Inspired Limited (INSE) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our results presentation. I guess, what we intend to do today is walk you through the highlights of FY '20, walk you through the group's performance with respect to ESG, which is obviously very topical at the moment. Then Paul is going to work through the financial performance of the business. And then finally, I'll pick up on strategy and outlook after that. So if we kind of look at the operational highlights, I guess, what a year. No one expected the year that we had from our side, really pleased to have taken a pragmatic approach to the pandemic, strengthen the balance sheet effectively through renegotiating our covenants and then really been able to capitalize on our competitive position through the placing that we did earlier in the year, raising GBP 31.3 million, which has allowed us to really accelerate our market consolidation thesis with respect to the Assurance Service business lines. I think the main transformation piece of FY '20 is really the disposal of the SME business through MBO. And this really allows us to emerge as a pure-play, technology-enabled service provider, focusing on corporate businesses, really delivering their sustainability and net zero carbon agendas. In recognition of that, we're delighted to receive the LSE Green Economy Mark, which really recognizes our sustainability credentials, and we're 1 of merely 96 listed companies, which actually have received this mark. Being able to deliver and deploy our technology, you'll be aware, we've made a number of investments over the years in terms of technologies, just to get that out to customers and really accelerate that rollout to be very satisfying. And given the macro situation in the year to really have evolved without prejudicing our thesis, strengthen our platform and giving ourselves a strong opportunity to bounce back in 2021 and accelerate in 2022, I think we're really quite pleased with. Our response to the pandemic has been professional. It's given us a platform to grow on. And we'd really like to thank all our employees and members of staff who've really worked fantastically well through the pandemic. And without them, we wouldn't have been able to achieve what we've achieved. In terms of ESG, I guess, there's 3 main factors to this. To be able to kind of actually deal with ESG properly, first of all, there has to be recognition. And as a Board of Directors, the Inspire Board do recognize that there is a global climate emergency, and it falls to us all to do something about it. Once you have that recognition, you need to disclose. And what you'll see is that Inspire will publish a full suite of ESG disclosures with respect to FY '20 and then really need to act. And one of the important things is that as a business, we start to take actions that are consistent with those ESG objectives, really recognizing that a global climate emergency does exist. So what have we been doing? Well, so from our perspective, it's all really about making sure that we lead the way on disclosure. So this year, you'll have a Green Economy Mark disclosure. We have our second streamlined energy and carbon reporting disclosure, which really sets out our Scope 1 and Scope 2 emissions performance. We're adopting the TCFD disclosure a year early, and we will issue a full ESG performance report. Now what does that mean in relation to our actions and what we've done? I think it's really important that everybody recognizes there's some fairly free and lose use of terminology in the marketplace at the moment, which might be kind of more for community effect as opposed for the reality of what's supposed to happen. So net zero carbon is all about actually reducing our carbon. It's about taking absolute measures to be able to make sure that there is a real reduction in carbon emissions. Carbon neutrality is achieved when, ultimately, you measure your emissions and then you take offsetting behavior or market-based measures to be able to compensate for the carbon you've consumed. From an Inspired perspective, we've done a full Scope 3 analysis. And what's also really important to recognize is for businesses like Inspired, actually 97% of our emissions are related to Scope 3. Our direct emissions in terms of Scope 1 and 2 only represent 3% of our environmental effect. So what Inspired has done is we've been able to achieve carbon neutrality in relation to our Scope 1 and Scope 2 for 2020. We're also going to stage further, and we've actually achieved carbon neutrality for our supply chain, which ultimately relate to emissions we directly consume. And this is really important for creating a commercial incentive for us to drive better performance from our suppliers with respect to emissions. In terms of net zero carbon, we've created our targets to deliver net zero carbon in absolute terms, where we're actually taking behaviors to reduce emissions, and we have a plan to achieve net zero on that basis by 2035. The UN Sustainable Development Goals have become adopted throughout the company, and Paul and I's remuneration has also been aligned with that to make sure that we have a direct line from the Executive Director objectives all the way through to performance-related remuneration. And then being able to align throughout the company that, by implementing the Blanchard leadership program, which allows us to set objectives for our employees, and one of those objectives is also for the implementation of the SDG and ESG performance behaviors that we're looking to instill in the organization. So that's where we are in relation to ESG. What I'll do now is ask Paul to walk you through the financial performance of the business in FY '20.

