Inspired Limited (INSE) Earnings Call Transcript & Summary

Yes. Thanks, David. So since the emergence from COVID in 2020, we've seen this division generate 85% CAGR revenue growth, 64% in year-on-year in '22, reflecting that further acceleration in the period. That's translated in a doubling of EBITDA for the year and an increase in margin. Acknowledging that at the start of 2021, the division had a level of disruption from ongoing COVID restrictions, so last year, the division didn't run for a full 12-month period of full capacity, whereas the margin this year is broadly in line with the circa 20% that we guide to for this division.

And last, Software. Software is the service that underpins everything that we do. There is so much data unstructured format that has to be assembled, analyzed and really understood. Our platform, we believe is the market-leading platform. The environment -- TPIs typically have been technology [ laggards ], they haven't invested in it. Ever increasingly, though, the complexity in the market means that spreadsheets and self-build programs are just no longer suitable. It requires that platform-based technology to be able to deliver the solution for clients. That's why 60 of our competitors are using the software that we have developed. There's also 200 direct clients using it for their needs as well. So a solid performance in the year with customers such as NHS Property Services, Peabody, Laser and SMS Plc, all using the service. And we have many more modules coming ready for release within the next year that will just make this service even more valuable to Inspired and indeed the rest of the market. And financially, Paul?

Thank you, David. So CAGR revenue growth since 2020 in this division of 9%. You'll note a slight reduction in that in 2022, which we believe is a reflection of conditions from a macro perspective. Adjusted EBITDA remaining broadly stable. EBITDA margin slightly down in the period, and that's a reflection of the acquired businesses in the period yet to be integrated. Okay. So if we now go on to the group performance and how the group performed since 2019. Note that we've only segmentally reported since 2020. So you'll see that the group delivered CAGR revenue growth through that period of 27%. And you'll see the pie charts on the right-hand side there that we've had that change in revenue mix. So the Assurance business in '21, previously, the largest revenue contributor to the group. '22, the Optimisation division is now the largest contributor to the group. And that reflects in the change in margin of the group. You see there, that's CAGR EBITDA growth of 8% and the CAGR PBT growth of 3%, with the impact of the amortization costs from some of our capital expenditure into our tech platform, flowing through into PBT as well as an increase in interest cost during that period. If you look at the right-hand side, what does that mean to EPS? So despite the fact that earnings during that period have increased, EPS is reduced by 9%. And that's a reflection of the significant equity raise the group completed in 2020 to strengthen the balance sheet and facilitate the strategically important acquisitions of Ignite and subsequently business-wise, which have enabled us to develop that confidence of being able to double EBITDA from an organic perspective over the next 5 years. If we then move on to look at the cash flow, so particularly pleasing performance in terms of cash generated from operations. So we generated cash conversion of north of 100% in the period. And that's [ falling on from ] an abnormal period last year in our Optimisation division, which was emerging from COVID by the start of 2021 and accelerated in a reduced trading period as a result of the disruption of COVID in the first 4 or 5 months, which caused that distortion of the trade receivables movement. In terms of cash flows from investment activities, so significant outflows for the performance-related payments by way of contingent consideration for the acquisitions completed in that period. And we'll touch on it in a minute why the business has [ struck to ] transactions the way it has and the merit of doing so. A reduction, as signposted, in capital expenditure as we continue to develop the service and products of our tech-enabled service and a tick-up there in interest costs in the period as a result of the group running at a higher level of net debt and also interest rate costs increasing throughout 2022. So the increase in net debt as a reflection of the outflows for investing activities, netting off against that generation of cash from operations, so a GBP 4.3 million increase in absolute terms. 1.77x from a leverage perspective at December, net debt to EBITDA. We're guiding that, that will remain broadly flat by the end of 2023. Again, that's a reflection of, you'll see, the continent consideration payments there in the current liabilities line of GBP 13 million relating to performance of the acquired businesses in 2022, noting that GBP 2.6 million of that GBP 13 million is to be payable in shares. You also note, subsequent payments again, performance-related payments and noncurrent liabilities, which we expect to make in '24, for performance of those businesses in '23. So we thought it'd be a good time noting the impact of the performance-related payments attributed to acquisitions in both the P&L and the cash flow in 2022 to reflect on our acquisition principles and why we structured transactions the way we have and will continue to do going forward. We structure deals individually and specifically determined by their acquisition thesis. So