Inspired Limited (INSE) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Inspired Plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received in the meet itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Mark Dickinson. Good afternoon, sir.

Good afternoon, everybody. Welcome to Inspired Plc 2022 Results. Presenting for you today myself, Mark Dickinson, Chief Executive Officer; Paul Connor, Chief Financial Officer; and David Cockshott, Chief Commercial Officer. I guess when we start these things, it's always good to remind people what the company does. So what does Inspired Plc do? We help corporate businesses deliver net zero and respond to climate change whilst controlling their costs. And we do that by meeting 4 key needs: Cost, Consumption, Carbon and Compliance, the 4 Cs, if you will. Now the business operates in 3 of the most topical and exciting macro themes available at the moment. The energy crisis, it's had an impact on everybody. And you'll remember that at our half 1 interims, we mentioned the uncertainty that the energy crisis was causing for not just businesses across the country, but also our own operations in terms of managing client needs and their service levels, et cetera. And what I'm really pleased to say is the group performed well, and David and Paul will walk you through on how the divisions rose to those challenges and also took advantage of the opportunities. Going forward, the energy crisis has really brought utility spend to the top of the [indiscernible] agenda. And energy crisis defense, we believe, is going to be a major positive driver over the next few years. ESG globally, one of the most exciting macro themes out there. There's a strong compliance driver. It's becoming a key requisite in an always attractive investments, and it's also becoming revenue-critical for organizations. When a business wants to win a new logo to its organization now or retain its existing customers, you generally need to provide ESG disclosures as part of that bidding process, whether it's a carbon action plan, a road map to net zero or a social value statement. That theme is really starting to drive behaviors and the Inspired thesis, we're absolutely delighted with the bootstrap entry made into this area 3 years ago, going from GBP 0 to GBP 2.6 million revenues in under 3 years. And Paul and Dave will bring that to life for you in our divisional analysis. The third driver, net zero. Climate change is real. And ultimately, businesses have their responsibility to play their part. What we're finding with that is it's increasing momentum for us to actually help clients intervene and reduce carbon emissions and reduce energy consumptions within the buildings and premises they operate from. This is a long-term driver and you look at how that underpins optimization services, it's got the potential to continue driving growth for the next 25 years. So we operate in 3 really exciting macro themes. How do we do it? So in order to manage those more client needs of cost consumption, carbon and compliance. If you went back to 2018, you would have seen a business that didn't have its own [indiscernible] software, didn't have an ESG services division, didn't have an optimization services division. Over the last 5 years, we've put together all the component parts to be able to be a full suite service provider. And we've done that whilst doubling EBITDA over that period. So now our 4 divisions work in a very symbiotic way. It starts with software. Software is our competitive advantage. Our [indiscernible] software allows us to purchase unstructured data and provide our services to our clients. It's increasingly becoming a market-leading platform, and that's evidenced by the fact we now have 60 other [ TPIs ], some of our competitors utilizing that software and 200 direct companies. So our software provides competitive advantage and is our technology enablement. That leads into assurance and ESG, where our customers enter the business, I'll add in the points. Some great macros in the area, nondiscretionary recurring call-to-action, recurring revenues, we simplify complexity and provide subject matter expertise, and that helps us build C-suite relationships. And when we build those C-suite relationships, it earns us the opportunity to help our customers actually make a difference, to actually reduce carbon emissions and to actually reduce energy consumption. That gives us a drive to be able to significantly increase the client lifetime value of our portfolio. And David is going to walk you through how that business model works later on. From a finance perspective, really pleased with the year in what were really challenging times. Revenue is up 31%, adjusted EBITDA up 6%. We note the reduction in margin of 5%, but that's mainly due to mix. So ultimately, each of our different divisions has a different EBITDA margin and that mix of blend of services, Paul will walk you through how that has evolved. Really proud of cash generation from operations, and we'll bring that to life for you, and Paul will show how that flows through to PBT and EPS. So [indiscernible] Paul and David now to walk you through divisional performance.

