Mind Gym plc (MIND) Earnings Call Transcript & Summary

Hello, and welcome to Mind Gym's interim results presentation for the first half of FY '24. We've got some exciting news to share. But before I get to that, I just briefly introduce myself. I'm Octavius, I'm the CEO, Co-Founder of Mind Gym, and I'm joined by Dom, our CFO. And our agenda today is to share a little bit about the overall way forward and the exciting news I'm going to announce. The H1 highlights, I'll pass over to Dom. A reminder of our strategy and some exciting new things we have in place to deliver it and then concluding with our outlook. But in terms of the way ahead, where I wanted to start was by recognizing that, of course, there have been some economic headwinds and some restructuring and turbulence in certain markets. But overall, the picture is very much one of the opportunity for Mind Gym. We're seeing the vast amount of change accelerating, if anything, in the corporate world. And this leads to very clear needs a CEO and CFO clients tell us about. The first is that the challenge of leadership becomes ever more present. CEOs frequently say that leadership is the one issue they most need to address in order to ensure the success of their organizations in the future. We also know that most leaders wish they weren't, a remarkable 64% of people who manage other people which they didn't have to do it. They also report record levels of stress and exhaustion and say that most of the time they spent doing things that don't add value. So there's a massive opportunity here to help leaders become more effective. But it's not just leadership, it's also culture. Culture sometimes guided by regulators who require organizations to change their culture to reduce the risk of ethical breaches. Others were -- business leaders want to create a high-performance culture. I want to create the right mood and environment where the people they've got perform at their best. But wherever it comes from, culture is a priority for many organizations today who see it as a source of competitive advantage. And the third area, there are more, but these are the 3 that particularly to highlight today is there is a skills and talent shortage. And organizations have realized that simply by exiting people and hiring new people isn't the right way to solve this problem because there aren't necessary enough of the people with all the right skills to go around and the cost and risk of hiring and rehiring is tremendous. So what organization is increasingly doing is looking at how do I build the talent from within and retain the people I've got versus buying from outside. All 3 of those are really helpful tailwinds in the market dynamics to support Mind Gym. And we are incredibly well placed with some unique aspects to our history, our product portfolio and our reputation that put us in a really great place. We have top-notch clients and many of the world's most pioneering and largest companies. We have proprietary IP built over 23 years. We are the industry leader in a whole range of different topics. Most recently, we launched a new research paper on well-being, the leadership Professor of Harvard Business School, Amy Edmondson has endorsed it as of CHRO from the likes of Shell, GSK, HSBC and many more. We are omnichannel. We deliver in-person all over the world. We deliver virtually live events all over the world up to 500 live in personal virtual events a week. We delivered digital assets, we have diagnostics, and we have the ability through our coaches who are over 400 in over 50 countries. That's a remarkable distribution opportunity. Top right, we've got 700 proven assets ready to roll. Bottom right, we've got platforms that we've built and acquired and developed one for one-to-one coaching, another for diagnostics. That allows us to collate and create data and provide unique insights. And all of this we've done in a self-funded way. We have no doubt unlike other players in the market who have enormous amounts of investment to find a return to give. We have all funded it ourselves, which we're delighted and proud of. That said, as I looked at the business at this time last year, I recognize we weren't giving the financial performance that we wanted or felt that we should be getting in return for having these amazing signature strengths and others like them. And so I asked the Chair, Ruby and the former Chair, Joanne, to start a process to find a new CEO for Mind Gym. They engage a top flight agency to executive research company, and we searched on both sides of the Atlantic to find someone who has worked extensively in the market for talent from an advisory side, who productized IP, digitized and grown commercial teams who had run all the key functions and ideally have been a GM and potentially even a CEO. And I'm absolutely delighted that after that search extensively, there was many candidates that we met, we found the right person to fit the brief. And I'm incredibly pleased today to announce that Christoffer Ellehuus, who is joining us as CEO designate from the 8th of January. He will come from 21 years in the human capital talent market, 15 of those at Corporate Executive Board, where he ran a whole series of different businesses in the U.K. and in the U.S. He then ran strategy execution, which was a product management training company that was owned by 80/20, the private equity company and also Miller Heiman and Chief Global. He had a tremendous success there in stemming unhappy trajectory. And led to a very successful sale to Korn Ferry. Korn Ferry was thrilled to get the strategy execution, but they were just as sort of, if not more so, to get Christoffer as part of their team. He was put in charge of digital, and he was also put in charge of Korn Ferry cell, which was the business that did live one-to-one and digital coaching on the sales training using the Miller Heiman IP that they had also acquired from 80/20. He did a tremendous -- has done a tremendous success there, and we're absolutely thrilled that he has decided to come and join us as CEO designate from the 8th of January with a view to making a transition by the time of the AGM in July. And then we're also making some changes to the Board, Ruby's term as Chair, which she has taken us through this tremendous journey, in particular, through COVID, comes to an end in the summer. So at the AGM, she will not be seeking renewals to that role. I will be transitioning to Executive Chair with a particular focus on connecting with our major clients, having a presence in the market and continue to support the development of our IP. We're making some other board changes that will ensure continued strong governance. Sally Tilleray, who's been our Senior Independent Director since the IPO in 2018 will continue as the Senior Independent Director. Trevor Philips and David Nelson will continue as NEDs. Joanne Cash will not renew her time on the Board, and we will be recruiting an additional independent non-exec director. So that is a substantial and very exciting new advance as we take Mind Gym into the next era. But before we get into that next era, we need to look a little bit at the past era, and I'm going to pass over to Dom to talk a bit about our H1 highlights.

