Inspired Limited (INSE) Earnings Call Transcript & Summary

Good afternoon and welcome to the Inspired Plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Mark Dickinson, CEO. Good afternoon to you, sir.

Good afternoon, everybody and welcome to the FY '24 interim results for Inspired Plc. Presenting for you today, myself, Mark Dickinson, Chief Executive; David Cockshott, Chief Commercial Officer; and Paul Connor, Chief Financial Officer. I guess as a start, let's focus on reminding ourselves what the business does. The group is a B2B business, delivering solutions to support businesses on their journey to net-zero. We do this by helping those companies manage the 4 Cs of cost, consumption, carbon and compliance. We're organized in 4 divisions. The first, software services, owns and develops our proprietary software that underpins our technology-enabled assurance and ESG services. This proprietary software platform is now increasingly recognized as a leading platform in the marketplace with more than 60 market participants utilizing it. Our Assurance Services division helps businesses manage their energy costs and defend against energy crisis and volatility in utilities. Our ESG Services division helps clients manage and solve the complexity in relation to making ESG disclosures and developing ESG strategies. Our Optimization Services division then takes those strategies and actually helps clients implement them, delivering the commitments they have made to net-zero over time. During the half, we had a fantastic performance in relation to new business developments, picking some fantastic brand names and adding them to the client base. For these clients, the majority have joined the group for assurance and ESG services. And as we help them manage their energy costs and make their ESG disclosures and develop their ESG strategies, we are then well placed to help them actually deliver and implement their -- the commitments they have made to deliver net-zero . And as we do so, increase the client lifetime value of those customers to the organization. We benefit from 3 key market drivers. The first is the high energy prices and the fact that businesses do not want to end up in the same situation as they were during the energy crisis of 2022. For most businesses, utility costs are their largest indirect spend and any variation in those costs typically flows straight to bottom line. Ultimately, this can cause EBITDA shocks for those organizations. We help businesses manage and control that risk and create a defense against future energy crisis. The second driver is increased ESG disclosure requirements. Whether those increase in disclosure requirements is coming from a business's customers, from their investors or their need to meet regulatory compliance obligations, we stand shoulder to shoulder with those businesses solving the complexity of their disclosures, processing the vast amount of unstructured data that's required to make them and ultimately helping them determine the ESG strategies that are appropriate for their organization. The third market driver is the current drive for businesses to actually meet their ESG commitments. So now many businesses have made commitments. They've published them, be them science-based targets or road map to net-zero. And the time has now arrived when those businesses have to start to make good and deliver those commitments. Our business is uniquely placed as a one-stop shop to help those organizations not only process all of the data to manage their energy costs and develop their ESG strategies and disclosures but to also actually implement those solutions that effectively remove the excess carbon emissions or wasted energy consumption from their portfolios. Our operating model is one of land and expand. Clients join our company through either the Assurance Services division or the ESG Services division. Once they've joined us, we take them on a journey, controlling the risk of energy and utility prices, on delivering ESG disclosures and as we do that, we develop a wide range of contacts across their organizations often culminating in C-suite. Because we process large amounts of data in relation to their sustainability equation, we are well placed then to sit in the room and help those organizations identify and implement the correct products or correct solutions and at the correct time for their organizations. Ultimately then, our Optimization Services division helps the client implement those solutions, reducing those units of carbon emissions, reducing that wasted energy consumption and helping those organizations, not just talk about delivering their commitments to net-zero but actually delivering them on a real-time basis. With respect to financial performance, we've been really pleased with the increase in gross profit between periods of 10%. Of that increase, all divisions contributed to gross profit increase but the primary driver was increases in our Optimization Services division. Of that increase, 4% flowed through to an increase in adjusted EBITDA, albeit adjusted PBT decreased based on increased financing and interest costs. A particularly pleasing element of the half was the increase in cash generated from operations, increasing up to over GBP 9 million. And ultimately, with 2005 seeing the group having no more contingent consideration to pay and the cash flow from operations flowing down to deleveraging the company and pursuing organic growth opportunities, we are well placed to create an environment where more of the growth in EBITDA flows to growth in PBT in the future. As we mentioned, our strategy is one of land and expand. Effectively, we onboard clients into the ESG and assurance divisions where we help them solve the complexity of making disclosures, process all of their unstructured data and start on that journey to deliver on their net-zero commitments. We focus on cross-selling ESG services to assurance customers and then Optimization Services to both assurance and ESG customers. We've been really pleased with the performance of new business developments during the period. And really enjoying seeing stability and consistency that's coming to our cross-sell engine as you can see between half 2 '23 and half 1 '24, noting that there's always the opportunity to overperform as we did in H1 '23 due to compliance drivers such as the Energy Savings Opportunity Scheme that was particularly important during that period. So in terms of the group, I guess the key thing is, half year performance in line with management expectations with particularly pleasing developments in relation to the performance of new business generation. I'm now going to ask Paul and Dave to walk us through the individual performance of each division.

