Inspiration Healthcare Group plc (LXD1.F) Earnings Call Transcript & Summary

Good morning, and welcome to the Inspiration Healthcare Group plc Investor Presentation [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Rafi Stepanian, CEO. Good morning, sir.

Good morning. Good morning, everyone. Thank you for joining our fiscal year '26 first half interim results. I'm joined by Alan Olby, our CFO, and we will go through the operational highlights of the first half as well as the financial details of the first half. And then in the second part of the presentation, focus on our business strategy for short and midterm and also a view for the longer term. We will close with an outlook of the year. And without further ado, I will go through the first half highlights. In the first half, we had a record financial performance in terms of turnover. Our revenues increased to EUR 24 million, a record high. This was driven by 2 large orders and contracts that we had, one in the Middle East, which we shipped in half of it. And the second one was a large order for a humanitarian organization, UNICEF. And we shipped both of these orders in complete and both of the contracts are fulfilled. This gives us a lot of tailwind for the first half with all the financials pointing into the right direction. Gross margin up with 2.7 points with a larger proportion of our sales coming from capital equipment and neonatal. We returned to profit with the EBITDA of EUR 1.3 million versus a loss last year. And of course, also that drives positive cash generation of EUR 3.6 million, while it was an outflow of EUR 2.3 million last year. Beyond the 2 big large orders for Middle East and UNICEF, our underlying business is also growing, and that's a very strong sign of the value of our products in the market. And most of this underlying is coming from the international region, while we focused our sales team and our sales efforts, and we see our increased presence in Asia Pac and Europe giving fruits. Our project of moving consumables manufacturing sites that we had closed down last year into Asia has now been completed. And now we are on track of clearing our backlog of consumables and taking on further volumes. And last but not least, in the first half of this year, we have been engaged in a company-wide ERP system reengineering, which is touching all our processes from forecasting to supply to sourcing, manufacturing and also customer support. And this, we are doing the background work in order to give us a robust systems and efficiencies going forward. This is coupled with a lot of organizational changes where we are focusing the organization on customer support, speed, accountability and rigor. We minimized compressed week arrangements, and we are kind of back to office situation now with all the people more coming to the office and working together and also to drive the rigor and the accountability that I mentioned. As far as North America is concerned, we -- Airon was starting as is performing as we expected, slightly declining, but due to a big H1 last year. We have a new General Manager onboarded who is driving the business now and with him and through our sales channels also in the international team, we are working on getting new opportunities for Airon so that we have a positive outlook for H2. In Canada, our submission for the 6000, our flagship product was declined because of the submission was as Class III. And now we will -- we are going through the process to resubmit it as a Class IV, which is a higher level of regulatory approval. Our work on the SLE 6000 to get it ready for the FDA submission is on track, and we are expecting to submit it late in 2026. Now I will hand over to Alan to go over the financial details.

