Inspired Limited (INSE) Earnings Call Transcript & Summary

Good morning, and welcome to the Inspired plc full year results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company can review questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Mark Dickinson, CEO. Good morning.

Good morning, everybody, and welcome to the 2023 Final Results Presentation for Inspired plc. Presenting for you today is myself, Mark Dickinson, Chief Executive; and David Cockshott, Chief Commercial Officer; and Paul Connor, Chief Financial Officer. What we're going to do today is remind you what business does. Ultimately, how we help businesses manage that transition to net zero and ultimately, that's driven by a cross-sell engine, which this year, I'm really pleased to be able to bring to life for you through a set of nonfinancial KPIs that we've published for the first time. Paul and Dave will then work through each division, bringing this to life before Paul focuses on the financials. And then I guess as an ESG company, which is really starting to build a best-in-class service, clearly, we have to walk talk. So I am going to update on our ESG performance before giving an outlook on FY '24. So if we remember what the business does over the last 4, 5 years, we've been transforming into a full suite sustainability services provider. There's 4 divisions offering complementary services, diversifying our revenue line. And ultimately, we start with the Assurance Services division, where we help corporate businesses manage their energy cost equation. Our ESG services division effectively helps those businesses make their ESG disclosures, which are becoming a revenue and investment critical item for businesses. Both of those divisions operate on a process of binding a lot of unstructured data, really starting to solve complexity for each of the customers and managing what is a nondiscretionary call to action. But all roads lead to a carbon action program, which really then sets out each business strategy to deliver net zero and then our optimization services division actually helps them implement their solutions and actually move those units of carbon emissions and those units of energy consumption. All that's underpinned by our Software Services division, which provides our own proprietary software to the marketplace and is increasingly recognized as the market leading platform. These 4 divisions together help our customers manage the 4C's of cost, consumption, carbon and compliance. If we think about our customer base, ultimately, a list of brand names to die for, and ultimately our relationship with these customers often at C-suite, which really underpins our cross-sell opportunity as we start to help them manage that transition to net zero. The business operates in marketplaces, which deal with major challenges for clients, which perform or contribute to effective tailwinds for our business. So the first one is energy crisis defense. The energy crisis in 2020 created a lot of EBITDA and cost shocks, for corporate businesses and none of them want to experience that again. So we find increasingly that businesses are concentrated in this at the C-suite level. It's a broad agenda item and one where they're willing to really now start to be creative about how to avoid the potential for future energy cost shocks. ESG gives us a marketplace where ultimately the need to make disclosures is becoming nondiscretionary. There's a lot of mandatory compliance regulations coming through new ones every year, which are bringing more and more businesses into mandatory reporting. But the key thing about this ESG disclosures is ultimately what they do is they also encumber supply chain, so for all the business have to do it, you can multiply that by a factor of 10 in terms of those who are increasingly seeing ESG as a revenue-critical item and an investment critical item. The final macro theme is really that transition to net zero. Ultimately, net zero is a societal problem, and all corporate businesses need to play their part. Now one question we often get is, well, is this a flash in the pan? Is it going to endure? So if we look at the government statistics as to what it will cost U.K. businesses to transition to net zero between now and 2050 in relation to industrial and commercial buildings and improving industrial processes, the estimated cost is GBP 138 billion. Now where we sit today, we're sitting here with a marketplace where we can clearly see GBP 0.7 billion of that which would indicate that U.K. PLC is somewhat behind in its transition to net zero, but what the Inspire platform does is basically provide a pathway to that opportunity to help customers meet that challenge and that cost of delivering net zero over the next 25 years. As we do that, a key element of our business plan and strategy has been our cross-sell opportunity. So we land our clients in insurance services and ESG services where we process a large amount of unstructured data, solve complexity for what is a recurring revenue line, which helps manage a nondiscretionary recurring call to action for copper businesses to solve those challenges. As we do that, we have many touch points with our customers from the energy manager to the procurement team, facilities manager, Investor Relations, accounts team and ultimately working our way up to C-suite. As we do that, we're in the room with those customers, when they're actually asking themselves the question, how do I deploy my marginal unit of capital to deliver my next marginal unit of reduction in carbon emissions or energy consumption." And when we're helping with that process, Ultimately, that leads to those optimization projects where we're actually delivering the solutions into their infrastructure, which remove those units of carbon emission and energy consumption and actually makes a difference to them in implementing their journey to net zero. In terms of FY '23, ultimately, I'm really pleased to report that we've done exactly what we said we were going to do. The transformation we've made into a full suite sustainability service provider was to create a double-digit organic growth business, which I'm pleased to say we did in '23 from both the revenue, adjusted EBITDA and adjusted PBT basis, driven in part by a slight tick up in EBITDA margin. Cash generated from operations of GBP 18.7 million, a little bit down on 2022, but purely driven by the timing of projects towards the end of the year. If we look at cash conversion up to February '24 on an LTM basis, in excess of 100%. And Paul is going to bring that to life for you later on in the presentation. But I think the thing I'm most pleased with is the group's ability now to give investors more insight into actually our operational performance. So we've been building up this diversified business with a cross-sell opportunity and lots of businesses talk about being able to cross-sell, but not many actually do it successfully. We now have historic KPIs, which really show the progress we've been making in this regard. So when we look at our business, the number of clients supported by multi divisions is now in excess of 600 double what it was in 2020. Not only do we want to increase the number of clients by multiple divisions, but we want to increase the spend that those clients are making. So we look at clients who spend in excess of GBP 50,000 a year with us year in, year out. and ultimately, really pleased to say that's also doubled since 2020. And of those clients spending more than GBP 50,000 a year, more than of 219 of them are actually taking services multiple divisions, which really shows how value creation is driven by that cross-sell process. But the key thing is to actually make a difference to those clients in relation to their journey to net zero. So it's really telling to look at the number of optimization projects we were active with clients in within the year. And so in 2023, we had active optimization projects with clients, 370 of them, again, double what it was -- 2.5x what it was in 2020. And of those, we've spoken about it quite frequently, but I'm not sure we've been able to evidence it to date. What's really important is that of the 370 clients more than 50 of them were repeat optimization customers. So what we see is that ultimately, it's not a case of just doing one project, one technology, we're in that room, helping those customers answer that repeatable demand question, how do I reduce my next unit of carbon emissions, my next unit of energy consumption? And I'm pleased to say that we're really delivering in that regard. We've spoken a lot in the past about really starting to focus on client lifetime value. And to date, what we've been able to show you in previous presentations is some of the case studies where we can empirically evidence that we have clients, we've worked with for over 10 years where their client lifetime value has been in excess of GBP 5 million, GBP 10 million, GBP 15 million, GBP 20 million. And what we've now been able to do is really extend that metric across the portfolio, so if we look at the CLV potential of our portfolio as it stands currently, we've taken the active clients in 2023 and looked at, on average, what have they spent with us each year back to 2020, and then extrapolate that on a 10-year basis. So that shows us that our CLV for the client base on average per client as it stands in '23 is in excess of GBP 200,000, double what we had in 2020 and really showing the value of starting to grow the relationships with those customers across the multiple divisions. So having gone through the headlines, I am going to ask Dave and Paul now to take you through each division one by one and bring to life their performance for you.

