Surgical Innovations Group plc (SUN) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Surgical Innovations Group plc Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to David Marsh, CEO. Good afternoon, sir.

Good afternoon. Good afternoon, everybody. Before we start on the presentation, I would just like to make an introduction. As you will all have read on Monday, this will be my last investor presentation as I'm retiring from the role of CEO. I'd like to introduce Alex Warnock, who is, as of tomorrow, taking over my role and will be driving the strategy of the business over the next couple of years. So, Alex, if you'd like to say a few words?

Thanks, David. Thanks for the introduction. Good afternoon, everybody. I'm sure you understand that at this point, day minus one, I don't have too much to say at this point, but I'm really excited about the opportunity, and I will have more to share once we get our feet under the table in the coming weeks and months.

Great. Welcome on board.

Thank you.

Okay. If we move on to the presentation, I'll take you through the first couple of slides. And then David Anderson will step in and give you an overview of the financial slides. So, in the last presentation in March, we talked about the focus on the fundamentals of the business and that continues. And as we look at the things that we've achieved, which is the majority of this slide. So just to give you an overview of where we were in the first half of the year, revenues were just over GBP 6 million, so broadly flat on last year, and there were a number of reasons for that. But we did see exceptionally strong growth in our APAC business, driven by the Japanese market. The U.K. third-party sales and distribution products that we sell, we saw strong growth in that, and that will continue into the second half of the year as well. The challenge we saw was around SI branded products, and that was impacted by our business in the U.S. and, sort of, our European market as well as some challenges in India. So we've had a couple of headwinds from that perspective. And also sort of the ongoing strikes in NHS and in the Spanish market as well have caused us a few problems that they impacted elective surgery. And just to give you some flavor around that, there are 171,000 appointments, outpatient appointments and surgeries canceled in the 2 years that these strikes have been going on in the U.K. So you can see the impact that, that will have on our business that directly impact elective surgery. The OEM business is in better shape. So we have two key partners for OEM, and we're seeing particularly strong sales from our relationship with STERIS. They've proven to be a really good partner, and we expect that business to grow with a strong order book in the second half of the year. And whilst margins reduced compared to the year-end in 2025, we have seen them improve on the 26% in the full year for '25. I think that's the other way. This is down to a shift in product mix and also the price increases that we have in H2 2026 as we go forward. So the NHS supply chain, for example, new MIS3, we're seeing better pricing that will come through on that, and we're seeing some positive price increases in our distribution network. But I think the biggest thing that we need to stress in the first half of the year is the MDR certification. And whilst this underscores our commitment to quality and compliance, what it allows is for the business to move more rapidly on new product development. It reduces some of the bandwidth restrictions that we've had in our R&D team and regulatory team and allows us to focus on developing new product opportunities, and I'll discuss those a little bit later. So we talked about focusing on the -- on focusing on the fundamentals. And we're building on the positive progress that we had in the first half of the year, MDR certification achieved, and I probably bang on a little bit about MDR certification and the importance for the business. We leverage our experience and relationships within the NHS, particularly within the supply chain, and we were awarded a place on the MIS3 framework, which went live in August this year. And that will allow us to continue to grow our business within the NHS, but also to achieve a higher price as well. The strong momentum in APAC has continued, and we expect to see that continue into the second half of the year. That's particularly around Japan, but we've got some other opportunities coming down the line as well. We're enhancing the sort of the distribution network and the products that we're able to drive through that. So we're going to be launching a number of products in the second half of the year in quarter 4, in particular. And those products, we can drive the opportunities through the network that we have. And the sustainability messaging continues to resonate. It's helping us win new accounts. It's helping us have a different dialogue with health care providers. And an example of that is in Austria, we're working with our partners there. And there's a 5 hospital group that are converting to YelloPort+plus based on the sustainability messaging. So we've converted one hospital. We're about to convert the second one. And then throughout 2027, we'll convert the remainder of those hospitals. They do significant volumes of laparoscopic surgery. So we see this as a real opportunity to get our European business back on track and into growth. The investment in sales structure, that's continued. We now have a full team back in the U.K. We've increased resource internationally, and we're seeing the benefits of those. And we're driving the international distributor sales efforts by adding additional resource, increasing the footprint that we have there and enhancing some of the product opportunities, as I mentioned earlier, that MDR allows us to do. The U.S. continues