Thanks, Rafi. First of all, looking at the financial highlights for the first half, we've got a very encouraging set of numbers and everything is moving in the right direction. As Rafi said, revenues reached EUR 24 million on the back of the 2 material export contracts, which is growth of 41% over the prior year. That led to an improvement in the gross margins. We saw growth in our capital sales of capital products during the first half, which helped margins and a greater weighting of our own products as opposed to distributed products, and that also helped to drive margins up from 43% to 46.2%. That, combined with the cost-saving initiatives that we implemented towards the end of last year have returned us to EBITDA profitability in the period with a profit of GBP 1.3 million compared to a loss of GBP 900,000 in the same period last year. And on a statutory basis, we get back to operating profitability as well. There are no exceptional costs during the first half, unlike last year. So the loss of GBP 3.2 million has been turned into an operating profit of GBP 200,000 for the period. Looking at the balance sheet and cash flow. Very pleased to be able to report inventory now on a clear downward trajectory. We started to see this at the end of last year, but we've managed to take over GBP 2 million out of inventory over the first half, which is now down to GBP 11 million from just over GBP 13 million at the end of last year. There is more to be done and expect to see inventory continuing to reduce over the rest of the financial year. Working capital improvements from inventory as well as receivables, combined with the EBITDA profitability and a small R&D tax credit have generated operating cash flow of GBP 3.6 million in the period, significantly better than the GBP 2.3 million outflow that we experienced at the same point last year. And that's enabled us to start to get net debt moving back in the right direction. Net debt has reduced by GBP 1.6 million over the period compared to just over GBP 8 million at the end of last financial year. Turning to the movements in revenue. I wanted to talk about the various moving parts here. And whilst it's been dominated by the export orders from the Middle East and UNICEF, which generated GBP 6.5 million of additional revenue in the period. The underlying business is also showing growth. In the U.K., our direct sales to the NHS showed 2% growth in the period, which is only modest, but that was held back by some short-term order backlog for consumables and products linked to the consumables that are being outsourced into China. Those short-term supply disruptions around the half year have been resolved. The backlog has been completed, and we're expecting to see better performance in the second half, and we expect our U.K. business to show growth of mid-single digits over the full year when compared to last year. More encouragingly, the international business outside these 2 material contracts is showing underlying growth of 12% in the period. This is the initial benefits of the back-to-basics approach, reengaging with our customers change in structure of the team. And in the period, we've put in place a distributor manager for the Asia Pacific region who's based out of Singapore, getting us closer to our customers in the Asia Pacific region. As we've also spoken about getting closer to winning our fair share in Europe. We've been more active on the ground in Europe, getting out talking to customers, and we've seen some nice contract or tender wins in recent weeks, which will contribute to second half performance and helping us with our full year expectations for the international business. The infusion products have unfortunately had a slow period. We've again experienced an overstocking with one of the key home care distributors in the U.K. market, which has led to an 8% year-on-year reduction in revenues this half. That will persist through the second half whilst those excess inventories are worked through. But what we can say is that the underlying use of the products remains strong. And so I think once this overstocking has worked through the system towards the end of the year, the infusion business will get back to growth next year after a year of decline this year. And then in the U.S., our Airon business had a very strong comparative performance last year. We're showing GBP 100,000 decline year-on-year, but we've won a couple of significant orders in the second half, which should show Airon business stabilizing and performing in line with last year by the time we get to the end of the year. We've also got the rest of the Middle Eastern order expected to be shipped in the second half once we get the import license. And we've got a very strong pipeline of opportunities, both in the U.K. and in our international business, which gives us confidence of delivering the full year expectation in terms of revenue. Looking at the income statement in a little bit more detail. You can see here the improvement in profitability with gross margins improving on the back of the higher sales, but also the better mix in terms of products, as I said earlier, higher capital sales. Admin expenses at a headline level have increased because there are some commissions and payments to our local agents supporting us with the delivery of these 2 material export contracts. But as you'll see in a minute, the underlying overheads have been reduced as a result of the cost savings we implemented last year. As highlighted, we are back to operating profitability. We're back to EBITDA profitability with GBP 1.3 million EBITDA delivered in the first half. Here, we're trying to focus on the underlying performance, splitting out the contribution from the 2 material export contracts. So the underlying revenue was GBP 17...

Hi, Rafi (sic) [ Alan ], I'm just going to request control and just pull you back through just to connect your mic.

Just over 45% in the period here. And we can also demonstrate the reduction -- control of overheads as a result of the cost-saving measures implemented last year. Core overheads reduced by 8% in the period, which takes the underlying business back to profitability after the loss reported in this period last year. And finally, turning to the net debt position. We have strong cash generation on the back of EBITDA profitability in the period, quite a significant reduction in working capital, predominantly driven by inventory, but also improvement in our credit control processes and debtor days. We've had an R&D tax credit received in the period of GBP 700,000, which has delivered overall GBP 3.6 million of positive cash flow. We've had traditional outflows in the period on interest leases and our R&D investment predominantly in our U.S. FDA project, but also a one-off payment of $1 million, which is the final purchase consideration for Airon, the U.S. business acquired at the beginning of last year. Airon exceeded its revenue targets for the period. And so we've paid out the maximum consideration of $1 million in the first half. That is now complete. There's no further amounts due for the acquisition of Airon. And after all of those, we've reduced net debt by, as I said, $1.6 million in the period with net debt of $6.7 million at the end of the half. In the rest of the year, we expect to continue the working capital reductions. We expect further profitability. And so we're expecting to see further deleveraging through the rest of the financial year. And I'll pass you back to Rafi.