Okay. Thanks, Mark. So in terms of the divisional performance. assurance services, this is the kind of backbone and starting point of Inspired. It's at the forefront of cost management. So whether it's energy or water, we're managing customers' costs or clients' costs. And that's in a background where some clients have seen energy prices soar by up to 500%. So it's become a boardroom agenda item. It's absolutely business-critical. It has been a fight for survival in some instances. So the importance of having professionals in your corner working on this for you has never been greater. Same with the complexity, the Energy Bill Relief Scheme was a welcome intervention, but added yet more complexity through an already complex market. So the need for professional support has never been greater. In terms of the performance, revenues were in line with expectations, as was cash generation from this side. We have seen some increase in customer churn to put that in perspective. We would normally quote around 85% retention rates. That's dropped slightly down to around 80%. But that's more offset by a record year for new business. Those are some of the names that are coming in there, [indiscernible] et cetera, really pleased to welcome them in as customers. There has been some increase in overheads to deliver the service. As we said, it has become an important topic to customers, and they've contacted us more often. They put shorter-term contracts that's led to a more admin work to be able to keep up, which has added some additional OpEx to deliver. So Paul, in terms of financial?

Thanks, Dave. So as Dave said, additional churn impacted the top line, which we notified the market of at the interim stage. So we saw a 1% increase in revenue in the division. And in terms of the additional cost, again, reflected in the change in margins, the reduction in margin, and that cost is to ensure that we sustain our level of service, which we believe to be market leading and in doing so, enabling us to develop that client lifetime value that Dave referred to.

Okay. Thanks, Paul. In terms of ESG services now, this is no longer the I ought to, I should do type of business. This is absolutely business and revenue critical. Whatever we as a business are quoting for a new piece of work that we want to win or indeed often retaining clients, we get the RFI, and we have to fill in various sections that will include things like the carbon action program, a roadmap to net zero, a social value statement, all of these things just to get to the start line. If you don't have them and have them in good order, you're not even at the races to win the new business. So it is revenue critical. It's investor critical. You want to attract new investment, you've got to be able to articulate your position on these ESG matters. So from a standing start, bootstrap entry, GBP 2.6 million in under 3 years, with a compound annual growth rate of 129%. It's a testament to our assertion that we have a market-leading product at a market-leading price point. We're the only provider of this bottom-up technology-enabled service that is completely framework agnostic. It can be translated into any taxonomy that's required. Testimony some of the customers there that have taken this service from us at this time. Paul?

Yes. So as Dave said, really pleasing CAGR revenue growth there from an organic entry point in 2020. But importantly, you'll note that we've grown 167% in the last 12 months, which shows an acceleration, which is particularly pleasing to note that when we -- this time last year, we noted the market had improved concept in 2020 and '21. We're going to increase the investment in this area to further accelerate. And then furthermore, when we got to interim stage, we upgraded the expectations for this division because it was performing at the higher end of management expectations. I'm pleased to report that the division performed in line with our upgraded expectation for the year.

Thank you. Okay. optimization services, whether it's cost from the insurance side or its carbon from the ESG side that drive us to actually do something to reduce emissions, reduce consumption, reduce costs are there. Again, it's a board-level agenda item and the pressure to do something and to act on this is absolutely growing. We're doing this from a position of strength from almost within our businesses organization, having gained trust on the assurance or ESG side, we've become the strategic adviser for these optimization services. Strong performance, revenue up 64% in the year, all of which is organic. And there's resilient demand, whether it is from cost or carbon, that those drivers will continue way out into the future, even if prices were to collapse that perhaps they're not yet. But even if they were, the drive for carbon is a 25-year drive. And therefore, will absolutely be there, driving services into that optimization division.

So from the emergence of COVID in 2020, where there was significant disruption to this division, the division has generated CAGR revenue growth of 85%, 64% in the current year and pleasingly contributed materially to cash generation of the group. Hence the group level cash performance, doubling EBITDA in the period and ticking up adjusted EBITDA margin, partly through a reduction, you may recall last year because the division wasn't running at full capacity for the full 12 months because of the levels of disruption in the early part of 2021 as the restrictions were lifted from a COVID perspective.

Thanks, Paul. And obviously, by no means leaves the software services division. This is a business that underpins all of our actions and those are the 3 divisions. It's market-leading and they increasingly recognized and attested to by the fact that we're selling this to 60 third-party intermediaries, our competitors. We've also sold it direct to 200 clients using the platform. It is market-leading. TPIs have always been laggards in terms of technology. But increasing complexity means the spreadsheets and self-build systems are just no longer suitable, and there is an increasing demand for this platform solution that we've invested in. So again, a solid performance in this area. Customers such as IHS Property Services, [indiscernible] taking our services directly from software, demonstrating its value and more good stuff to come. There are several modules expected to release in '23 that will give us further upside potential in this area.