whether we're looking to a revenue synergy play, a cost synergy play or a capability enhancement, we'll structure deals to incentivize vendors to succeed through performance-related payments by contingent consideration structures. We'll ensure that transactions are earnings enhancing within 24 months of completion. So why specifically performance-related structures? We will only pay for EBITDA that's real, so we won't pay for forecast EBITDA or multiple of forecast EBITDA. That ensures that the acquired companies are contributing cash to the group and where possible, the transactions can be, in part, self-funding. It provides us the ability to remain acquisitive through periods of significant market volatility, like we saw in 2020 and '21, when we completed those strategically important acquisitions. We're able to incentivize vendors to: firstly, transact; secondly, deliver our acquisition thesis collaboratively and also support successful integration through that period. The outcome has been that we've paid, on average, less than 4x adjusted EBITDA for our acquisitions. We've protected shareholders against downside risk. And the intention will be to continue to structure transactions prudently to ensure that we maximize the outcome from those transactions. So I'll now hand back to Mark to take us through the ESG performance.

Yes, absolutely. Thanks, guys. I think one of the key things for us is having seen the challenging circumstances of 2022, really delighted with how the group has performed. And when you think about that growth rate, the 8% EBITDA growth that we've delivered since 2019 having endured COVID, if we hadn't had COVID there, that would have been double-digit EBITDA growth. And that was something we said to the market back in 2019, was something that we'd be there to achieve and design into the business. Now ultimately, we touched on the idea of the organic entry into ESG and how important and exciting is the macro theme, so we can't be significant service driver to that macro if we're not a leading light in ESG performance ourselves. So if we look at our disclosure suite, the key thing about this is when you look at businesses in your portfolios, businesses that you cover as analysts, ultimately, if they're not doing this level of disclosure, then they're still some way further back on their journey. This, to our mind, is where our disclosures go to for investors to have a proper understanding of the business from an ESG perspective. So it starts with streamlined energy and carbon reporting, which basically provides insight into a business Scope 1 and Scope 2 emissions. It's really important, the businesses in your portfolio provide a carbon balance sheet. That carbon balance sheet layers in Scope 3 emissions and is fundamental for a business to be able to understand its carbon cost of operations and how it might achieve carbon neutrality and be in a place where it can bridge from year-to-year on the impacts of the steps it's taken. Task Force on Climate-Related Financial Disclosures, TCFD, that's becoming increasingly mandatory and there will be 1,800 businesses by 2025 that are obliged to provide TCFD report. Now we've been on that voluntarily for the last 3 years. And it's really important when you get these, you don't just get a TCFD disclosure, but you produce a TCFD index. That's going to allow all of the ESG analysts and the ratings companies to really understand where in your disclosure, the [ personent ] piece of information is. Once you're doing TCFD, those who are really looking to make sure that investors can understand the ESG [ product ] business should be doing an ESG performance report. There are many taxonomies for this. We use GRI. And similarly, it's about producing the performance reports and the disclosure. So from that perspective, all of these are available on our website. And what we also find is that when you get queries in and questionnaire from investors, there's a really strong way of responding to these. And that's by -- when you have those questions, rather than putting a 2-, 3-line answer, which we suspect most of your portfolio companies do, you can actually go to that answer, give the headline, but then link to the appropriate [ patent ] disclosure and the appropriate [ patent ] index. So from our point of view, if businesses aren't doing this right now, it's what they will have to be doing in the next 2, 3 years. So ultimately, we try and lead the way on a voluntary basis. Another important thing then is as a company that we understand how we look to the outside world. So as one of our services, we'll provide for fund management investors actually ESG evaluation dashboard for all companies in that portfolio. And this is the result for ours. So this is what we look like. And ultimately, it's really important that investors can actually analyze and benchmark companies across the portfolio from an ESG perspective. So what I'm not going to do is I'm not going to go through in detail how we performed each metric, it's all there in the public domain, it's all clearly signposted, and I would invite everybody to go and engage with that and evaluate us and feel free to fire in questions as people interpret that data. So if we've ultimately got the strong thematics, we've had a good performance in 2022 and we've got the 4 divisions that really start to work well from Software to landing customers on Assurance and ESG to the potential of increasing lifetime value to Optimisation Services. What Dave's going to do now for you is really bring that to life, both in terms of the operating model and some client case to this.