Thank you, Alan. In the next section, I want to present the groundwork for our direction for short, mid and slightly longer term. And I will do it in stages about what we are doing first with Back to Basics, which started last year with our previous CEO. And the Back to Basics at that point was about change of direction, turning into the right direction into profitability and survival mode and to start making profit for the company and having the financials in the right level. And this is what we believe we have achieved in the second half of last year. And then those actions still continue, and we will continue for the next 12 to 18 months until end of 2026. Meanwhile, we have added another layer of back to basics, which go to other functions of the company. And this will form the basis and the groundwork for future growth. And this will touch all the aspects of the company in terms of marketing, sales and all the operations. We keep the same focus on sales, profits, working capital and future strategy. And in sales, some of the examples are renewed focus on Asia Pacific, and we will also focus on Latin America. We will focus a lot of clinical and marketing efforts on the more advanced market in Eastern and Western Europe for gaining our fair share in those markets. And we will focus also on getting more add-on opportunities outside the U.S. Increasing profits is through operational efficiency. As I mentioned in the introduction, we are doing a whole revamp of our company ERP system, focusing all the culture of the company on customer-centric values and speed and efficiency. On the working capital from the finance perspective, we are working on improving all the financial metrics, as you saw through Alan's points. And on top of that, improving our supply chain management with inventory control through proper forecasting and through proper demand planning. And then we already started our future strategy planning, reassessing the vision and the strategy, which starts with our presentation today, but has been ongoing in the company. And we have already onboarded a key opinion leader helping us with the future direction from the clinical perspective. We are in the last stage of recruiting a medical director who will be part of the company in December. And then we are also continuously rationalizing the product offering to focus on the core and value-adding products and also minimizing the impact of the non-value-adding ones. If we go to long term, mid- to long term, while continuing all this back to basics, which will stay forever, we drive sales will come -- the biggest drive will come in the mid- to long term from our access to the U.S. market, and that's where our R&D is focusing on now. And then we will, of course, also increase our recurring revenues from service and consumables, which will also build into point number two, profits because access to the U.S. market, which is a high-price, high-margin market and also consumables, which are always at a higher margin will increase our earning quality. Finally, on the future strategy, we are going to start now in the next few months to start drawing up the lines for our product road map once we clarify our company strategy as such and focus on innovation, bringing new therapies, new modalities for the neonatal care area and placing us for a leadership in the market. If we go back a step and look at the situation where we have the company today or yesterday, we have the history of Inspiration Healthcare being a distribution company and acquiring various companies throughout the history of 22 years. Some of the synergies of the acquisitions were lost in the last 2, 3 years due to MDR and the end of lifing of some products. The brand equity of each of these brands were not fully maximized. And while we are grouped under Inspiration Healthcare Group, the branding is not known internationally and all these pieces together really didn't make sense from an outside-in perspective. What we want to do is to realign and clarify the brands and what they stand for, both internally and externally to our customers. And the highlight here is those 3 brands. We will position SLE as a global provider of neonatal ventilation. We will position Inspiration Healthcare as it was a U.K. med tech distributor as it was founded 22 years ago and Airon as a global provider of pneumatic ventilators. And each of these businesses will be having their focus, each will have to prove their profitability and each will grow at a different rate with SLE biggest -- having the biggest opportunity. And this is what I will go through in the coming slides. What it means is the following. These are not going to be 3 different companies. These are going to be the ways we work internally, and this is the way we will work operationally within the same entity of Inspiration Healthcare Group. The first one being SLE. The brand image is so well known in the world globally, internationally, and we will reposition it, refocus on it as a global innovation leader in neonatal ventilation. And of course, what SLE will do is neonatal ventilators, consumables and accessories. Last year, turnover was GBP 20 million, and the aspirational potential growth for 2030 will be GBP 45 million. And this will be driven by the points that are mentioned below, U.S. market entry and share gain, share gain in European countries, launching and sales of our own consumable range and then strengthening our service business. To the second part, second business unit will be the Inspiration Healthcare, and this will be a business unit focusing on U.K. and Ireland as a distribution partner for the NHS. Of course, Inspiration Healthcare will sell the SLE ventilators, which is more than half of the turnover. And then other neonatal products, which we do today and as well as infusion therapy, which is again a big part of our turnover. Fiscal year '25, this business unit had a turnover of EUR 15 million. And again, the aspirational goal would be to hit EUR 25 million in 5 years. And this will come mainly from growing infusion business in hospital where we have minimal share today and then continue to share gain in home where we have already commanding a 55% to 60% market share and then also going into other pathologies with the launch of new pump modalities and new pump models. We will continue to evaluate and look at other third-party products if we want to distribute in the future. But currently, we are in the environment of minimizing the nonprofitable products and the long tail of minimally valuable financial ones. And this will be an ongoing activity. So a big part of Inspiration Healthcare Group, as you see there, EUR 15 million. The big part of it is infusion. We will continue focusing on this, but we will bring both Inspiration and SLE teams together to maximize the opportunities of working together while keeping the dedicated salespeople in each of the channels as they are today. And lastly, Airon, -- it's a global champion in pneumatic ventilation. It's a niche market where there are not too many competitors, but also not a big market size. As we mentioned before, the 95% of the sales of Airon come from U.S. Turnover was EUR 2.5 million last year. And our goal for 2030 is EUR 5 million, more than double. However, if we compare to the other 2, of course, the millions and the impact is smaller. And this will come through strengthening our U.S. sales organization, more share and more activity in the emergency segment, emergency segment, meaning ambulance and fire departments and et cetera, and of course, growing the international sales, which are minimal today. So doing all those things will be the actions to -- for the goal. And as a fitting title to this slide, I think our aspirational goal is to move ourselves from performing today to doubling in 5 years from now. We will continue focusing on these 3 aspects of the business and driving each one of them for profitability on its own, but SLE being the big one, I will focus on several more details on the SLE side. Why we mentioned that SLE as the brand image internationally is because it was founded in 1958, and it is in the neonatal space since 1977. We have a long-standing distribution channel in all over the world who -- with a very good brand image and both through our distributors and also our customers, the doctors, the clinical -- clinicians who use our products. And this is what we want to focus on and to bring back this fair market position for SLE in the market. Why SLE has the biggest growth potential? Simply because we have a very low share in the marketplace. On the devices side, the market is estimated at $170 million, where we -- last year's number, we had 7% to 8% share. And on the consumables and accessories, the market size is $260 million, where our share is probably less than 3%. And then if we combine both last year, our share was probably less than 5%. It's a very stable, robust market that has slow growth. The CAGR is usually 2% to 4% on both sides. However, our share being less than 10% and in terms of overall less than 5%, our game here is -- our plan is share gain. And we will have to grow faster than the market with our share gain, and there is plenty room of growth for that. And the biggest part in that market size and our plan is U.S. It's the biggest single market. On the devices side, the size is $55 million. If we combine with accessories and consumables, it goes up to $120 million, and our current market share is 0. So going there at this opportune time where some of the market -- big market players are stepping out of the market, it's a very good timing for us to go. And the plan will be to go through a strategic partner or a strategic distributor while also strengthening our already existing force there with more neonatal-focused clinical and marketing personnel. So a big bet for the company to U.S. market entry, and that's where our R&D efforts are focusing now to prepare our device for the FDA submission. And this is the aspirational longer-term slide where you see that the devices -- the current offerings that we have today are the blue ones, and we are quite present and quite prominent in the neonatal ICU unit, while in the overall care pathway of the baby from the neonate, from the delivery to transport to step down and home, in some of the other areas, we are not there. Also in some of the categories, we are not there like in consumables or decision tools or AI and the aspirational goal mid- to long term would be to have more solutions in all of the steps of the pathway of the neonatal care and strengthening our existing solutions, for example, in education or services, becoming a more active provider of clinical education, clinical marketing and, of course, services, which go beyond the technical maintenance of the devices. To conclude regarding SLE, we are now at the back to basic stage, back to basics on everything in sales, marketing, operational efficiency and organizational efficiency and focusing on the customer. While midterm, as explained through the previous slides, U.S. market access, share gain in EU and other geographical expansion, own consumables and then strengthen the service business to ensure growth and profitability. And once we are at a stage where we have enough growth and profitability and good market share, continue in the long-term vision of becoming a leader while giving more solutions, as I said, through the whole care pathway and also add new innovative therapies and decision-making tools. Finally, to close our outlook for second half and the full year. We have quite positive outlook following from H1. The second part of the Middle Eastern deal contract is under -- on track for delivery and completion. But moreover, we have our backlog and opportunity pipeline quite strong, and we are quite confident that we will meet our full year market expectations, which will definitely drive more improvements on all the financials that Alan shared in terms of working capital, reducing inventory and net debt. We will continue our operational and organizational changes to drive the culture to more rigor and accountability and continue strengthening the leadership team with the right elements. And while midterm, our road map is clear, our R&D work and our quality and regulatory work will be focusing on product enhancements, which is our first launch beginning next year. And then U.S. market access with the next FDA submission at the end of next year and then launching our own consumables, which will drive more flow business also driving profitability and better margins. So it's all about execution and the team is aligned, and we are thankful again for all our shareholders who have been supporting us through the challenging times and now through the growth period of the company. This concludes the official part of the presentation. Now we open the floor for questions.