Thank you, Dave. So from CAGR revenue growth in 2020 of 9%, a slight reduction in the period of 5%, adjusted EBITDA remaining broadly stable. EBITDA margin slightly reduced as a result of the acquired businesses in the period, yet to be integrated into the wider group. So having run through the segmentals, if you were just to reflect it from a group perspective on how the group has performed since 2019, noting that we've only segmentally reported in the structure we just run through since 2020. So you'll note a 27% increase in revenue across that period. As the pie charts demonstrate on the right-hand side, we've seen that change in mix. So the Assurance business, previously the largest contributor to the group in '21, now in '22, the optimization services division is the largest contributor to the group, which has led to the reduction in margin and therefore a CAGR EBITDA growth of 8%. That's reflected in the CAGR PBT growth of 3%, noting that the amortization of some of the expenditure report and capital expenditure into our platform over the last 3 to 4 years has started to flow through into amortization and plus an increase in interest costs as a result of the higher levels of net debt. What does that mean from an EPS perspective? So the fact that -- despite the fact earnings have increased across that period, you see a 9% reduction in EPS. And that's driven by in 2020, you'll recall the significant equity raise, which ensured we strengthened the balance sheet in times of material uncertainty, but it also allowed us to continue with our strategy in terms of M&A in acquiring the strategically important Ignite acquisition and then subsequently, the business-wise acquisition in early 2021. In terms of cash flow performance, as Mark touched on, really pleased with the cash flow performance in the period. That was coming off the back of an abnormal cash flow period in 2021, where we saw that GBP 9 million increase in receivables as we emerge from COVID from a period where, by the end of 2020, we had a really low rundown trade receivables position as the group was back into -- or the optimization services division was back into a position where all the [ WIP ] had been built and all the invoice cash have been collected. And this year, we've seen a 100% cash conversion performance across the group, which is particularly pleasing. And we're able to guide the market as we continue to focus on the working capital cycle of the optimization division to an expectation of 80% to 90% cash generation in '23 and beyond. You'll note there the contingent consideration payments in the period. So this is performance-related payments in the form of contingent consideration for those acquisitions. And we'll go on to the way which we structured acquisitions and why we structured acquisitions the way we do in a couple of slides time. Also in the period, a reduction in the spending capital expenditure, we noticed some exceptional stuff that we -- in 2021, that wouldn't be repeatable, hence, the reduction there. And also a tick up in interest costs in the period as well due to the high levels of net debt through the period and an increase in interest costs. From a balance sheet perspective, so net debt for the period increased by GBP 4.3 million. So that strong cash generation from operations in terms of free cash flow, allowed us to fund the performance related contingent consideration payments in the period. Net debt expectation for the end of this year, so broadly remaining flat from a leverage perspective, so 1.77x at December '22, 1.74x at December '23, noting that there was performance-related payments for those acquisitions, we expect will be circa GBP 30 million in 2023, GBP 2.6 billion of which will be payable in shares and offsetting the free cash flow of the group in that period. So in terms of M&A, noting that the performance-related payments attached to M&A have been a notable number within both the P&L and the cash flow in this period. We thought it was worthwhile reminding people of our acquisition principles and how that translates into performance-related structures. So we structure transactions determined by the specific acquisition thesis for that deal. So you've got revenue synergy transactions, cost synergy transactions and capability and enhancement and will structure deals accordingly to maximize those opportunities. We structure transactions to incentivize vendors to succeed through performance-related structures in the form of contingent consideration. We'll object the transactions are earnings enhancing within 24 months of completion. So what do performance-related payments allow us to achieve? So we only pay for EBITDA once delivered, so we won't pay for forecast EBITDA. And in doing so, that allows those acquisitions to contribute to cash of the group in the period and where possible being part self-funding. They allows us, importantly, again, to remain acquisitive through times of volatility, and that was clearly apparent in 2020 and 2021, which have allowed us to complete those strategically important acquisitions and position the business really well to deliver that doubling of EBITDA organically over the next 5 years. It allows us to incentivize vendors to firstly transact and then subsequently deliver the acquisition thesis as set out above. And also support the wider group and a successful integration throughout that period. And the outcome we've achieved as a result of that, multiples paid for acquisitions have averaged less than 4x adjusted EBITDA. We've protected shareholder value throughout periods of significant volatility, which has never been more evident in 2020 and 2021. And where relevant, in future, we will continue to use performance-related structures to ensure we maximize the outcomes from our acquisitions completed by the group. And now I'll pass to Mark to take us through the ESG performance.

