that was in immunoassays. So a majority of that category is in lysates, proteins, biochemicals, kits that don't have antibodies in them. And we see most of the growth opportunities from just smart bundling and marketing of products that are related to important research areas where we're -- we have a strong position in antibodies. I think part of the reason why we're investing in these areas is because we see that marketing and that effort working, we just want more control over our ability to innovate. And again, we'll probably be able to talk more about that in the future. But it's a cross-sell, if you like, to make it simple. And I think we'll be a more effective cross-seller if we can bring more products if we control the design to those opportunities.

And then just coming back, Charles, to gross margins. So in the year, we saw -- on the product mix, we saw an expansion, a modest expansion, as you'd expect, as we sell more of our own products. Going in the other directions, China was strong. China is a region that's slightly below our blended margin. And CP&L was also strong, and the projects part of the CP&L revenue is below group average. So those 2 are -- balance each other broadly off this year. I think as we look forward, we've maintained that we're working hard through a variety of different mechanisms, like with automation and some of the process improvements that we've been doing, to try and expand our gross margin. We gave some guidance a couple of years ago to 300 basis points over 3 to 5 years. We're about 100 basis points into that 2 years in. So we've got some work to do. But we continue to maintain that sort of long-term guidance. I think the automation side of things in the next 12 to 18 months is going to be quite exciting, and the [efforts] of updating that. But we've now got -- for example, we've now got liquid handlers in every single one of our sites that's reducing hands-on time. So small incremental productivity improvements repeated many times across all of our operations, that should help drive that margin expansion.

Stefan Hamill from Numis. I've got 3 questions. I wonder if I'd just do sequentially one at a time. Slide 12 gives a very helpful outline of the way you saw increased operating costs going in. As we look forward with increased cost guidance, should we think about the increases there in rough proportion -- similar rough proportion? If we think about how you're going to drive that growth, it seems to me the emphasis is on moving into new addressable markets. I just wondered if you could comment on whether you need some new content to do that. Do you think -- I mean, in the last investment round, your ability to accelerate the core OEM part of your business, which is still very sizable, was one of the key factors. Do you think you can do that again? Or do you think the emphasis has to be on these new markets?

Is that all 3 questions? Or is that one?

So one broad question, the biggest factor in your results today.

You want to tackle the...

Yes.

Profile of proportional investment.

Exactly. For those who've got Slide 12 in front of them, we can slice and dice how we invest, how we try and call out the investments. I think perhaps next -- at the half year, we'll try and break it out into some of the areas that Alan called out. So China, for example. Now if we look at Slide 12, China clearly spends scaling off operations and sales and marketing because as we've put Abcam Inside people into China, it's -- that's also sort of volume related. So it's quite hard to do what you're asking to do, Stefan.

As I think, competitively, I'm not sure I want our competitors to know how much money we're putting in China. So as ever, we're trying to balance transparency with the fact that we're one of the few single focused players out there. But we'll give you a bit more color on that at half year. On the growth of the OEM products, the truth is we can still grow OEM products. They come with some limitations, right? If a customer wants anything that's not provided exactly as we get it from the supplier, then we're less speedy, less flexible and that's usually less good. So as a strategy, I think where antibodies are involved, we certainly are committed to -- particularly where recombinant antibodies are involved, that we're going to make them. Where antibodies aren't involved, historically, we've not made them. And as you saw, and Charles was just asking me what's the growth rate of the nonantibody portfolio, we can grow that quite successfully, okay? There is quite a lot of OEM business in there. To the extent we want to customize and do some things to open up market share faster, we're looking to control a bit more of that, and that's where the 1% investment is coming in. That's -- again, it's longer-term play. OEMs are really important part of our business we're still growing. I think OEM antibodies, if anything, that was an important part of how we grew the first couple of years. It's still an important part where there are certain antibodies we're just not going to make, like chicken polyclonal antibodies. And some of these things that -- we don't run farms, polys are not for us. To extent a customer is on polys, we can serve them. That's going to be an OEM model. I think the market is slowly pivoting away from polys to monos, and we're well positioned to take advantage of doing more monos ourselves than ask.

And then just -- obviously Japan, we saw a marked H2 deterioration there. Is that -- I mean, we're not seeing that in the peer group. Does that reflect how well you did last year? Or is there a company-specific distributor specific thing going on here?