[Operator Instructions] I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed by our investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Right. I'll start the list of questions just seems to have changed. So first question here is, how are we affected by weak U.S. dollars? Do we sell overseas in U.S. dollars? And this will be in reference to the GBP 0.5 million FX loss that we experienced during the first half. This is almost entirely linked to the one-off export contracts, both of which were invoiced in fully in U.S. dollars. As you may be aware, there's been quite a significant weakening of the dollar between the end of January and today. It was around about $1.22 at the start of the period when some of these sales were invoiced and it ended up at $1.37 in July. So we saw quite a significant drag on those U.S. dollar revenues. And as we have very low level of U.S. dollar costs to offset against, we saw an FX loss. Most of our international business is actually invoiced in Sterling. So the core business has a much lower FX risk attached to it, although there is some element of the revenues that is invoiced in euros and dollars on an underlying basis. Next question was, you mentioned winning some significant orders in the U.S. in H2. What more can you tell us about this? Also, you mentioned winning tenders in Europe in recent. Can you share more details? We're not going to share specific details of these contract wins. The point of mentioning them was to highlight the confidence that we have in meeting the full year expectations for the neonatal international business and the fact that Airon will have a solid year despite the fact that it saw a small decline in the first half. None of the items I'm talking about are individually material, but they all point to a strong pipeline to the actions we're taking showing results. It's important, as we've highlighted, to win our fair share in Europe. And so we are very pleased to win some orders from Central European countries, which are where we've been targeting our efforts in growing revenues during the first half. So that will become apparent when we report full year numbers for the year, but this is really about supporting the pipeline of revenues for the second half of the year. The next question is around the detail on U.K. and international sales, neonatal versus infusion. The full detail has been set out in the detailed statement that was published to the market this morning on the same basis as it was previously. In the presentation, we've chosen just to show the bridge in terms of the movements from last year to this year. But the themes that we've discussed in terms of the infusion products declining, more capital sales, growth in the underlying international business. The detailed numbers are in the statement that was released to the market and will be on our website later. Next question, have you considered adding further analyst research for the company, for example, paid for research? Straight answer to that is yes. We have taken our time to think about what to do on this front. As you appreciate, controlling costs and overheads has been the target over recent months. But now that we are showing things moving in the right direction and the numbers are improving and the outlook is improving, we are considering what we're doing with research. And I'm actually confident that we'll see some additional widely available research published in the coming days on the back of these half year results.