The divisional performance, we've been reporting it for almost 3 years now, and that really starts to show how each division has got its own characteristics, and they're built into an overall strategy that is very symbiotic. Really pleased that since 2019, we've delivered the compound annual growth rates that we have. You'll know the 8% EBITDA growth rate, and that thus had a COVID effect. So if you go back to 2019, we came to you all with a thesis that we would do these things and we would create a double-digit EBITDA growth machine. If you normalize out 2020 from a COVID effect and just gave me the credit of staying flat in 2019, this is a double-digit EBITDA growth machine. Now ESG, one of our most exciting verticals and ultimately we would not be a leading authority on it if we didn't do the right things from an ESG perspective ourselves. So what I want to walk you through is how you can interpret our business from an ESG perspective. So this is our disclosure suite. You can find this all online. The TCFD and ESG we updated 2022 when we released our annual report. And ultimately, when you look at businesses in your portfolio, if they are not doing this, they are not doing it correctly. Ultimately, this is a direction of travel where what we see is a large amount of momentum for businesses to need to do these things even if they're not actually required to from a compliance perspective. Because ultimately, all ESG disclosures require amalgamation of the supply chain, which means that businesses who are not directly affected, it becomes revenue critical for them to keep their customers who aren't. So there should be a streamlined energy and carbon reporting a second report that does Scope 1 and Scope 2 emissions. There should be a carbon balance sheet, that does Scope 1, 2 and 3, and it's what allows a business to really show its progression to net zero year-on-year, how it's being achieved, how it's achieving carbon neutrality it wants to, and ultimately the carbon cost of its operations. Some people will say, well, I'm only going to report 2 or 3 categories of Scope 3 because they're not material. For me, that really sits there and misses the point. All of the categories can be done. It's not that hard. Businesses just need to organize the data and make the disclosure. TCFD sets out the risk and opportunities in relation to climate change and it's important that business publishes both the disclosure and an index. What the index does is it effectively puts the points to the taxonomy and allows analysts to look and find the right parts of the disclosure that address the point that's required from taxonomy. So doing those things, having both of them is a really important way to get an effective ESG rating. If the companies in your portfolio aren't doing that, then they're not ultimately giving the information to the rating agencies in a way they can utilize effectively. Finally, the ESG function reports, we disclosed to a GRI taxonomy. You could use SFDR. There's lots of them to use. The point being that when we do it, we can actually produce our report and in a taxonomy and framework agnostic way. So it's in the eye of the beholder. Now how this manifests itself in a level of professionalism is we often get inquiries in from our investors asking us to complete questionnaires. A lot of businesses, when they do this, they're putting down a 2 or 3 line answer that's pretty much made at the same day just to get the cash out of the desk. For us, we're able to actually point to the specific places in our disclosures that allow us to give the investor confidence that there's some robustness behind this process. And ultimately, you look at the marketplace here, you've got the big firms like Pricewaterhouse, Deloitte, Grant Thornton all operating in this space and you've got [indiscernible] who really take a different approach and instead of being advisory down, were data-driven bottom up. What that gives us increasing confidence of is that we have a market-leading product at a market-leading price point. And that's testament to the growth we're seeing and the demand for their services. So ultimately, we've invited to go and engage in our disclosure suite, look at it and if you have any questions, clearly, send them on to the team. The other thing we do is make sure that we consider ourselves the way the outside world sees us. So we've now deployed software, which a number of fund managers use to actually evaluate all the companies in their fund. This is the Inspired page, this is how we look. And ultimately we allow -- the software allows the fund managers show their ESG performance of all the companies at a fund level, at a holding level, and we also do the controversy monitoring for them. The key thing here for us is not that this is an amazing market. It's probably only a GBP 20 million market in the U.K. But what is very good for is really starting to help us engage with the companies that are in those portfolios, so we can help them improve the way they are perceived by the world from an ESG perspective. So what we're going to do now is I'm going to ask David to walk you through the business value proposition, bringing to life how we really now build and focus on client lifetime value so that having delivered a doubling of EBITDA over the last 5 years, we can organically do it over the next 5 years.