Okay. Thanks, Mark. So a reminder, our market -- the drivers for our market, energy, it's really high prices, extreme volatility, complexity. And indeed, something we've not touched on yet is those increasing credit requirements for customers before they can even start buying the energy, they've got to start posting collateral in many cases. From an ESG perspective, we've demonstrated how it is absolutely business-critical. It's not a "I might do, I should do, I ought to do." It's absolutely critical from both an investor and a revenue perspective that you have this ESG understanding and a plan to improve, let alone the legal compliance, and it all goes to very heart of business ethics. Okay. So what does that translate into? The 4 Cs, the needs of the business, the control cost, control consumption, comply and reduce carbon. We are uniquely positioned to be able to help on all 4 elements. We look at our customer numbers. The Assurance business, we have around 850, what we call large clients, generating gross margin of GBP 20,000 per year. And if we take that over a 10-year cycle, the client lifetime value, the [ 10-year ] lifetime value, GBP 200,000 per customer of those large clients. Smaller clients, around GBP 5,000 per year. We have 1,600 of those, and they will generate a lifetime value of around GBP 50,000. We have also some very small clients, generating around GBP 2,000 a year, with GBP 20,000 lifetime value. If we flip to the ESG side, we've got 44 clients at a large scale that are generating gross margin of GBP 40,000 per year and a lifetime value of GBP 400,000 and 57 of what we'll describe as entry level where they're just starting on that journey, gross margin of GBP 7,500, GBP 80,000 lifetime value. And now on the Optimisation side. It's harder to put that into an annual figure because they sometimes come in kind of burst and [ lumps ]. But on a large organization, we'd expect that to be GBP 2.5 million over a 10-year cycle and on small organization, GBP 400,000. Now just put that number in context from a moment, we'll come back to this as one of the case studies. GBP 2.5 million is not just a number we've plucked out of the air. It is a reasonable figure. Actually, we'll give you an example of where that lifetime value from the client is, GBP 23.7 million and growing. Well, anyway, if you add all of those three together, if you get the full-service clients that take all of our services, the large-scale lifetime value of $3.1 million. We have 12 of those at the moment. The full-service smaller clients, lifetime value at GBP 0.5 million. We have 15 of those at the moment. If you multiply those, GBP 3.1 million or 0.5 million, out by all of those customer numbers, you get a current client existing opportunity of GBP 3.6 billion. So again, to put that back into context, 2027, if we are working during that year on 25 large full-service clients and 75 small full-service clients, that would generate increased gross margin of GBP 73 million. And at that moment in time, we would just be working on 3% of our existing client opportunity. So the market is there, the scale is there for us to really drive this home now. The [ EGO world ] kind of just speaks to that, some very famous perhaps of names in there that our clients have inspired that are taking our services. But let's bring this to life, okay? This is a case study on a high street retailer. They have 500 stores. They've been a group client since 2010. And over those last 13 years, on average, they spent GBP 1.7 million each year on repeatable projects, and that's to reduce their consumption by around about 30%. Now you can see, we started in 2010 doing LEDs, lighting. And that was a rollout program over all the stores. So it was done on a gradual basis over the first 3 or 4 years. We then moved on to control installations, again, rolling [ lightings ] out over subsequent years. You'll see, in 2020, we've gone back to upgrade the LEDs. Why is this? It's the need that we're solving for the client. The client needs to reduce and remove that marginal unit of carbon or units of energy consumed or cost. So they want to know where to deploy their next pound capital to remove that next marginal unit. That's what we do, is we continue this virtuous circle of going around and removing the next units of wastage. Lifetime value at this time today, GBP 23.7 million. There's a further GBP 4.7 million of planned expenditure already identified and already planned that will reduce consumption by a further 30%. So a great example there of the repeatable demand nature for Optimisation Services. But let's take it to a completely different scale. These are 4 completely