I'll take the next one. So next question, how does Inspiration Healthcare plan to defend and grow its market share against both established global players and emerging lower-cost competitors in its key product categories? Good question. I think it's -- currently, it's with increased market support through our existing distribution channel, as I mentioned. I think there is a lot of brand loyalty and big brand recognition of SLE in the key markets, which we can still bank on. And that's showing in the growth of our underlying business by going back to the basics and supporting our distribution channels. And we will increase more definitely on the services side on what we provide to our customers, on clinical education, on clinical marketing and support. And for next mid- to long term, I think it will come for -- with more focus on innovation and investing in new features and new therapies to stay ahead of competition. So both mid and long term. Next question is, what are our R&D plans? I alluded to some of them. They are on the final slide here. The immediate ones are new product enhancements on our flagship product, the SLE 6000, which is going to be launched in first half of next year. That's basically to cover a lot of requests that we had received from our installed base and our existing sales channels. And then the next bigger one and the big bet is the updates that we are doing on the device to be able to access the U.S. market. In parallel to both these, we are continuing our R&D efforts on launching our own consumable products. By midpoint of next year, we would start working on our next generation of products. That's where then R&D will focus on. Good morning is inorganic growth and option for midterm revenues doubling, thanks. Inorganic growth is not part in those numbers that we have presented. Those numbers are all organic, slightly aspirational, but with a clear path of how we can get there. The biggest growth, again, will come from entering U.S. market, will come from add-on opportunities internationally, will come from increasing our infusion sales in the U.K., where we have a very low share in the hospital segment. So there is a realistic approach to the aspirational number, all with organic growth. Inorganic growth is considered for longer term, but that will be considered once we are already strong enough and with a good market share on our existing core products today.