Thank you very much, Octavius. As we move into H2, clearly, we've had a disappointing first half. So I'm going to take you through the context around that but also explain why we're confident about H2 and into FY '25 and in particular, talk you through the significant cost reduction exercise, which has so far reached an annualized GBP 8 million cost reduction. The business is clearly shifting its focus to cash generation and profitability. And I think you'll see that clearly today. So revenues are down 22% in the first half, and this was essentially driven by Q2, where we saw a significant slowdown in decision-making, clients delaying projects and reductions and some limited cancellations of proposed programs. Now because that drop was sudden and it happened essentially in Q2, it was not possible to adjust the cost base in time to have a material impact on EBITDA. So while we have been doing cost reduction, and it's quite material, not a huge amount of it has impacted the first half. And therefore, you see the full impact of that slowdown dropping through into EBITDA. As we move into the regions, you can clearly see that the biggest challenge has been in the U.S., which saw a significant reduction in revenue, in particular in Q2. And the clearest drop was in technology, which probably isn't a surprise, and particularly our West region was therefore impacted. And whilst there are some examples of clients spending and continuing to spend, particularly in pharma and healthcare, there were definitely some cancellations and delays in most industries. So a significant impact on the U.S. EMEA performance has been more robust. Despite the difficult market, the organization is performing well. The most notable point was a GBP 2 million shift, which we talked about before of the energy framework, which got delayed. That got pushed into H2, that GBP 2 million and then GBP 2 million from H2 has now got pushed into FY '25. So you can see the impact of that. Again, elsewhere, we have seen evidence of delays, but what that has resulted in is a really strong pipeline growth. And as we head into H2, we have recently started to see some initial early wins coming through from this pipeline, which bodes well for FY '25 in particular. And the energy framework, which I've mentioned already, was successfully launched in September, and we now have bookings for that for the calendar year of 2024, which have been now signed off by the client. The pipeline is growing in both regions. There is some improved conversion in recent weeks, but of course, it does remain quite lumpy. As we move on to client mix, there's nothing particularly exciting or different here. We'll probably see a very slight reduction in the all other accounts mix, particularly in H2, driven primarily by the energy framework, but there's nothing hugely differential about that. When we go into product mix, again, no surprises given the performance. So delivery is obviously growing. And that's as a share of the business. And design and advisory is declining. Now that really isn't a surprise. Design and advisory typically is at the start of large new projects. And obviously, as we've seen delays in some cancellations, it's not a surprise that design and advisory has been falling off. Of course, that would lead us to expect that to come back quite markedly in H2 and FY '25 in particular. Digital continues to be an important part of our mix. Again, it's been impacted by H1 performance. But again, we expect it to grow as we head into FY '25, reflecting the increased focus on the business on our revenue-generating assets that we've been building, including our new diagnostics platform, which -- it's very exciting, Octavius will be coming back to later on in the presentation. As we move on to exceptional items, obviously, as a business, I've touched on a very clear focus on cash and profitability because of this and because we've reduced our expenditure in CapEx, as a result of that, focusing on our revenue-generating assets, but that means we've paused some of our significant investments towards the business behavioral change platform. Now the good news, as I've said, is there's some interesting progress on Diagnostics, which we'll come to later. But what that does mean is that there's a one-off noncash impairment of GBP 7 million. There's also GBP 1 million of restructuring, of which 50% is again noncash, and it's a partial impairment of the New York office. As a reminder, this New York office lease ends in February 2025, and will free up at least GBP 600,000 of cash savings from February 2025 onwards. As already mentioned, we are focusing on our cash and profitability. So, so far, we've identified and largely completed GBP 8 million of annualized cost reductions, of which about 40% or GBP 3 million is going to impact H2 and the rest will obviously flow through in FY '25. This leaves the business generating cash at a GBP 45 million revenue level, and we continue to work on this and would expect that further improvements going forward. Talking specifically about cash. Cash at the end of September was GBP 2 million, and we continue to retain immediate access to a further GBP 2 million of our credit facility, but we do not expect to use that facility in the near term. Okay. That's enough of the results. I'm going to pass you back to Octavius who's going to take us through more on the strategy side.

