Inspired Limited (INSE) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Inspired Plc Final 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 all the 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 to you, sir.

Good afternoon, everybody, and welcome to the FY '24 results presentation for Inspired Plc. Presenting to you today are myself, Mark Dickinson, Chief Exec; and Paul Connor, Chief Financial Officer. Over the last few months, we've been really thinking about how to improve and simplify our communication to investors. And that's really distilled into the graphic you see before you here. So what is the purpose of Inspired Plc? We are a B2B business that helps businesses in the U.K. and Ireland achieve net zero. Our vision is to remain to be the U.K.'s leading energy and sustainability adviser. Our strategy to achieve this has got 3 primary pillars: recruit, retain and return on investment. Each of these pillars has 2 elements to it: one, external; one, internal. Recruit is where we leverage our Assurance Services and our proprietary software platform to attract and recruit more businesses to the portfolio. And as we do this, we seek to earn trusted adviser status. Internally, that underpins our organic growth aspirations and allows us to capitalize on the favorable regulatory tailwinds of energy conservation, ESG and net zero. From a retain perspective, we focus on utilizing the data assets we create from providing our Assurance and ESG Services, where we process millions of pieces of client data every month. We analyze this to look for opportunities to add further value to those customers and cross-sell additional services, which in turn drives up the potential client lifetime value of the portfolio. From an internal perspective, this helps us increase barriers to scale, provide a whole of market service, which improves our competitive position and the quality of the asset you are invested in. From a return on investment perspective, we focus on delivering operating efficiencies for our clients, helping them save money and avoid cost. It's interesting to note that of our GBP 36 million of Assurance revenue within 2024, we've delivered more than GBP 150 million worth of measurable benefit for our clients, a return on investment for them of more than 5x the fees that have been paid to us. Internally, we're focused on improving net working capital and central cost control to improve the return on capital of your investment within Inspired. This strategy allows us to focus on our aspirations of being debt-free by year ending 2027 and creating a business that is capable of doubling EBITDA on a 5-year basis. As we look at 2024, clearly not the year we intended when we started the period. But as we strip that back and look at the underlying operations of the business, there were a number of positives. With respect to our strategy and the 3 pillars of recruit, retain and return on investment, we had growth in all our nonfinancial KPIs, increasing the 10-year client lifetime value potential of the portfolio by 20%, increasing the number of clients served by multiple divisions by 10% and adding 170 new clients to the portfolio. During 2024, we also took the opportunity to reset the balance sheet. You will note, we raised GBP 25.4 million of net funds in early January '25. And this improved our pro forma net debt to adjusted EBITDA ratio from 2.59x to 1.47x post fundraise. Most importantly, the balance sheet at the end of 2024 no longer has any contingent consideration liabilities on it, noting that these have been a primary source of consumption of free cash flow in previous years. As a business, we are sector-agnostic and we work with some of the biggest and best customers in the U.K. and Ireland, further demonstrating the quality of the assets you're invested in. From a financial KPI perspective, as we've said, 2024 was not the year we intended at the start of the period. We were pleased to deliver a 4% increase in gross profit and most importantly, a 13% increase in cash generated from operations. Overall, by the end of the year, net debt has increased by GBP 10.5 million to GBP 59.2 million, but noting after the fundraise in early FY 2025 or January '25, that reduced to GBP 33.8 million on a pro forma basis. I'll ask Paul to walk you through in more detail the financial performance of each division and the group later in the presentation. From a nonfinancial KPI point of view, all of these going in the right direction. We increased the number of customers served by multiple divisions. So in other words, a measure of the effectiveness of our cross-sell from 615 clients to 675. And in doing so, increased the number of clients that pay us more than GBP 50,000 per annum in fees. Most importantly, we increased the number of clients where we were active in optimization projects from 370 to 412. And what's really pleasing about that is more than 50% of them were repeat optimization clients. All of this served to allow us to create an increase in the average 10-year client lifetime value potential of the portfolio from GBP 231,000 to GBP 277,000 per customer. I'm now going to ask Paul to walk you through the performance of each division.