I never liked making excuses for comparables because it's not very satisfying. But it was, I think, part the year was, what, 11% or 12% growth in Japan. And in the second half, it was even stronger, it was mid-teens, 16%. So if you were doing your personal review with me in Japan, I'm sure you would have raised that as an issue. My response is we have to work harder and do better, and we will. Harsh.

And then just one last little one. CP&L, could you just comment on -- because, obviously, you're in what may be one of the biggest new drug classes. You're in the companion diagnostics for those, most of them. What's the impact there on the top line? And what's happened to the margins there, I would have expected them to have grown?

If you look at the stack of customer products and licensing business, it's partly projects, 150 projects, which are effectively, as Gavin pointed out, lower gross margins than the average for the company. And then there's a stack of revenues associated with selling immunohistochemistry and other related companion diagnostics to the market as a product. And then there's a small stack of royalties, licenses and milestones. The majority of it is still projects. And we're not -- nearly half of it is projects. And that's not where we're trying to make the impact. We're trying to make the impact on the long-term downstream economics associated with those projects. So we're building portfolios of a large number of projects, some of which will go nowhere and a few which will go somewhere. And that's -- it's just very early stages. One thing I didn't mention when I talked, just to remind you, a lot of those projects are developing antibodies which are now being sold on the catalog. So when we look at those recombinant antibody numbers, they will have in them some of the successes coming out of those projects. We actually can see that sooner than you can see some of the downstream performance of the other elements. It's going to take a while, as you know. I mean, it's sort of 3 to 5 years from initiation of project to companion diagnostic is the fastest. I mean, anything more in declining capacity even longer. So this work that we're doing will, as I tried to illustrate in that conceptual chart about long-term growth of Abcam, what we're doing now is going to pay off much later.

David Ellington, JPMorgan. Gavin, just wanted to get an update on FX for the year and how you're positioned particularly with respect to having hedges. It kind of just looks like a big moving piece for you guys. And then just on the ERP, obviously, that's -- the last couple of years, that's tended to cost more and take longer than we would have expected. Just wondered if you could just talk to the factors there, and do you think we've backstopped it now?

Sure. So on the FX, we've seen sterling weaken post year-end. It's about 4% off average for last year. Clearly, I was listening to the radio this morning and Panmure Gordon at least are saying it could be down $1.20, $1.25. The important thing to take away is that we've maintained our hedging program. That hedging program has been broadly affecting and offsetting both the upside or the downside movements at the reported P&L line. And we've maintained our hedging program throughout and will continue throughout. We're not speculators. So if there is a tailwind to revenue, which we're currently seeing, then that won't flow all the way through to the bottom line. Some of it will, because we're 100% efficient in our hedging or effective in our hedging, but that's our approach. On the ERP, yes, it was -- I've been here again, it was -- what we're trying to do was something quite bold. We were trying to get 46, 47 modules globally live in 1 day, one cut over weekend. And we had worked especially hard for that and the team have put a heap amount of effort into it. As we got further and further or closer and closer with it, they became increasingly obvious to us that the maturity, particularly of the warehouse management systems, was not as it should be. But also, the risk that, that was going to put our business and to our customers, in particular, were not worth the up -- the desirable side of getting the program across the finish line. And that review has led us down to revise our approach to the approach, which is generally more broadly taken by others doing ERPs. Sometimes they get there the same way we do by trying to go in a big bang and realizing how difficult it can be. Others get there in different ways by doing a phased implementation. And so what we're doing is we're breaking the remaining tranches into a series of implementations. So for example, this weekend, we went live with scientific support module, which is an enhanced module helping scientific support link into our customer services. Now they're working off the same database. We're going live in a couple of other modules in the next few weeks for global expenses, for example. The heavy lifting this year, we'll be putting our finance Fusion in. And then we'll look at the last and perhaps the knottiest one, which is supply chain and manufacturing. And we'll update probably at the preliminaries. At the moment, we're laser focused on getting the finance Fusion in flight and working to make sure that that's going to get live quality, and then we can turn our attention to supply chain and manufacturing. I think it's important to think about, as we go forward, ERP is increasingly just how we do it. Our IT is now 50% of our -- of business is now running on ERP. Soon, it'll be 60%, 70%. And as an IT-heavy company, I think we need to -- or that we think that we'll be spending on IT, whether it's ERP or data analytics or our website or cybersecurity, we'll be spending more and IT going forward. And I think an important part, when you look at your modeling for CapEx, is to recognize that IT spend historically had probably been underinvested and that we need to address that through the ERP. But in the new world, we continue to invest there. Long answers, so hopefully that covers most of your questions.