separate, disparate clients. The one thing they have in common, though, is they're taking Energy Management-as-a-Service, or EMaaS, from us. EMaaS is designed to make Optimisation Services available to smaller clients. It gives granular-level understanding of where energy is used and more importantly, where it's wasted. And part of this subscription-based service [ buys ] time with the experts to be able to interpret that data to understand and identify opportunities to reduce wastage or improve efficiency. It support ESG disclosures. And the product of itself almost doubles, in every case, the lifetime value of the client. But that's not the past is that it gives us those opportunities to move out into the Optimisation Services and develop the relationships with the clients even further. Final case study is something completely different, make U.K. the manufacturing organization. Example of our sales of one to many. We started with them on a kind of advisory service, small piece of work, just helping their members control energy costs during COVID. That moved on in 2021 to designing a net zero toolkit for small manufacturers just to help them start to get their head around what they needed to do to deliver a plan for net zero. We extended that in 2021 [ latter ] half to different sector-based net zero road maps. And in 2022, fast forward to last year, we delivered GBP 750,000 worth of revenue against 23 new logos. And that's just the start. The opportunities with those customers are many and wide ranging, all of which though has been built from this trusted adviser status, starting giving the advice, helping and then moving on into the trusted adviser status. So three very different examples there of repeatable demand of the need for understanding of energy on a granular basis for our smaller clients and the relationship building that we've been able to establish. Mark, I'll hand back to you.

Thank you, David. So I guess kind of ultimately, we've gone through the macro themes. We've seen how the business has transformed. If you went back 5 years ago, there was no Software Services, there was no Optimisation Services, there was no ESG Services. So we've done a significant amount of transformation, and we've doubled EBITDA over the last 5 years, whilst we've done it as well as battling COVID and an energy crisis. So what's that holds for 2023? So if we look at the current year, we've got a new normal created by the energy crisis, accelerating demand and really bringing things up the boardroom agenda. From our perspective, we've got focus on increasing lifetime value. David has taken you through the examples of where we can make a material difference as we start to work on that client base. And what's really interesting for me is I look at some of the analysis and people make and CLV metrics. And it strikes me that sometimes that's very aspirational. People have got 2 years evidence, and they're trying to show how good their business is because they extrapolate forward over a future time period. Our GBP 23.7 million CLV from the example clients is empirical evidence. It's factual history from realized long-term relationships. So how does that translate into this year? This year, if you look at the market expectations, we're expecting from a management point of view to deliver between 12% and 15% EBITDA growth and deliver 80% to 90% cash conversion. So really bringing into the 2023 year the momentum on cash conversion that we had in 2022. What else will take you through is our growth aspirations. So we've got that track record of doubling EBITDA, and we're going to do it again. So -- but this time, [ the first bit ] was transformationally increasing capability with a lot of acquisitions. And we've currently got all the pieces on the board now to build EBITDA organically. There'll still be an M&A thesis later over the top, but ultimately, we don't need that to deliver, in our opinion, that FY '27 aspiration. We're going to do it by focusing on lifetime value. And if you extrapolate out the numbers, we have to be active on site in the premises reducing carbon emissions, reducing energy consumption in 2027 and with around about 3% of our portfolio. What drives that ability to increase CLV? Recurring revenues on the Assurance and ESG businesses, repeatable demand Optimisation Services and really play in the strong macro themes of ESG and net zero carbon. So bringing that all together, strong results against a challenging backdrop, excellent opportunities for Optimisation Services and ESG Services, our strategic focus on client lifetime value and our aspirations to organically double 5-year EBITDA. Again, thank you very much.