Thanks, Mark. So we'll start with the Assurance business, the foundation of the original Inspired. We are the undisputed market leader in this area. We have our own tier, as you were on the call report, just recognizing the scale and breadth of our service. It is a high-margin business, 40%-plus adjusted EBITDA consistently delivered, high customer retention rates, 90% plus. The strong revenue visibility is that more than 80% of our revenue from this area is visible at the start of the year going into a year of delivery. Now it's true there are relatively low barriers to entry, but enormous barriers to scale as you get to bring on multisite clients, so the complexity just gets more and more evident it just makes it harder and harder to grow to a size and scale that Inspired are. What have we done this year? We've concentrated on refining our operations and improving the lifetime value of those clients by creating the opportunity to cross-sell our ESG and our optimization services. We can see that by our higher retention rates and the stabilization of margins, and all of this is augmented by client -- new client wins that you can see on the screen there now.

You'll know the division since 2020 has delivered CAGR revenue growth of 7% per annum. As expected, the division has responded to the need of our customers. We've seen a reduction in the margin the Assurance business has contributed from what we saw in 2020 and 2021 of 78%, 79% to 45% last year and 41% this year. And that cost has been investment in staff costs, both in terms of FTE, but also in terms of where we've spent that staff cost with a focus on ensuring that we have the right people to support the customers and deliver the level of service, which we believe to be market-leading to enable the execution of cross-sell into the other divisions. As Dave mentioned, we go into 2024 with an excess of 80% of the Assurance division revenues secured in our order book. So great visibility. With 14% of 2024 revenue is expected to come from renewals from existing customers through that high retention rate. And then the balance in 5% coming from new business wins within year. So we aren't dependent within the next 12 months on executing significant levels of new client acquisition to be able to deliver our 2024 expectation.