Dom, thanks so much. I'm going to start off by just reminding those who know us well and introducing to those who don't, what the overall strategy of the business, which remains absolutely as solid as it has been for the last few years and is very much still what we believe is the opportunity. And the opportunity lies in the way that this market is currently structured. The clients for which we mean in this case, organizations usually centered around the CHRO, Chief Human Resource Officer, have a whole range of different issues and needs they want to address. And they have usually commissioned a different suppliers and different partners to address each of these largely in isolation. And now if you may have 100-plus providers in an organization sometimes even more than that without necessarily integrating or aligning. And what that means is there's duplication, there are gaps and people get confused and therefore, key messages don't get through and the pace of change is far slower than it needs to be. So what we imagine in the future is that we will create an overall ecosystem that combines them together so that behavioral change efforts in one direction complement and supplement those in another. And we're already starting to see this happen. We have a client in pharmaceuticals who started off with us and worked with us on diversity, equity and inclusion. Then really liked our new approach to well-being and brought us in for that. And now we've just won a very significant contract on leadership and management development. There are client -- said at the beginning, we like to have many different providers. We're going to put all our eggs in one basket. But actually, they've changed their [ team ] on that and seen the power and opportunity of having these things more integrated together. So we're already beginning to see that, and there's a lot more we believe to come. We've shared also it's not just a content that needs to be integrated, but also the distribution channels. And we started at the beginning with one to many, our ability to deliver bite-size workshops to small and large groups of people. We then launched our on-demand our e-workouts, which are constantly being evolved and upgraded and is very much in motion now. We launched Performa, our one-to-one coaching for position, which has been very popular with those people who take a part in it and who are keen to come back for more. And we are on the customer launching a diagnostic which I will share more in just a moment. Where we've paused, and I emphasize pause because of the cash position because of the economic headwinds that we faced in H1 is some of the work we were doing for in the flow and the work that we were doing to build a behavioral change platform to integrate all these pieces together. And the focus now is to resolutely concentrate investments in areas that are revenue generating. I have clients who are committing funds to support them. So our focus on the top 4, and we're pausing on the other 2, which is the consequence of the CapEx decisions Dom has just mentioned. There are 2 new areas I really want to share, which I am incredibly excited about. The first is a new approach we are taking with our clients that has proved, as you can see on the site to be award-winning in the vital area of culture change. Many organizations say we want to change our culture. Most finds that it isn't effective the way they go about it. There's either a desire to get to from A to B whereas culture is much more adaptive than that and requires a much more psychological approach. All the ideas you can do it top-down. But again, that has been proven to have only limited effect be quite slow and quite low levels of adoption. And so what we're really excited about is a new approach, which we've called habits and the habit-labs that we have created to support them. And what this looks at is how do you change 1 or 2 daily habits for large numbers of people across an organization so that they not only apply those habits but that then has a ripple effect on the rest of the culture. And there are a few bigger organizations with whom we could be working to deliver this within city, the Financial Services group. With 270,000 employees, they tell me that I'd be hard-pressed to name a country in which they didn't operate, and I suspect they are probably right. So what they had was 3 different values that they wanted to address, 1 year on each, ownership, challenge and collaboration. And what we focused on was how do you create a habit that people will adopt across this organization without having -- certainly not the capacity all the time to be able to train everybody to do it. It has to be something that comes almost viral, almost infectious. And so we worked with a group of changemakers initially 2,500, that grew as more people were keen to take part. And what we did was we A/B tested a series of different habits. A/B testing is where you run Option A and Option B and then a control group, and you see what impact each of those scenarios has. And what we found was that the habits that we thought were going to have an effect, in particular amongst the senior leaders, we thought would work best, we're not the ones that actually got most traction. Because the keyword I have is it's in the workflow that is easy to do, that you get an immediate payoff when you do it. But you also get a repeat effect. The more you do it, the more it pays off. So telling a funny joke can get a group pay off for the first time around. But if you repeat the joke, you're unlikely to have the same response that actually declines in terms of impact. What needed to have is the aggregate and accumulation. But not only do they need to help in terms of using them more, they need to have a broader effect, not just the habit itself and the effect it's having on that incidence, but it actually changes in this case, increases