And that phased introduction presumable means you'd be double-running systems which adds to the costs.

Yes, that's the downside of not going with a big bang. And so we're actually having to look to do some of our legacy systems, which we were going to turn off, we're having to look at how we interface those legacy systems into Oracle Fusion finance. So that is the downside of not going for a big bang. Part of the reason why we were focused on a single deployment was to avoid that dual running cost. And however, as I say, the risk to our customers and to our business was just too high, and we were unwilling to take it.

Julie Simmonds, Panmure Gordon. Just on the licensing revenue portion, that -- obviously, some of that did fall off over the period. Are we now at the point where the licensing portion is steady state? And roughly at what proportion of CP&L is that?

The licensing proportion has declined as we've moved into more products into the CP&L line, as a proportion. As we go forward, if Abcam Inside is successful in a way we'd like it to be, we'd expect that licensing and royalty revenues to expand those. Alan was just saying earlier on, it's -- we're still early in that.

It's also volatile. I mean, we'll occasionally get milestone payments, there will be a big lump that comes in. The reality is, last year, it grew a bit. It grew about the same as the average for the group. We haven't disclosed what percentage it is.

And just secondly, on direct -- you talk about increasing your proportion of direct marketing and sort of direct sales, which territories are you looking to move that into?

In the past, we've talked about Taiwan. I think that's still an opportunity. We've not disclosed any of the other markets because that would be sensitive.

Miles Dixon from Peel Hunt. I just wanted to very quickly ask on revenues. So if you take out the growth that you've seen any recombinant antibodies, the primary and secondary antibodies look like they might be slightly flat or below market growth. And I was wondering if you could comment particularly in reference to the mature market, such as this [state], whether you feel that there's any signs of, well, laboratory networking and sourcing of primary and secondary antibodies, excluding the recombinants? Or is it a pricing point and/or competitive catching up on quality?

I don't know how you got to your math, but they're still growing and they're still keeping up with market growth a little bit better. We don't see any evidence of anything you've described.

So that's the primary and secondary antibodies 165 to 174. Of that, the recombinant antibodies 40 to 48?

Yes.

Year-on-year?

Yes.

So the primary and secondary antibodies excluding recombinants?

Still grew.

But by 1/3, 2% by my math?

Again, you have to -- you'd have to have perfect visibility of what's the growth rate excluding recombinant antibodies within the antibody market. That's not inconsistent with our view of what market is, and I'm happy with the performance of our business.

Martin Hall from Hardman. In your -- on your employee share participation program, is that a traditional tax-efficient ESOP? Or does it fall outside that? And is the new program in place already, such that given the share price for Abcam today, you're going to end up having the opposite effect you're trying to achieve and some unhappy employees instead of happy ones?

So it is outside of ESOP, it's -- we'll talk in more detail once it's -- we're literally launching it, there's a road show going around China as we speak. We're literally launching it at the moment. It's a nice decision, it's quite an exciting scheme that gives a meaningful stake to our employees and...

Simple answer is they're setting aside fund for shares that will be bought in the 3 years.

At a price rate today?

Yes. The program hasn't quite gone live, so we're signing up. It will go live maybe this autumn, and we'll give you an update on how many -- what percentage of uptake and approximate cost at the midyear.

It's Max Herrmann from Stifel. Just one question, which on the kind of Abcam Inside the licensing element. I'm trying to understand, again going back to this, I guess, 2 elements. One is how do we assess the opportunity there and how -- what progress is going to be made? What's the first kind of metrics that we should be measuring to assess the performance? And then in terms of just trying to understand competitively where you're positioned versus other companies of antibody technologies for diagnostics or for therapeutics, what are your sort of advantages there? What's your product offering? Is it the target that you're just closer to science, and the basic research is just to understand the targets rather than obviously the technology and actually developing a therapeutic which you guys have not ever done? So...