Thanks, Paul. So Assurance had a real strong quarter action because of the need to buy energy and the need to account for it. ESG has a strong quarter action based on obligations of the client themselves or more as we're seeing obligations of their supply chain or investors. If they can't answer the question of what that pathway to net zero is, then their customers or their investors will start to look elsewhere. Remember, we entered this market organically in 2020 using the data that we have, building up our ability to be able to process that unstructured data, we build the ability to build the audit grade framework agnostic that the client can choose which of the frameworks they want to report against, and we can support that from a data-driven basis. There are some really strong structural tailwinds that are helping this market as we focus on delivering value in there. CSRD, the Corporate Sustainability Reporting Directive, will capture another 50,000 companies in Europe with the obligations to know where their energy is used and to start reporting on that, giving us great further opportunities.

Thank you, Dave. So since that organic entry into the provision of the ESG services, in 2020, we've seen a rapid revenue growth of 123% CAGR through to 2023. Also really pleased to report ESG division has contributed meaningfully to EBITDA and also cash generation of the group in 2023, following those periods of initial investment into the start-up. We know that 2023 did benefit from service provision under the energy savings opportunity scheme, which is cyclical in nature and we don't expect to repeat at the same level in 2024. So ESG services generated GBP 1.9 million of revenue from delivery of energy savings opportunities, scheme work to our customers. stripping that out, underlying ESG growth from 2 -- from '22 to '23 was in excess of 70%, and we're projecting underlying ESG growth into '24 of in excess of 40%. You'll note that we've always said that we believe the ESG division at maturity is a consultative margin, tech-enabled, which would deliver a 40% EBITDA margin, and we'll expect the division to continue to mature and evolve towards that over the next 3 to 4 years.

And so optimization, we refer to this, obviously, as the growth engine of the business. It's where we are actually physically intervening on our plant sites to help them deliver on their net zero commitments. It's a huge opportunity for cross-sell for us, within Assurance and ESG. That's where we win the customers. Optimization is nearly always a cross-sell from one of those 2 divisions. Of course, Mark has already talked to the fact that there is an increasing number of clients we have cross-sold to. And more importantly, over 50% of those customers are repeat customers where they've taken optimization projects from us before, but have come again last year to take those repeat optimization products. As we continue this virtuous circle of answering the question, where do I spend the next pound of capital to remove that next marginal wasted units of energy and emission. So real strong drivers for this, whether it's cost reduction or carbon reduction doesn't really matter, both combined to give a real strong call for action in this area.

Thank you, Dave. Since that diversification of the group from a pure assurance player through 2020 through to that full suite sustainability service provider, you'll know that the division has generated CAGR revenue growth over that period at 57%. So really strong growth. And importantly, generated $5 million over the last 3 years of additional EBITDA in each period. So noting that the optimization services delivery contributes or delivers a variety of services and products to our customers. We know that the division can generate that increase in absolute GP and EBITDA from a range of revenue growth and EBITDA margin metrics, noting within the CFO statement this morning, we state that we expect to see margins in the range of 20% to 25% for this division. You'll note that the division generated in excess of that in 2023, and as we look forward to 2024, you'll note that we're guiding margins to be nearer to 2022 levels, meaning that to generate absolute GP and EBITDA growth, we need to deliver comparable revenue growth to what we've seen in previous periods. Entering the year with real confidence through that continuing growth in our pipeline and expansion of service delivery to our existing customer base.

If optimization is a growth engine, then software is the oil that keeps that engine running. Software is holding the data. We use it for our purposes for delivering to our customers, so we can record their bills, validate their bills, prepare their budgets and so on. But more importantly, we also now use it to identify those optimization opportunities. We have a wealth of data on customers and therefore, we can go to them with solutions that are underpinned by that data. But that's not all. We also have direct clients who want to understand their estate data. So they too are direct clients of our software division. Finally, we also have 65 of our competitors that use our software system. We have over 500,000 meters on our platform, making it the dominant software within the marketplace.

Thanks, Dave. So software, ultimately, a facilitator for growth within our other trading divisions. We're still delivering growth in its own right. So it's seen 12% CAGR revenue growth, noting the only revenue we recognized through the software division are the direct fees we get through providing software to each of those users. We noted a slight reduction in margin in the period as a result of allocation of central overheads. But we project that margins in the software business will increase over the next 3 to 4 years, as a result of the operational leverage that we currently have from the cost base we currently have essentially.