a sense of ownership. Now at Citi, one of the things people felt quite disempowered about and frustrated about was the amount of time they spent in the meetings. They felt this wasn't always a good use of their time, and they weren't in control of how their time was spent. They often move back to back from one meeting to another. And therefore, the habit that we tested with them was a simple one, which was the -- anyone who are hosting a meeting or introducing a meeting, would have to say why this topic, why now and why us, why these people on the call. And we create templates in the Zoom and Microsoft teams calendar entries that will pop us up and need to be populated. And this allow people also to say, hang on, but I don't need to be at this meeting. Well, this doesn't require me and therefore gave people the agency to be able to remove themselves from meetings. It also felt that people who are organizing are more in control and thoughtful about what they were doing with other people's time. I mean, at the end of the meeting, tell them who does what. And that was a pop-up 5 minutes before the end of the meeting to remind the meeting organizer and the participants that they needed to spend 5 minutes deciding who does what at the end. And as you can see from these charts, the adoption levels were phenomenally high. An organization of 270,000 to get to these levels of adoption, in the first tranche of rolling out this new approach was phenomenal. And the really important thing is the consequence that came from that. So people who are held more accountable with this habit and without it, it was a very high score and their tasks are clearer with this habit and without it. There's a high score as well. And there were many other benefits that the organization saw as a result of introducing these habits. So the data that was shared as part of the board submissions meant this became the top winning award at the Association of Business Psychology Awards. It won the Chair's overall choice. And as you can see here, the Chair said, the work was originally in so many ways, but still evidence is to allow a reasonable assumption of success. This represents operating at the exciting forefront of business psychology. So we're obviously thrilled with this project. We're through with our partnership with Citi and we are adversely organizing to take the habit-labs to a range of other companies that we work with who are our clients. So that's one area where we've got some reciting innovation on an issue that matters to businesses. And the second thing I want to talk about is the advances we've been making with diagnostics. And the first thing is to share a little bit about how the world works in our clients' lives at the moment. By and large, on the left-hand side, you have people who do measurement. And then in the circle atop is you have people who provide solutions. And quite often, the measurements come out and then you have to find someone who's got a solution that meets it. The solution doesn't quite fit or the amount of time it takes to find a solution can be quite long or sometimes nothing happens at all. And you just measure again and not a lot has changed because you haven't managed to do much in the in between times. What we've developed is an integrated approach. So we can diagnose the need. We can shape that diagnosis. So it automatically fits into a behavioral change solution, a Mind Gym solution and then we can repeat that process at defined time later, possibly annually to measure the impact. And that then creates a very different kind of proposition to our clients where they get the whole system working as one. It removes a lot of the friction in the system. It increases the speed, and it increases the likelihood they're going to see a positive delta in measurable results. It also makes a different kind of relationship we have with our clients. So this will be increasingly look like a SaaS proposition and annual subscription where you're measuring things year after year or more frequently if you choose. And the really exciting thing about this is not only have we designed the content of these diagnostics but we've also got our own proprietary platform. We acquired an incidence of a platform for another organization, we've adapted it, and we're now testing it with 3 clients, which will be complete by the end of FY '24. This means we have control of the data of the user interface of the features and of a whole range of other things that we can develop and potentially build other things into this platform. So the whole piece works as one. So that's a really exciting opportunity. And I just want to share with you an example of how it works. We've recently launched our new search on well-being and how do you make organizations resilient and strong to cope with the a multitude of changes that are coming their way. So part of that cultural change I talked earlier, could be, we want to be a healthy organization where we can react and respond with agility and strength. And what we've done with our psychometric team is separate the ideas of ill-being and well-being. So just absence of a negative, it doesn't mean you have a positive simply because I haven't got a broken leg, doesn't mean I can run a marathon. So we've got 2 axes here. This is the first time this has been on this space. People have previously thought it was one single line, where high yield being a bad thing and low yield being is a good thing and the opposite for well-being. And then we use our diagnostics to create benchmark data, which you'll see on this chart, and you'll see there's tragically 4% of people are in crisis clearly in the professional medical attention. You've then got people who are struggling and a very interesting group called the fragile thrivers. These people who look like they're doing it brilliantly, they're your high flyers in that phrase, if