Thank you, Mark. So as ever when we talk about our divisional performance, we start with our Assurance division, which remains the key client recruitment and retention engine of the group, continuing to bring some great logos to the group during the period. From a revenue model perspective, you'll recall some really attractive characteristics. So we have strong revenue visibility as we go into a new financial year. So for FY '25, we have 82% of our expected revenues in the Assurance division already contracted with a further 10% expected to come from renewals signed in year. And those renewals are supported by fantastic retention rates. So generally, year-on-year, you see this division generate in excess of 85% retention rate. And in the year of FY '24, we saw an 88% retention rate in period. Remains a high EBITDA margin business, consistently delivering in excess of 40% EBITDA margin per year. So if we just reflect on the FY '24 performance of the Assurance division, you'll note revenue growth in line with expectations, so marginal growth period-on-period as we aspire to deliver 1% to 3% organically. You see a stabilization of EBITDA margin following the need for the business and the division to react to the need of the customer during the energy market volatility we saw in 2022. As we move forward, we expect to continue to sustain those growth rates and margins to remain stable at the levels you've seen in FY '24. So the ESG Services division, following that organic entry in 2020 has quickly become a further pillar to the client recruitment and retention engine of the group, benefiting from those strong regulatory tailwinds. And also, you'll note recruiting some really strong logos to the group during the period. A very similar revenue model to that you see in our Assurance division. So contracted revenues 2 to 3 years in length, strong retention rates, which means that we enter FY '25 with 65% of our expected ESG revenues already contracted and a further 15% expected to come from renewals in the year, noting that in FY '24, our renewal rate for recurring revenue streams in the ESG Services division was 89%. In terms of performance in the period, you'll note since our organic entry into this space in 2020, we've delivered a compound annual growth of 89%, which is pleasing in the period year-on-year, we delivered 16%. You'll know that EBITDA was broadly flat in the period, period-on-period, and that's because we're rightsizing the investment into the revenue growth opportunity, not only in the year of FY '24, but in the subsequent years to follow where we -- noting we see such a growth opportunity for the delivery of ESG Services, not only to our existing client base, but also the opportunity to bring new clients to the group through delivery of this service. Optimization Services. So following that successful execution of the strategy in establishing ourselves with the customers through delivery of Assurance and ESG Services, that gains us the opportunity as a trusted adviser to deliver optimization solutions to our customers. And ultimately, the delivery of cross-sell to existing customers and reoccurring repeatable or existing customers of the other services -- the other divisions within the group, but also the reoccurring and repeatable demand of existing Optimization Services division customers is what gives us that confidence in delivering the group growth rates we expect, which ultimately underpin the aspiration to double EBITDA in a 5-year time horizon. So in terms of performance during the period from a P&L perspective in Optimization Services, we saw gross profit growth in the period, albeit marginal as a result of the deferral of those 3 significant projects as detailed in the RNS announcements during the period, which were delayed and in part deferred into the first half of 2025, and all of those are now contributing as expected in the period. You'll note that the P&L of the Optimization Services division is impacted by the pass-through cost or the optics of the P&L of the Optimization division is impacted by the pass-through nature of our service delivery, the pass-through of the cost of our contractors and the equipment of the solutions we're providing to the customer. So from gross profit down to EBITDA, that ultimately represents in terms of OpEx, the cost of our internal cost of delivery of those services. So if we have a situation where we did in FY '24, where you have a deferral or delay of project GP contribution, that drops straight through to your EBITDA performance because the OpEx in this area is fixed as it is with our other trading divisions. If we then move on to our Software Services division. So this is a real enabler of group performance across all of our divisions as well as in its own right, being an industry-leading proprietary software platform in the period, particularly pleasing rolling out a further 10 new modules in 2024. Important to note, when you look at the P&L performance of our Software Solutions division, the P&L revenues represent customers who we bill directly for licensing of the software. So there's no cross-charging or unbundling of the value of our software provision within our ESG, Assurance or Optimization Services division. This is purely direct billing for customers who consume the software license directly. As you'd imagine, the software business benefits from great revenue model dynamics. We have a highly sticky customer base. So 85% of FY '25 revenues will come from renewals of existing customer licenses, noting that retention rates in FY '24 were at the 92% level. So in terms of P&L performance for the year 2024, consistently, this division has delivered revenue growth of 10% to 15% period-on-period. And following that level of investment in '22 and '23, primarily in the likes of business development resource, we now see the operational leverage of that in a tickup in margin in the period, which we expect to continue as we move forward into FY '25 as we see the benefit of that investment cost dropping through to absolute profit generation in the period. So in terms of what that means from a group perspective, if we pull it all back together, so you see there each division contributed gross profit growth in the period, albeit revenues reduced in the Optimization Services division because of the specifics around the delivery and delay of those 3 significant projects in the second half of the year. If we then look at from a profitability perspective, just breaking out that investment into OpEx, primarily in ESG because we're continuing to rightsize the investment to enable execution of the revenue growth opportunity we see in that space, but also the investment into the Optimization Services division, which was ultimately there to deliver the gross profit that we expect in the period, but that was delayed into the first half of 2025. So from a cash perspective, you'll note there if we follow EBITDA through to the net debt movement in the period, a reduction in utilization in working capital in the year as we expected, a tickup in absolute cash payments as we see a normalization of tax rate for the business. CapEx broadly flat period-on-period as we continue to invest in our platform to enable the service delivery across all of our revenue-generating segments. You'll see their peak interest costs in the period because of that peak level of net debt, which are now expected to reduce in terms of cash cost to the business as a result of that recapitalization of the balance sheet in the period, a tickup in free cash flow, ultimately driven by the cash from operations improvement in the period. M&A. So M&A and contingent consideration payments in terms of cash flow have been a key part of our story for the last 3 or 4 years, where we've utilized free cash flow generation of the business and also the debt facility to fund those following the transactions we completed in 2020 and 2021. Pleased to report those obligations are now complete, and we have no further contingent consideration obligations in the balance sheet of the business, which means as we move forward, it gives us that confidence following the recapitalization of the balance sheet to deliver on the target to be at 1x net debt to EBITDA by the end of 2025. And furthermore, you'll note in this morning's announcement, we also included the aspiration to be debt-free as a result of that increase in free cash flow through the increase in profitability by 2027.