Thank you, Mark. Okay. Our market, we've talked about some of these, but there are some really, really strong business drivers for this; high prices, extreme volatility, huge complexity. Indeed, for some customers an increasing credit requirements post collateral even before they can start procuring these some real strong business drivers for professional support. On the ESG side, we've already discussed [indiscernible] revenue critical. It's no longer reluctance compliance. It's about making sure your business can still sell and operate within your supply chain. It's investor critical, investors more and more are looking for good ESG credentials to direct their investments. It's legal and it's all about the whole business ethics. That results in the 4 liens. The need for help on cost, help to reduce consumption, help reduce carbon and help to make sure they're compliant. We think we've got the unique position to be able to help on all 4 elements of this. If we take the customer numbers now, on the Assurance side, we have around 850 of the large clients, which are generating a gross margin of around GBP 20,000 per year on average. We take a 10-year CLV or client lifetime value, that gives us around GBP 200,000 CLV. The 1,600 smaller clients with GBP 5,000 per annum will give a CLV of GBP 50,000 each. We also have some very small clients with a more modest contribution. We then have large ESG clients, of which we do have 44 at the moment, that generate GBP 40,000 per annum on average each or GBP 400,000 CLV. And 57 entry-level ESG clients with around GBP 8,000 per annum or GBP 80,000 CLV. But on top of that is the optimization. Now it's almost impossible to try and put that into an annual value because it can fluctuate. But over the 10-year horizon, we expect a large customer to deliver GBP 2.5 million of CLV and a small optimization customer, around GBP 400,000 of CLV. Now to put in context, we'll talk in a moment about a very real example of where the CLV is far, far in excess of that GBP 2.5 million or more of that in a moment. If we actually look at the number of clients that are taking all 3 services from us in 1 year, last year there were 12 large-scale clients with an average of CLV 3.1 million CLV and 15 small clients with an average of GBP 500,000 CLV. That's just active within the year. If we extrapolate that out across our entire customer base, then our opportunity is GBP 3.6 billion CLV. Now of course, we're not going to do that all at once, but let's just set the aspiration now, to go from 12 in a year up to 25 in a year. Now that might be some of the same 12, you might be on that journey to 2027, that there'll be some customers come in and go out from an optimization perspective. We just acted within that year, we're active with 25 large and 75 small, 100 total clients, would increase the gross margin by GBP 73 million. And that's just been operational with 3% of our customer base at that one moment in time. So the surface area opportunity is immense. We move on to the [indiscernible], some famous household names there that you'll understand and you'll recognize. But let's bring this more to life with a real example. Those of you that searched through this last year, this is not the same retail, it's the different retailer, high street retail, 500 stores. They've been a group client since 2010, and we deliver around GBP 1.35 million of Assurance services over the lifetime of the client. The average spent over those 13 years has been GBP 1.7 million per year on repeatable projects. We've reduced their consumption by around 30%. Now starting in 2010 with [ LED ]. And that was a rollout across all stores. So that carried on for a number of years. We then moved on to controls installation. And again, there was a rollout continuing over a number of years dependent on the ability to deploy capital. Eventually, 2020, we come back around to upgrading the LED lighting. And the reason we're doing this is because of the need we are satisfying. The need we're satisfying is the desire to understand where to spend the next pound of capital to offset or remove that marginal unit of wasted excess consumption and therefore carbon emission. So it creates this virtuous circle and sort of referred to you like painting the Forth Road Bridge. As soon as you think you're finished, you start again. So it's a repeatable demand that will continue on. As attested to, but the fact there's a further GBP 4.7 million worth of projects in the pipeline, delivering a further 30% reduction on top of that which we've discussed already. The CLV to date, GBP 23.7 million. And that's not extrapolated, that's real. Those are real numbers. But let's take that to the opposite extreme. These are 4 disparate customers. The only thing they have in common is they're taking EMAS, Energy Management as a Service from them. Energy Management as a Service is a subscription-based model, the opening up optimization services to smaller clients. It's about that real granular understanding of what's happening on the side, where energy is being used and more importantly, where it's being wasted. And then leading to the optimization projects to say, this is how you can reduce consumption. These are the projects that could come off the back of it. So EMAS in its own right is a driver to increase the lifetime value, but more importantly, an opening towards the optimization-type projects. Third and final example, completely different one again this time, [ making pay ] the manufacturing organization. We started with this in 2020 is a relatively small piece of educational work around how we can support their number to control energy costs during COVID. During 2021, we developed a net zero toolkit, mainly for small size manufacturers just to help them understand some of the requirements and how to develop a plant in net zero because they were, as we said, being asked by their supply chain, the questions that we've been referring to on the ESG section. So we help them the toolkit just to start to understand where to go with that. We extended that latter half of '21 into a subsector roadmap to that net zero [indiscernible]. Fast forward to '22, and we have now built up that trusted adviser status with the organization and indeed a number of the customers. We've on boarded 23 new logos and delivered GBP 750,000 worth of revenue across those customers with countless more opportunities to go out on top of that as well. So again, example of a trusted adviser partnership and being able to sell one to many. Mark, I'll hand back to you to take us through the year 2023 and beyond.