I'll take the next one. Despite 2 big orders and record H1 revenues, there was a loss before tax. How will you get the business to real profitability? I think 2 points to make there. I can't make a profit forecast. But if you look at the forecasts that are out in the market, the analysts are expecting us to be profitable at the before tax level on a full year basis this year. In terms of repeating that, it's about embedding the back-to-basics approach and improving the margins further. We've made some initial steps this year. There's more work to be done there. So focus on improving margins, improving operational efficiency and productivity as a result of the internal work on the ERP and the operational processes. I think there is a decent amount of operational leverage to be delivered from this business. We've got an infrastructure in place. We do not need to invest in expanding our distribution in the U.K. or internationally. We've got a very broad network of distributors. So it's about improving sales, improving operational efficiency, and that will get the business back to profitability at the before tax level very soon. And how will you fund these investments given the current low margins? I think the investments in terms of the U.S., getting the SLE ventilator registered in the U.S. are already being funded from our operating cash flow with our existing R&D team and R&D budgets. We will always continue to invest whether it's for the U.S. or for next-generation products once we've completed the U.S. project. Improving the margins further will improve our operating cash generation, and that gives us the ability to consider investing further in other R&D projects once we've completed the current priority ones.

Rafi, Alan, thank you for answering those questions you can from investors. And of course, the company can review all questions submitted today and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which is particularly important to the company, Rafi, could I please ask you for a few closing comments?

Again, thank you for all for your time and listening to our presentation. We are quite pleased that we come to you today with a very robust and strong results in first half of the year. Just to repeat, we are quite confident that we will finish the year in the same positive manner and meet market expectations. And thank again to all our shareholders for their continued support and belief in the company and what we do. Thank you, and have a good day.

Rafi, Alan, thanks for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This may take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Inspiration Healthcare Group plc, we'd like to thank you for attending today's presentation, and good morning to you all.