Thanks, Mark. In terms of the financial performance of the business, it was clearly a year, as Mark said, where we were notably impacted as a result of the pandemic. So the revenue growth at top line was primarily driven by the acquisitions completed in the year, with organic revenue 20% down 2019 levels. Now that's directly a result of the pandemic's impact on the consumption of our consumers for that part of our revenue line, and then also our optimization revenue line, which experienced disruption as a result of deferral of projects due to the inability to access customer sites to be able to carry out those projects. Those impacts to the revenue line had a direct impact on the margin performance and the profitability of the group because any impact from a consumption perspective, et cetera, just flow straight through to bottom line. You'll note that in the year, we've presented our results on a continuing operations basis, and that represents a disposal we completed in December 2020, which was our SME division. From a financial perspective, the SME division has a significant impact on both the balance sheet of the business, notably the working capital profile of the business, but also the quality of the earnings going forward and the visibility of earnings. So what you'll see is in the balance sheet of the business, we've got a 36% reduction in our receivables as a result of the disposal. You'll note that our cash conversion metrics as a result are improved, so you'll see that we're running at north of 90% in FY '20. And as stated in the CFO statement with the results, we expect that the business will perform in excess of 90% cash conversion going forward. In terms of the impact on visibility of future earnings, we've got greater coverage as a result of more of our revenue coming via our secured order book within our corporate division. The net debt position of the business, you'll note at the year-end, we had GBP 18.8 million of net debt, which represents about 1.5x EBITDA for FY '20. In terms of market consensus for the full year, net debt is expected to be about GBP 26 million, which equates to about 1.3x FY '20 earnings. Now that increase in net debt is driven by the acquisitions we completed last month being Businesswise and GEM, which we'll talk about in more detail as we go through the presentation. But what you'll notice is despite the acquisitions and the increase in absolute terms of net debt, there's an overall reduction as we see that kick back in performance in terms of earnings. The strength of the cash performance of the business, I think, is very apparent in the FY '20 numbers. As we've talked about, the cash conversion metrics, people should expect to see a much more consistent high level of cash conversion with that improved working capital position as a result of the disposal of the SME business. And what that allows us to do is reinstate the dividend, albeit we're clearly taking a cautious approach in the immediate term, noting back to our stated policy of the interim results in September '20, where we stated that we would reinstate the dividend, but at a level which was in excess of 3x dividend cover. And that's what you can see in the 0.12p final dividend in addition to the 0.1p interim we paid earlier in the year, given a full dividend for FY '20 of 0.22p versus EPS of 0.7p. In terms of Q1 trading, you'll note that as expected, we've continued to experience disruption in both the optimization line and also the insurance line, with consumption levels performing about 13% down on 2019 consumption levels for both parts of the business performing in line with management expectations as we move forward into Q2. So I just hand back to Mark to run through the strategy.