Thank you, Paul. So one thing I think is important for investors to understand is how the 3 pillars of our strategy, recruit, retain and return on investment actually translate into a practical experience with the clients. So here, we have a case study of a client with 700 stores in the U.K., spending about GBP 43 million a year on utilities. We've been working with this client since 2017, so that's a 7-year partnership. And over the life of that partnership, we've delivered measurable savings in aggregate of GBP 42 million. So when we can think about that is over the life of the partnership, the client is pretty much 1 year's worth of utility spend for free. Now 80% of those savings are driven by optimization projects that we installed for them that reduced energy consumption by 30%. The remaining GBP 7 million comes from our Assurance Services, where over the life of the overall service provision, we have delivered savings and benefits, which are 4x the fees that we have earned from the client, really demonstrating a strong return on investment thesis and that key pillar of our strategy. So how did that all happen in practice? Well, from 2018 -- 2017, we recruited this client into the organization, providing Assurance Services for gas and electricity. That allowed us to start to create a data asset, which we leveraged to be able to provide ESG Services between 2019 and 2021. We then leverage that data asset again to identify the opportunity for delivering the optimization projects into the organization to save that 30% and also to provide additional services from an ESG perspective to the client. We are currently in the process of leveraging that data asset again, where we've identified GBP 12 million worth of projects with clients, which will deliver further incremental benefits in terms of energy consumption reduction and reduction in carbon emissions. Now that's an example of a client where we've implemented all pillars of strategy and it's a mature working relationship continuing to deliver repeatable demand. It's important to recognize that this is a partnership and it is a journey. So here are some examples of clients at different stages of that evolution. So Big Yellow storage have been a client for Assurance Services for a reasonable period of time. We leverage the data asset created to be able to provide ESG Services in the form of ESOS compliance, so the Energy Savings Opportunity Scheme. We then ultimately identified the opportunity to make interventions in the premises that would reduce carbon emissions so that Big Yellow could be consistent with their science-based targets whilst also benefiting from return on investment. Having identified those pilots, we worked with the client to engineer the solutions and implement them in a number of stores where we could prove the concept works and really demonstrate the same as real. And now at the stage where we're going to start to roll out those solutions across the portfolio. Victoria Group is another client that landed on Assurance, and we recruited into the Assurance division and create a data asset, which allowed us to identify 5 sites where there's opportunity to install solar and reduce the Scope 2 emissions for that client as well as having a return on investment, helping them take the next stage on their journey to achieve their net zero targets. Precision Color Printing is a client that's at an earlier stage of its evolution. So this client was looking to organize its procurement contracts in a really challenging market. We were able to leverage our size and scale to provide a solution that many other assurance service providers wouldn't have been able to provide. And from that perspective, we are now in the process of creating that data asset, which will help us identify the opportunities to help them on their next stage to achieving their net zero objective. As a company that provides ESG Services, it would be remiss of us not to walk the talk ourselves. In 2024, I'm pleased to say that we were able to submit our long-term Scope 3 net zero targets to the science-based target initiative. We put our first integrated ESG report compliant with e-legislation, specifically the Corporate Sustainability Reporting Directive, CSRD. This is really important as it's a directive which is going to impact many companies over the coming years. We also performed the surveys and the work necessary to work out the interventions on our own estate so that we can remain on track with our own net zero strategy. We further conducted the biodiversity assessments that really lay the groundwork for providing our first TNFD Taskforce for Nature-Related Financial Disclosures report towards the end of this year. And this again is another area of compliance reporting that businesses will need to do in the coming years. And finally, we were able to continue to evolve our supplier engagement strategy and making sure it aligned with our science-based targets. So in summary and outlook. Our key priorities for 2025 from a recruit perspective is to increase the rollout of software modules and accelerate sector-based sales. This is something that we haven't really done much of in the past. So we've been busy working with clients, helping them deliver solutions, taking them on that journey from recruit to retain to ROI. And as we've been doing that now, we've got a good track record in many sectors where we have referenceable clients and proven track record. And so now is the time we're able to start to focus on a more sector-based sales strategy, which we believe will allow us to recruit more Assurance clients, recruit more clients in ESG and recruit more Software clients. From a retain perspective, we're going to continue to leverage the data assets that are generated through the provision of Assurance and ESG Services, increase our points of contact within the client base as we develop trusted adviser status and use that to continue to increase the number of clients taking services from multiple divisions, demonstrating the effectiveness of our cross-sell. From a return on investment perspective, it's all about focusing on reducing debt and free cash flow and continuing to maximize the ROI for our clients as we've clearly got a good track record of doing. If we look at that with respect to FY '25 outlook, year-to-date trading in line with management expectations, robust pipelines across all 4 divisions, and we continue to see positive benefit from the drivers of energy market volatility and European ESG regulations, which continue to drive demand for sustainability services. And this is really important because ultimately, especially with respect to CSRD, the Corporate Sustainability Reporting Directive, this is going to be something where it doesn't matter whether you're a U.S.-based company or a U.K.-based company, transacting within the European Union, then you are going to need to make these disclosures if you're of a certain size. And finally, over the course of the year, we look forward to executing our strategy and delivering a reduction in the net debt to adjusted EBITDA ratio closer to 1x by the end of the year. I'd like to thank you all for attending, and we'll now move to take questions.