Thanks, Mark. Okay. The -- starting with the assurance division. Just a reminder, what we do here, this is a division that helps customers to buy their energy at the right price, at the right time, in the right way. And then when they've done that, it helps them account for that energy, understanding their estate, understanding their data and where and how their energy is used. It's our main acquisition channel and we've got very high retention rates in the area, over 90%. Great forward visibility of revenue on long-term contracts, as you can see there from a quote from Iceland about their recent long-term renewal for our Assurance Services. Margins, pleased to say, as expected, are stabilizing at the 40-plus percent level and we are the undisputed market leader in this particular space. Our focus as a division is on delivering that first-class service, making sure there's absolutely no reason why we don't create a fertile ground for that expansion mode of being able to sell in people the services that the group offers.

Thank you, Dave. So from a financial perspective, in the period, the division performed in line with expectation. So revenue growth of 3%. As Dave said, margin stabilized, the full year, 41% we saw in FY '23. Following that period in which this division reacted to the customer need during the energy crisis when we invested further costs in ensuring that we maintain what we believe to be a market-leading service. Without delivering that service, ultimately, we're not going to unable -- to enable and facilitate the cross-sell opportunity which we believe will drive the growth opportunity which exists for our Optimization Services and ESG Services in this market.

Moving on to our ESG division. Since our organic entry in 2020, we've demonstrated that this absolutely is no fad. It is here to stay. It is revenue and investment critical. If a B2B business doesn't have a credible net-zero strategy then customers and investment will be going elsewhere. It's a complex area. It's constantly evolving. CSRD and TNFD, new legislations that create that need and the tailwind behind us for developing those products for our clients. We take a very different approach to this area. It is data led. It's reporting framework agnostic. Whichever way the customer wants to report it, that is the way in which we can help them structure it, to be able to comply with their requirements. That resonates with customers, both new, as we win new business, as you can see there but also that cross-sell into our existing base where they too are appreciating the new services we can deliver, helping to deliver that 17% growth in revenue. It's a natural route, a natural extension for our optimization business, creating that nice flow of business between the divisions.

As Dave said, 17% revenue growth for this division period-on-period, half-on-half. Pleasingly there, you'll see a compound annual growth rate of in excess of 90% since our organic entry into this area in 2021. As we saw in full year '23, now contributing materially to group EBITDA in this period, and as I said, for full year 2023. Still very much in its growth phase. So after our initial investment on entry into the space, now contributing profit. Margins wise, we believe this to be a business model, which is comparable to the assurance business both in terms of contractual visibility in your revenue line but also margins. So we believe this to be a 40% EBITDA margin business at maturity. But clearly, the division is still very much in the growth phase and we're rightsizing our investment cost in maximizing the top line growth opportunity that presents itself.

Moving on to the growth engine, the Optimization Services division. This is the area that focuses on actually removing carbon emissions, cutting costs, eliminating wasted energy and, of course, wasted water, forgotten utility. It's the cross-sell goal for Inspired. We work with many household names that you can see on the chart there. We have a great pipeline of opportunities for these services, driving and helping customers to decide where to spend that next pound of capital to be able to remove that marginal wasted units of energy and that marginal carbon emission. The focus is now on bringing together the Ignite and Inspired teams to build a broader platform and capitalize on those resources to be able to diversify and deliver through more of our customer base.