It's for me now to really pick up the strategy. So ultimately, as we've restructured the group, we're in a place where the business really looks quite a lot different now. We are a pure-play, technology-enabled service provider. We look after 3,400 corporate businesses in the U.K. and Ireland. And ultimately, what we do for those clients is we help them respond to the climate emergency and control their costs. And we do that with the Energy division, which is the one you all know and has been around since flotation. We've now added an ESG disclosure division, and that's all underpinned by our Software division that provides software for both. Now what does that mean for customers? Well, it means in 2020, we saved our customers GBP 44 million collectively in terms of managing their energy cost equation. We help them avoid 1 million tonnes of CO2, so kind of actually improving their established credentials, and we processed 400 million pieces of data for them. And that's what a lot of people don't realize is how much of a data management business this is. It's our core competence, which what lends itself really well to ESG because from an ESG perspective, it looks to me very much like the energy market 20 years ago. There's a need to make disclosures. There's a need to process data, and there's a need to be effective in the way that you make impacts in relation to those disclosures. And that's ultimately what our business now does. In 2020, we analyzed 25 companies from an ESG perspective, and we made 71 ESG disclosures on behalf of our customers, which for an organic entry to market, we're really very pleased with. So when we now look at that in terms of the group evolution, we're more than an energy business now. The ability to now be a pure player for the corporate business consumers, the ability to really help focus on their sustainability and net zero carbon objectives means that it's no longer appropriate just to be Inspired Energy PLC. So we have a resolution in front of the AGM to rename the company Inspired PLC, and we've taken all the actions to make that possible. And I guess, as we go into this new world in the post-pandemic period, who wouldn't want to be Inspired PLC, right? Inspired PLC is going to be run in 3 divisions. The Energy Division is the one you all know, and it is the core cash-generating engine of the business. And alongside that, there is the Software Solutions Division and the ESG divisions, which ultimately all work on the basis of effective data management and providing technology-enabled solutions to corporate businesses in the U.K. and Ireland. In terms of our markets, this is all the sort of thing you've seen before, 3 divisions operating in 4 service lines. So we have effectively optimization services where we help manage the consumption side of the clients' energy cost equation; energy assurance services where we manage the price side of the customers' energy cost equation. And then our ESG disclosure and our ESG impact services are really the ESG versions of those. You can see that we've got a lot of blue ocean in relation to ESG. It's a really new market. When we're speaking to customers, they're saying things just like, "No one's ever explained to us like that before," and that makes a lot of sense. A lot of this work for ESG so far has been very much done at the high-end advisory level where people are maybe coming from a communication perspective, perhaps more like the old corporate social responsibility reporting. And with this marketplace now, what we're really seeing is it's all about making effective disclosures in relation to under the taxonomies. And with that, we can really reduce the complexity, and we can also reduce the price point, making ESG disclosures more and more accessible to a wider range of businesses. As we look to our strategy on Energy Assurance services, we delivered 6% to 8% organic growth. We raised money to accelerate our consolidation thesis. We did 3 acquisitions, plus buying out the remainder of Ignite. Once we get to a post-COVID world, we believe in reality, we'll have created a portfolio which adds an extra GBP 3 million to EBITDA and we'll have paid a roundabout GBP 15.5 million for it. So really attractive multiples in the execution of that part of the thesis. For Optimization Services, it's where we really accelerate the cross-sell. So we've seen with the Ignite business that we managed to achieve our first 2 cross-sells in FY '20, and we've just gone to trials on a third. So really pleased that even with the lockdown situation and the deferral of projects, we're still making inroads in terms of building the pipeline. And that's the part that really kicks us up to a double-digit organic growth. And then we start to look at Disclosure Services, just a new market with fantastic regulatory drivers. You'll all be aware that [indiscernible] is consulting on the implementation of TCFD. It's going to become mandatory for all listed companies and companies with over 500 employees. So there's a big new market we've got there. And then also with SFDR coming in, in Europe and the U.K. needing to put its own equipment out there, we've got strong registry drivers for mandatory reporting of ESG coming into FY '22. And that will lead us into delivering ESG impact services over that period as well. And this is all underpinned by Software Solutions. And Software Solutions is where we deliver our technology for our services, but also we make that technology available to third parties. Since we've really started to invest in that business, we've increased the third parties. We've worked with from 25 to 50. And with the new technology we developed and deployed, we're really excited about the potential for this business, which in a marketplace where everybody is your potential customer from a corporate perspective, it's naive to think that we're going to own the relationship with every customer. We don't need to. What we want to do is add value to those customers by having a core competence in data management and data processing. If we can have multiple channels for that, that's just the right thing to do. And you'll see that it's also worked well, professionalizing our M&A pipeline, noting that Businesswise, for example, we recently acquired, was a user of the software. So it helps with the integration and those sorts of things. In terms of the acquisitions that we've actually done, we have completed 3 acquisitions, 2 post period, plus kind of buying out Ignite. As always, we operate pragmatic structures in doing that, and I'll let Paul just walk you through our thought process as we created those.