There are 2 case studies for you at this time, just to kind of bring to life some of the features that we are talking to clients about. First one here is Nuffield Health. A client that joined us on the Assurance side in 2018. And since then, we've recovered over GBP 1.4 million for them in billing errors. We've then moved on to look at their water and water efficiency securing GBP 170,000 worth of savings. Then the forgotten contracts, the meter operated contracts they are just enablers that never really get much attention, but we've been able to secure GBP 116,000 cost saving by consolidating those. Just to demonstrate the variety of products and service lines within the Assurance division that have then led on to further products within the ESG division, and now looking at the optimization services that will really make a difference to the actual consumption. The next one, though, is where we have done the optimization as well. Again, 2015, landed started on the assurance side. Since 2016, all the way through to '23, though, you can see this nature of the repeating answering that question, what do we do next? whether it's LED upgrades, whether it's bespoke building management systems, refrigeration enhancements and so on. All these steps are answering that question of how and where do I spend the next marginal pound of capital to reduce and remove that wasted kilowatt hour of consumption and emissions. With CSRD coming in, they need to understand where energy is used across their worldwide estate has given the opportunity for the smart metering implementation across their worldwide operations that we'll be working with them in 2024 on. So lifetime value, now well in excess of GBP 5 million as an example of the optimization, repeatable demand client.

Thank you, Dave. So just to reflect on group performance. Since that diversification pre-2020, at which point on the right-hand side there, you can see 90% of our EBITDA came through our Assurance business, true to that diversified sustainability service provider, in which now 45% of our EBITDA comes through optimization and 5% through ESG. You can see that over this period since 2020, the group has delivered broadly double revenue and double EBITDA and also put the cost in place from a central cost perspective to enable the execution of the aspiration of doubling of EBITDA from the levels we saw in '22 through to 2027. So in terms of cash flow in the period, 75% underlying cash generation, which is slightly lower than we'd expected at 80%. And that was because of the timing of our optimization project. So we had a real strong Q4 H2 weighting, which is what we've seen in 2022 and also '23 and also expecting in 2024, but noting that as that working capital unwound from the balance sheet at the year-end, last 12 months cash generation to the end of February '24 was in excess of 100%. You'll note across 2023 on a last 12-month basis at each month end the business generated in excess of 85% of cash generation, which gives us that confidence in guiding to in excess of 85% in 2024. Clearly, in terms of investing activities, outflows, continued consideration as expected, remained a material outflow, so we paid GBP 12.1 million in 2023. We're expecting to pay a further GBP 10.6 million of cash in 2024, which represents that balance on the balance sheet within current liabilities with a further GBP 2.6 million, we expect to satisfy through the issue of shares to the vendors of Ignite Energy. The balance sheet at the 31st of December '23 very much represents an inflection point for contingent consideration from those transactions we completed in 2020 and 2021 in the depths of COVID in which we protected shareholders against downside risk by paying initial consideration based on the performance of the businesses during COVID and then contingent structures, whereby we would pay for delivery of the growth plans of those businesses over the following 3 years, as stated at the time, the balance sheet at 31st of December 2023, the current liability represents the conclusion of those SDAs, which we said will be funded by the balance sheet. And those balances will be paid within 2024 and then the noncurrent liability of GBP 5.5 million represents or wholly represents the value in terms of the deed of variation, we entered with Ignite vendors in May 2023, subject to delivery of growth trajectories from '24 through to the first half of 2027. The key note from this one's RNS, in terms of net debt, was that as these contingent consideration structures conclude we have confidence that we will expect to see a reduction of net debt to EBITDA to near 1x by the conclusion of 2025, noting that the maximum contingent consideration payments after the final payments in 2024 will be up to GBP 2.3 million per year versus GBP 10 million, GBP 11 million, GBP 12 million, you've seen over the last 3 years between GBP 25 million and GBP 27 million, which gives us real confidence in that net debt-to-EBITDA reduction to near 1.1 to 1x by the conclusion of 2025.