Thanks, Dave. So a 21% increase in gross profit in the optimization service division, noting the focus on gross profit from a financial KPI for optimization. And the reason for that is because the pass-through impact of the solutions provided to our customers in any period, noting that we end-to-end the solution to the customer and therefore through our revenue line and also our cost of sale line within this P&L for optimization services, we incur the cost of the equipment and the installation or the fit-out. And therefore, our focus is very much on gross profit, the costs from an internal perspective in terms of quality assurance, health and safety, data managers, account managers, et cetera sit within overheads. And therefore, absolute GP growth is our focus. Because of that pass-through element of the revenue and cost of sale of the equipment and the installation cost, we give a range of outcomes for EBITDA margin in this area. That range is from 20% to 25%. This period so happens to be at the higher end of that range because of the solutions provided in the period. But ultimately, this group -- this area is a part of business which we deem to be the real growth engine of the business as we look forward to '25 and '26. You'll note that as per the previous 2 financial years, we've seen a 40% GP contribution from optimization services in the first half of the year and 60% in the second half of the year and that's very much driven by the concentration -- client concentration we have at the higher end of optimization, working around client financial year-ends and subsequent CapEx budgets and allocating those CapEx budgets to deployment of those projects in any financial period.

And finally onto the Software Services division, which is the foundation of our delivery for our clients. Here, we continue to push the boundaries and develop new modules making our software solution the de facto solution for -- within the market. There are many customers on the market just relying on our software solution for their delivery. It's an area with a very high retention rate, over 95%, and excellent margins, over 60%, a clear market-leading product.

Consistent revenue growth from our Software Services division, noting that ultimately our Software Services division is an enabler and a facilitator for all the 3 divisions. So the P&L for software services represents customers who take -- or license our software, and this is customers we bill directly for use of the software. And we've delivered in this period, 17% growth, compound annual growth rate, 14.5%. High EBITDA margin as a business, following a period of investment, very much now positioned to generate operational leverage over the coming periods. But as we say, ultimately, a facilitator and an enabler as well as being a market leader to enable the delivery of the services in our other 3 divisions.

What we thought we'd now do is, just bring all of that together into this case study that we've perhaps shown before but I think it's worthwhile just emphasizing this holistic solution. So the example is Nuffield Health and how we've transformed them through our effective energy management. Number of figures there that I quoted. The first one, GBP 250,000 worth of negotiated savings. As we said, the assurance business helps businesses to buy energy in the right way. We can't help what happens within the market but we can make sure that customers have the right kind of contract and contract structure to be able to help them to buy energy effectively within the market. GBP 250,000 worth of negotiated savings there. We then help them account for that energy correctly. In doing so, the bills that are coming into us, when we validate them, we've identified GBP 1.4 million worth of billing errors that we got corrected before they were paid. You'll notice another figure on that, [ GBP 217,000 ] of retrospective. So this is where we've gone back over previous invoices that they've already paid prior to our involvement and we've identified errors on those invoices totaling [ GBP 217,000 ], that we've got returned for them. The GBP 666,000 was actually another saving, pre invoice. So there are certain charges that are reconciled and billed off-line. When the statement came through to us for their trial charges, we noticed a number of errors on that. So before it even got on to a bill, we were able to reduce that charge by GBP 666,000. There's also water savings and meter operator savings. So a very effective assurance business there, tying all those ends together. We've also then gone on to expand into our ESG Services, so we can help them with their CFD reporting. And more importantly, now they have their net-zero goals, we're also starting talking to them about how they're actually going to achieve those and actually help them remove those units of carbon through our optimization services as well. So a real example of the end-to-end service offering that we can provide for clients.

Thank you, Dave. So just to put all together, I guess, from a group financial perspective in the period [indiscernible] performance. We provided a similar bridge and the full year position. This is the half year position, just illustrating that diversification of the group from a wholly assurance service provider through 2021 to a full suite service provider in 2024 with that growth in top line revenue and also EBITDA very much coming through from the Optimization Services and ESG Services divisions. From a cash flow perspective, clearly, a key focus at the group. Really pleasing cash conversion metric in the period. So we generated 87% of profit into operating cash. As we know, because of the Q4 weighting, expected Q4 weighting of projects in the second half of the year, we noted in the RNS this morning that we expect that metric to reduce for the 12-month period ended December as we have the working capital investment in delivering those projects into the period end and that working capital is expected to unwind in the new year. You'll note in terms of cash flows from investing activities, clearly, a key part of our cash flow over the last 3 to 4 years has been the payment of contingent consideration. You'll note that we've paid a comparable period -- a comparable level in first half of '24 to what we paid in 2023. But you'll note per the trading update on the 16th of August, very much an inflection point now in terms of contingent consideration liabilities for the group. On the back of entering the [ redetermination ] of the Ignite due to variation, on payment of the current liability of GBP 2.2 million in the balance sheet at the 31st of June 2024, which will be paid in October this year, the group will have -- will no longer have any contingent consideration obligations, acknowledging the performance fee that we've put in place for the Ignite vendors through the restructuring period out to the 31st of May 2025, the volume of which we expect to be circa GBP 2.3 million, which we will pay in the first half of next year. Subsequent to that, as we've stated, the Board's objective is very much to move the leverage of the organization, net debt-to-EBITDA to near 1x as soon as feasible, whilst also enabling and facilitating the opportunity to execute on the growth strategy that presents itself particularly within the Optimization Services division.