Again, I'd just come back to it's very early days. So all I can say to you is you can listen to the things that we're doing, which is we're signing agreements with people that give us the opportunity every time we do a project with that organization. It's now under the terms under which we get paid for project. We get opportunities to make money if they're successful downstream from their successes. And we have the rights to put that product into the catalog and sell it to researchers. Those commercial agreements' are in place. And there's 28 organizations that have those agreements in place, and they're names that you would recognize in -- who are leaders in the field. What remains then is to do more projects within those agreements that reach more successful outcomes. We're in control of the agreements and the number of projects. We're not in control of the success of the outcomes. So if the revenue growth comes mostly from doing more projects, and it's helping our catalog, then the growth would be fine. It'll be modest. If the revenue growth is mostly from that plus some success stories that our customers have, then we'll be talking about much higher growth in either supply agreements with those customers or in licensing fees. And so we probably will, at some point, start talking more about where we are in that journey. As I said earlier, there's a 3- to 5-year lag from doing a great project to seeing license fees. So if you think about this year was the first year we had all of the projects under the right commercial terms, it's very early days. And GBP 16 million of sales on a billions of pounds market is testament to that, to early days. So I think we can just talk about what of the drivers of growth and how do we see that mix. Today, it's mostly not that much growth in projects. We did about the same number of projects this past year as we did the year before, but they're under better commercial terms. A lot more growth under selling the products that were made from those projects, and a little bit of growth from licensing and milestones.

So just to remind us, how many of the -- you said how 28 projects this year...

28 organizations under which we have framework agreements for projects forevermore. They give us terms. Remember, the old Abcam and, really, Epitomics custom products was a fee-for-service business. We do a project, we wouldn't know what the biology was, we may not know what the target was. We would charge for doing some work. Basically, it was outsourced to us, and then we never hear from them again. This is a very different business model, where we're involved in collaboratively designing the approach to biology. So getting to your question about competitive advantages, I think what we've learned is that at the scale that we're operating for antibody discovery, we're one of the world's largest discovery engines for helping researchers figure out what is the right binder to a particular biologic target. And when we know the target and we know the biology, we can bring multiple approaches to making an antibody, they're getting higher success rate faster than they would otherwise even when their internal teams, and we're getting traction. And our main competitor here is the internal biologics development teams within pharma and diagnostics. And if we can help them be more successful or to supplement what's already being done in-house, then we're going to win more business and do more projects with them. But it's a very long-term opportunity.

Generally, at this point, we go to the phones. Are there any question on the phone?

(Operator Instructions) And we have a question from the line of Nick Keher at RBC.

I just really wanted to focus on, actually, Slide 20 and the opportunity to grow into those adjacent product market verticals. If I -- I mean, this has been the focus for the company for quite a number years now. And obviously, there's a lot of white space for you to target, which is great. But actually, within the most successful area, like kits and assays, it's obviously been helped by the Firefly acquisition. And I'm kind of keen to know do you think -- obviously, you've delivered growth rates, but could this have gone better? And do you now -- do you think you need other people's technology? Or how important is the technology aspect to taking further share here, so could that speak to direction of M&A as well? I know that's 2 or 3 questions in 1, but just keen to hear more on that in particular.

I think the insight, perhaps not that clever, was that great antibodies and antibody pairs make great immunoassays. And when we looked at whether we acquire or build organically here, we realized that making our own antibody pairs that we're very sensitive and specific was going to be a competitive advantage versus some others in the marketplace who might have not made their own pairs or have been sourcing them for people even like us. So we're committed to building organic pairs. What platforms those pairs go on to, we're more open. And in fact, you'll find antibody pairs and panels in a variety of third-party instruments and platforms. And we're continuing to work with partners to make our reagents available on their platforms, because it's very hard to dictate or determine whose platform is going to win in the market, particularly in high-throughput immunoassays. So we've got our own technology. We've got our own platforms. We've got third-party platforms. Where we're really investing is making sure we've got great pairs. And as I've said, we're halfway through that project, and we've got to keep pressing ahead.

What about those other adjacent markets as well, let's say, the proteins, peptides, DNA-related polys, et cetera? How important are the technologies involved here for you? Or actually, because you can grow organically here and obviously over time, would you actually focus M&A here as well to try and gain share quickly?

Again, I don't want to prejudge that. But as I said, we feel like we've got the right strategy in immunoassays. In some of these other areas, we're kicking off some teams to look at what we do there. And we will -- we're hunting on what we build, what we buy, what we in-license, what we partner across some of these other areas. And I'm sure we'll have more to talk about in the years to come.

And then finally, just a follow-up. There was one comment you made earlier about knockout sell lines and having a new partner. Did I hear that right? And could you talk about who that partner is and why you've changed the partner in that area?

I think I've said that we've added a partner, and I won't be saying who that is.

There currently is no further questions in the queue. May I please pass it back to you for any other questions from the room or to close.

Thank you, everyone. I appreciate the thoughtful comments as ever, and we look forward to seeing you all in 6 months for the half year.

Thank you.