Thanks, David. So hopefully, what you've been able to see is that not only have we done what we said we do all the way along, creating this double-digit organic growth engine, but now by putting and together a portfolio of a large number of clients with the opportunity to deliver significant growth in client lifetime value. You're looking at the factor of 10x growth on that client list in terms of the value that can be generated over that 10-year life. And whereas some organizations might be using CLV to protect an aspiration, we're demonstrating empirical CLV that we've already delivered multiple times, and we're in that process now of really accelerating the cross-sell throughout the portfolio. So let's just look at where we get to for 2023 and how the year started. Ultimately, the new normal created by the anti-crisis still has some potential to create a range of uncertainty in the Assurance division. But increasingly, we're seeing that defense against the energy crisis, macro theme emerge, and we believe that ultimately that translates into an opportunity. And we're focusing on increasing lifetime value of existing clients. And ultimately, we've taken into the year the momentum to meet our market expectations. And those market expectations at the moment show that we're going to do that double-digit EBITDA growth in 2023. That's ultimately what the thesis says and how we started the year. And also, we're going to deliver that 80% to 90% cash conversion, noting the great work that's been done in 2022, we expect that to continue into 2023. What we also want to do is make sure the market fully understands our aspirations. So between 2017 and 2022, we doubled EBITDA and went from being an Assurance services business to a full service suite solution for the 4 Cs. And those macro themes of ESG and net zero have really coincided well for us in that regard. We have a large portfolio of clients with very high retention rates that give us recurring revenues, which then allow us to have the opportunity through our C-suite relationships to really start to increase that client lifetime value. And ultimately, you can see our aspiration to double EBITDA over the next 5 years organically. That's achieved by client lifetime value, building on recurring revenues, building on repeatable demand and from the optimization services, playing to that strong ESG macro theme and playing to that strong net zero macro theme. So if we put that all together, in summary, strong results in '22 against a challenging backdrop, excellent opportunities from optimization services and ESG services, our focus on client lifetime value and a 5-year aspiration to double EBITDA. Again, thank you very much for your time. Any questions?

Mark, Paul, and David, thank you very much for your presentation. [Operator Instructions] As you can see, we receive a number of questions throughout today's presentation and the first question reads as follows. Do you see the growth in optimization services as a sustainable trend? Or did it spike as a result of the energy crisis?

Do you want to take that, Dave?

I will, yes. So [indiscernible] is a sustainable trend, absolutely. So there is no doubt that high energy prices made ROIs much more attractive and brought this right to the very, very top of the pile. But actually, the longer duration carbon net zero drive is here to stay. And it's fundamental to the way in which businesses will operate. So I think the drive the pipeline for the optimization services is absolutely sustainable and growing and we'll continue to do so for as long as we concern.

The next question here asked, can you provide more color on customer retention in Assurance Services as the announcement referred to increased customer churn?