So in terms of the Businesswise transaction, this is another perfect example of being very diligent in our approach in terms of structure, particularly in the COVID environment. So we'll only complete transactions subject to rigorous and satisfactory diligence, as you saw with the transaction we reported in Q4, which didn't work from a Board perspective. With the Businesswise transaction, this is a business which is growing within the sector. It's very well thought of from Inspired leadership perspective. But what we're very cognizant of the fact is the business has been impacted by COVID. So the current COVID run rate is about GBP 1.3 million of EBITDA, but we do see real potential for growth in this business with a real strong leadership team. So we put together as a structure, which pays for the GBP 1.3 million on day 1, which is the GBP 6 million of initial consideration against GBP 1.3 million of COVID run rate EBITDA. But the structure gives the ability for the management team to earn up to a further GBP 23.5 million of contingent consideration over the performance in '21, '22 and '23, both from a profitability perspective, but also from an order book perspective. So I guess, just to bring that to life for you, if we were to pay the full GBP 23.5 million of contingent consideration for Businesswise come December '23, Businesswise will be generating in excess of GBP 5 million of EBITDA, which is about just over 5.5x multiple pre-cost synergies. And as ever with these businesses, as we've explained previously, once we integrate them into our business through the leverage we can generate through our systems and processes, we normally see a turn -- a reduction in the multiple by a 1x reduction. The GEM transaction, great business. What we've done with this structure is it's got a greater level of coverage of future earnings over the next 3 to 4 years through the security of their order book, an order book with customer base, which has been robust throughout the COVID period in terms of consumption levels. So in this transaction, you've got a lower level of continued -- a higher level of initial, with the contingent being based on securing a further level of order book and the total contract value, which in turn, as post integration of the business, will work at about 4.5x multiple on the full consideration number of GBP 2 million.

Thanks, Paul. So I guess, we then move to the outlook. Basically, the key thing for us now in FY '21 is the bounce back. So it's delivering that Optimization Services cross-sell, making sure that as premises open, we are really on top of driving those projects through. It's about making sure that we scale Software Solutions. So we're in a process now where we drop new product every quarter. Some of the problems we're solving, some of the actual, if you like, services we're delivering, really excited about in terms of the ability to really add material improvement to clients from both the energy accounting, sustainability and ESG disclosure perspective. And then complete that ESG market entry to date, we've been really happy with what we're running. I think we were guiding originally to the idea we expect first revenue in Q3 '21. We've got the first revenue in Q1 '21 and really just enjoying the way that business is evolving at the moment. It's also then about kind of actually not just entering the market and kind of growing the business. It's about making an impact. We mentioned that the SDG is now part of remuneration for Paul and myself and through the organization in terms of starting to embed them in the culture. And if you went across a lot of [indiscernible] listed companies, the SDGs are really kind of being equally embedded remuneration for everybody. What we've done is we've created a tool, which allows us to track the SDG activity of our employees, and we can group that by businesses. So we're going to roll this out for free across our client base, so that any business that we're working with is able to record activity for their employees and then report back as to what SDG behaviors are happening in their organization. Just the first step of trying to make sure that we add value to businesses in relation to some of the [ softer ] side of delivering ESG impacts. And then what we always try and do is we always try and let you know where we're going next. And I guess, the question I've been asked every year for the last 3 years is, do you intend to internationalize the business. I guess, kind of that internationalization theme is one where FY '21 marks the year where it's probably the right time to start to look at that. So we've been doing the work to make sure we understand markets that we would like to enter. Basically, we'll do the work in 2021 to facilitate that and then ultimately look to make some market entries by acquisition. Our focus will be on Europe, and we'll be looking to talk more about that thesis later in the year. But what we quite like about that is we've been expanding our bandwidth. So you'll know we've appointed a Chief Commercial Officer, David Cockshott, and that really helps to provide that bandwidth to be able to deliver some of these, noting that the CCO role is not an Exec Board role, but ultimately one where we can really start to drive out the delivery of the cross-sell thesis for the Energy business and create capacity to deliver on Software Solutions and kind of ESG.