On the half 1 results, satisfying results in line with management expectations and ultimately, really pleasing performance from a new business development point of view. So I guess kind of ultimately, when we start to look at the kind of summary and outlook moving into FY '24 and beyond into '25, from an assurance, ESG and software perspective, we continue to perform in line with expectations. We're really pleased with the size and scale of the pipelines that underpin each of the business divisions and really gives us strong conviction as to the growth opportunities into 2025 and beyond. One of the things we have noticed as we've come into the period is that as we get better at serving clients in relation to optimization projects, delivering those solutions to reduce carbon emissions and energy consumption, we find that actually we're getting access to bigger and bigger projects. And from that perspective, we entered the period with a dependency on 3 significant projects. I'm pleased to say that one of those is now contracted and the other 2 are anticipated in Q4. As we start to work, as a management team, we really are focused on making sure we diversify this client concentration risk which has been accelerated through the integration of the optimization team within Inspired and the Ignite business team. We're currently in the process of transforming that into 1 operating model which ultimately provides significant capacity to ensure we can help more customers, simultaneously help meet and deliver their net-zero commitments that they've made to the marketplace. As part of that process, we were also able to remove the continued consideration aspects from the business. So from FY '25, we're really pleased to say there's no more contingent consideration to pay and that really allows us to focus on reducing net debt for the business and being in a position where we can finance our organic growth opportunities. So as we go forward, we are better placed than ever to help our clients with the GBP 138 billion challenge over the next 25 years to deliver on the net-zero commitments that they've made. Thank you, everybody, ready for questions.

[Operator Instructions] As you can see, we have received questions throughout today's presentation. And Paul, if I can hand over to you to chair the Q&A, that would be great. And then I'll pick up from you at the end.

Yes, absolutely. Thank you, Alessandro. So I guess first one for myself. How is your cash flow in relation to this time last year? So as we saw from a cash generated from operations perspective, particularly strong versus the same period last year and driven by that profile of optimization project revenue. So we have the unwinding of the activity into the period end last year in this period and a later period in terms of activity levels in H1 versus H2 last year, which drove that high 80% cash conversion metric below operating cash, comparable to last year, as I said, in terms of contingent consideration, interest costs clearly higher. I think the most important thing looking forward from a cash flow perspective is clearly that cash flow in this -- in 12 months' time will look notably different for the first half of next year and that we won't have that circa GBP 9 million of contingent consideration that we've seen in the first half of the last 3 financial years, which starts to give us the confidence and visibility and in turn investors that visibility of the deleveraging of the group nearer to 1x as we've stated we intend to do so. I guess a question linked to that, again, for myself is, when do we think that net debt will peak and when is it likely to reach 1x net debt-to-EBITDA? So I think we're currently in the peak period now, so the half year period on the back of those nonoperating cash outflows in the first half of the year. But because of the profile of trade in the second half of the year being very much Q4 weighted and then that working capital unwinding at start 2025, we'll remain at the peak levels through the remainder of this period. And then you'll start to see that deleveraging as more of the operating cash is able to drop through to reduce net debt. So I think by the end of 2025 per the guidance we put out this morning, we expect it to be near to 1.5x. And then part way through -- halfway through 2026, we expect to be nearer to 1x net debt-to-EBITDA. Another question. I'll pass it on to you, Mark. UNIFY appears to be a key enabler for Inspired's broader services. Can you share any plans to further develop this platform and what role will software services play in scaling the business in the next few years?