you want something done, give it to a busy person. Well, they're busy people, your fragile thrivers. But they're paddling underneath and they're at risk of things falling apart. I was [ launched ] this at the Longevity Forum at Oriel College, Oxford, a couple of weeks ago and someone there who has started a biotech business, said what she hadn't realized is every time people got exhausted, she reemphasized what a great thing they were doing and how important it was, which always trying to increase well-being, but she didn't work out how to reduce the high levels of ill-being and that -- once you saw this, you realize that it required a very different remedy. Then you have those who are boring out, who are the opposite end and those who are coping and flourishing. And what we've done is design remedies to address each of these. So there's a series of remedies that help reduce ill-being, get rid of the negatives. There's also a series of remedies that help increase wellbeing. And then there's a whole series of remedies that reinforce the stock, things getting worse, help me stay where I am, build a solid base, so that I can then move further forward. And what we've done at Mind Gym is allocate and curate a journey for each of our managers and individual contributors using that portfolio of proven assets that I mentioned at the beginning of this presentation. So all of this can become very simple and easy for clients to do. They can run the diagnostic. They can see where people map on the picture of health. They can then have tailored journeys. And these are not as tailored. These are about the 3 Rs; recover, reignite and reinforce. But you get much more tailored than this, the yellow circles are the e-workouts, the digital 9-minutes sessions, the [ Science ] squares go largest, live or virtual events for big groups. The green circles are workouts, more of a behavioral change of live and virtual for smaller groups. All of these exist. All of these, you can run immediately. So you can run your diagnostic on Monday, get the results the following Friday or other Friday that will give people 2 weeks to fill it in and then have solutions ready to go immediately, certainly by the following Monday. So this is a very, very different way of allowing organizations to move a lot faster address their challenges. So we're really sort of at habit-labs. We're really sort of a diagnostic and the potential that has to create an integrated holistic solution, in this case well-being, but it can -- and does apply for other areas, too. So that hopefully gives you a sense of the overall strategy and the great strides we are making in execution to deliver on it. I also want to share a little bit about our outlook. To summarize things that you would have heard from Dom and from me just earlier. This is a massive market. It is a really important market for businesses because they care enormously about talent, how to nurture it, how to grow it and how to maximize the productivity of the people that they have. We are incredibly well positioned with our unique aspects and attributes built over 23 years of IP, a fantastic library, great clients and a strong reputation. And that all puts us in a good place. We're also positioned for growth. We have successfully launched the energy framework and that has been slightly delayed as Dom said, is absolutely happening in H2 and booked for next calendar year. We are seeing substantial growth in the pipeline for both regions, which is great news. We are seeing some changes in decision-making, taking a bit longer, longer to mobilize, requires a bit more socialization. So as ever of this business, the timing is very hard to predict even if the direction of travel is quite clear. And we're absolutely thrilled that we've got Christoffer joining us as CEO designate, to provide a much more commercial focus, a greater rigor around generating the financial returns that we believe these strong propositions should be generating. I mentioned before, our digital focus on revenue-generating assets which are the diagnostics performer and the e-workouts, the Habit-labs are coming, the wellness point of view, we just launched. We are very focused on cash. We've managed to make some very significant annualized savings, but we are expecting to return to strong profitability in the second half, and we continue to target the 15% to 20% EBITDA margin over the medium term that we have recovered. So thank you very much for your time. I shall now pause and open us up to questions.

And we've got a question from Ian German from [ Alan Bi ]. Of the GBP 3 million cost reduction expected to benefit half 2, what will the split be between OpEx and CapEx?

Shall I take that Octavius?

Yes, it's definitely the one for you. No problem.

Okay. So there's about 2/3 OpEx, 1/3 CapEx.

And another question from Ian, who asks, how do you educate clients that your service is not a nice to have in good times and a discretionary spend that can be halted when times are tougher.

Fantastic question, Ian. What we do is we help clients understand the financial consequences or what's happening in their talent pool. For example, the cost of attrition and rehiring and also the cost of low productivity of presenteeism, of people not performing at their best. And we help them see the delta that they can generate from that. I think what you saw from the Citi example is we're increasingly running psychological tests to see the impact and application of different interventions in order to drive the outcomes that are important to that client. So we are focusing on customer service metrics, as well as on sales conversion metrics and on productivity metrics and HCM metrics like intent to stay and whether the people stay as promotions built to take on new tasks. So a whole range of the KPIs, either in the HCM base or in the business space that are important to clients.