Perfect, Mark, Paul. Thanks very much for your presentation. [Operator Instructions] I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. As you can see, we've had a couple of questions come in already. And Paul, what I'll do is I'll hand over to you to run through the Q&A, and I'll pick up from you at the end.

Thank you very much. So I guess the first one we'll take is, can you further explain the commentary in the statement on dividend policy? Yes. So I think if I take that in the whole in terms of capital allocation and the views of the Board moving forward. So yes, ultimately, the business is cash generative, and we're expecting to see a significant improvement in free cash flow generation, ultimately driven by an improvement in -- or an increase in absolute EBITDA contribution over the coming years. And therefore, I guess, the primary focus of capital allocation is very much in that organic growth opportunity that we continue to invest in, in the near term, noting that it is very much an organic growth opportunity and M&A is not on the agenda in the near or medium term. The second priority, therefore, is using that free cash flow to de-gear -- continue to de-gear the balance sheet from the recapitalization of the balance sheet at the start of the year and noting that clear objective of being at 1x net debt to EBITDA by the end of FY '25 and the new objective aspiration stated in this morning's statement that we are aspiring to be debt-free as a result of this free cash flow generation increase by the end of 2027. And then subsequent to that third is, of course, rewarding our shareholders. We've held our cash dividend flat period-on-period broadly. So we've reset the DPS as a result of additional equity now in issue. But we've maintained and we've guided the market that we continue to maintain absolute cash outflows in relation to dividend, but we'll engage with shareholders during the year to get further understanding of their views on the equation of how quickly they would like us to de-gear versus the rewards to be distributed to shareholders over the next 2 to 3 years. The next question is, one for you, Mark. Can you provide a bit more detail on the 3 optimization projects, which impacted 2024 trading? And is the lumpiness and volatility of optimization projects? Does that remain a challenge you will face moving forward?

Yes. So I mean those projects, obviously, everything was well documented in 2024. They all commenced as expected as we enter the new financial year, and we're actively on site with those clients as we speak. I think in terms of the lumpiness and that sort of thing, it's important to remember, it's 2 ways. So in 2023, we benefited from this. But ultimately, our key focus is making sure we increase our pipelines of opportunity to diversify away the risk of being reliant on any project in any period. Clearly, that takes time. So we are now operating with pipelines that are at record levels. And that's really a result of action we took back in 2023 as we started to deploy more resources into this area. We continue with that momentum. And I think kind of every month that goes by, that diversification gets better. But certainly, ultimately, from the point of view of being able to help clients achieve net zero with these interventions that reduce energy consumption and reduce carbon emissions, you're always going to have the reality that things impact those clients in their operations, and we have to adapt in the context of the challenges they are facing as well. But from the point of view of, if you like, operational performance, we're happier than ever with the momentum we're gaining in that pipeline diversification.

Thanks, Mark. And one for you, Mark, I think. So with 85% of FY '25 software and services revenue expected from renewals, are there additional growth levers beyond renewals such as expanding the customer base or upselling new modules?