So thanks, everybody. I think in terms of bringing to life the division and the performance, the transformation we've been on since 2017, and the ability to have the organic double-digit organic growth engine, which really plays to that cross-sell thesis now evidenced by nonfinancial KPIs is a great step for the business and one that we expect to go into the future as we look to continue our journey towards our aspiration of doubling FY '22 EBITDA by FY '27. Clearly, a key facet of that is our ESG services where we are increasingly confident we have the market-leading service at the market-leading price points, noting that actually one of our customers was an award winner this year in terms of best sustainability disclosure by the Investor Relations body. And I guess kind of ultimately what's important, therefore, is that what we need to be doing is actually walking the talk ourselves. So in terms of our own ESG, we aim to be transparent in everything we do and the progress towards our targets. And as such, we voluntarily disclosed to GRI standard and on TCFD for the last 4 years, along with meeting obligations on SECR and the Carbon Disclosure Project, and really pleased to have received yet again the Green Economy Mark from the stock exchange, which is testament to the credentials of the business. We're an early adopter of TNFD, The Taskforce on Nature-related Financial Disclosures, which ultimately starts to bring biodiversity into the purview of corporate businesses and their responsibilities from an ESG perspective. In 2023, the group revised its Scope 1 and Scope 2 net zero target to make it more ambitious by bringing it forward from 2035 to 2030, which is underpinned by a move to a new corporate headquarters where we're in the process currently of removing all of our Scope 1 emissions from that facility. So if we consider FY '24 and beyond, ultimately, the business has ever been better placed to support U.K. businesses to deliver net zero and manage the estimated GBP 138 billion opportunity, which represents the cost to the U.K. businesses as opposed by the government between 2024 and 2050. Strong start to Q1, and particularly pleased with the cash generation, as Paul has mentioned, and as I just mentioned, great progress on our own ESG strategy and delivering our targets. Ultimately, the cross-sell engine we developed, which isn't something that we're planning to do, but something that we now can demonstrate to you, we have a prudent track record of doing that really underpins our strong organic growth and ultimately, our aspiration to double adjusted FY '22 EBITDA by FY '27. Thank you very much, and we move on to questions.

Fantastic, Mark. Thank you and the team for your presentation. [Operator Instructions] Paul, if perhaps I may hand over to you as you can see we've received a number of questions throughout today's presentation and pre-submitted as well. If I could just ask you to read out where appropriate to do so, the question and give your response, that will be fantastic.

So first one. At the current share price, what doesn't the market understand about Inspired plc. One for your Mark.

Yes, sure. So I mean, I think kind of ultimately, from doing what we said we were going to do point of view, we've done exactly that. So from the point of making strategically important acquisitions of Ignite business wise during the COVID period, clearly, circles were published, and we set out exactly what we're going to do, and we've delivered on that. So we have that double-digit organic growth engine. We have transformed into a full suite sustainable service provider and I guess, kind of ultimately, we've done that stay within the leverage commitments that we made at the time being less than 2x EBITDA. I think kind of ultimately, when you look at the performance we've had, we're in a position where we continue to do what we say we're going to do, and we say it in advance and the market gets to observe when we've done it or not. In terms of what the market may not be understanding at the moment, I suppose, is ultimately that as we go forward and the final parts of that contingent consideration is paid, which basically allowed for those strategic acquisition to be made, we're in a place where the Board has a clear commitment to make sure that we are reducing leverage through to 1x in 2025, which ultimately, I guess, is something that as we do that, hopefully, the market will start to recognize the value of the performance that we've delivered, noting that, I guess, since 2017, we've increased revenues by 5x and increased EBITDA by 3x.

Thanks, Mark. So next one, let's do this together. What's your strategy for growth and do you intend to make any acquisitions in the next 12 months?

Yes. So I mean, hopefully, the growth strategy is clear and not only that it's a strategy, but something we're actually executing. So the nonfinancial KPIs give you a really clear evidence of how we're delivering on the cross-sell opportunity and how we're increasing that client lifetime value and it's all about being able to support those clients on their transition to net zero, which is a great overall kind of opportunity in terms of adding value to our customers as they meet the challenge and the cost of doing so. So I guess that growth driver is there to some fantastic macro themes. We add value to clients in areas where there's complexity and ultimately they have non-discretionary call for action. And just I suppose if you followed, you can see the amount of growth we delivered since 2017, and since 2021, that growth has been organic. So ultimately people could say, well you acquired your value growth, we absolutely did to be able to transform into the diversified business we are today. So in terms of going forward, I think we see ourselves well placed with our current momentum to continue with the thesis, which is one that's underpinned by macro drivers, which are not the short term, but actually in terms of net zero, have a 25-year lifespan, at least from today. In terms of M&A, we've been really clear to state that there's M&A opportunities in the market. You can see things that can be a potential, but our priority is reducing our leverage to 1x EBITDA. We're going to look at focusing on achieving that first. And then effectively, we can take stock in the future. But the prime priority for us is to making sure that we let the substantive growth engine and cash generation of the business feed through to deleveraging by the end of '25.

Thanks, Mark. What do you think the greatest challenges are for companies like yours that get in the way of growth?