to be sort of a bit of a problem child for us, but we have a new strategy in place. We're looking at building a network of dealers, and we're expecting to go live with those during quarter 4. So that will start driving revenue into 2025. And then, of course, the restructuring of the management. I took the decision that it was a good timing for me to step down as CEO and Alex to step in and assume that role. I'll remain in the company as a non-exec, and I'll do everything I can do to help Alex transition and push the business forward. So this is the road map we set out in March, April time around focusing on the fundamentals, and we're going to continue with that plan. So it's about driving sales. That's the important part of the business now is to having invested in sales is to leverage every opportunity we have, and we'll continue to do that. Increasing the profitability of the company, that's a key focus. So it's about improving operational efficiency. It's about improving margins, reducing stock -- sorry, reducing costs, and we're driving down costs. And it's a constant review of everything we do to look for opportunities for efficiency. Important part of the business is improving working capital. We're doing that by a number of ways, reducing inventory, managing creditor and debtor days and it's managing our supply chain as well to make sure that we can maximize the terms that we get and ensuring that pricing is competitive, too. And this all forms part of developing our vision and strategy and sort of we have that in place and Alex will enhance that and develop his own strategies around that to make sure we deliver on all of the commitments that we're making. So part of that focusing on fundamentals is to drive the sales. So we're continuing to improve the sales organization. We have completed the field sales coverage. And we're now looking at the other areas of that, improving the geographical footprint that we have. We're looking -- currently, we're working on registration in a number of countries. And whilst that's been slower, we would have liked, we expect that to speed up. And in 2027, we should be adding a number of significant countries to our footprint. We're continuing to develop our sustainability programs and work with our dealer network to drive those initiatives to see if we can capitalize on the growing demand for sustainable solutions in health care. And we're seeing that as a real positive for us. It allows us to have a different conversation with health care providers other than just around pricing. And then part of the strategy is to drive additional revenue through third-party products. So we have a good dealer network, particularly within Europe, and we're building a portfolio of third-party products that we can put through our network and drive additional revenue. So from a U.K. perspective, Elemental Healthcare has a really strong reputation in the market, particularly within the NHS, and we're developing better relationships with the private health care providers. And we're seeing that help us drive business. We're continuing to strengthen those relationships. And that allows us to be able to attract new technologies and new third-party products. And we'll see in quarter 4 and into next year that we can add products that already have an existing revenue within the U.K. so allowing us to accelerate some growth. Talk about the U.S. and the challenges that we have there. But we have a good strategy going forward. It will be a network of independent distributors, and we're working very closely with those and that will allow us to initiate to increase our footprint from covering about 8 states to about 22 states. So we should going forward into 2027, have the opportunity to grow the business going forward. And it's -- we talked about higher margin opportunities. So we're looking at some of the third-party products where we have opportunity to grow margins. Some of the new product development we have, we believe we can obtain a higher margin and drive that business as well as increasing our importance to our partners around the world. And we're diversifying some of the product offering we have. So it's about looking at how we can improve our existing portfolio of products, how we can add to that and how we can expand on the SI branded products that we have as well. So some of that, now we've got MDR is working with third-party manufacturers for developing a portfolio of SI branded products that we can sell around the world. So profitability, increasing profitability, obviously, key metric for the business. This is around delivering on efficiency and driving the efficiency of not just the facility that we have in Leeds, but it's every aspect of the business and driving efficiency through sales, driving efficiency through all of the operations. And I think, again, MDR will allow us to focus on some of the internal structures within the business and drive that. We're looking at high-margin products and higher-margin markets as well. So Japan is a really strong market for us, and we get a really good margin through those products. We're also implementing price increases across our network where we can to deliver better margin and outcome for the business. And key to it as well is driving costs down. So there are some projects that we've talked about over the last 18 months or so that are now being delivered and will take some significant cost out of our own manufactured product. And there's reduced overhead costs as well. So we've looked at the structure of the manufacturing business and how we can reduce that overhead cost around that. So in the clean room, for example, we've taken some heads out. And by cross-training of all parts of the business, it means that we can utilize people from different parts of the business when there's a capacity issue in another part. And that seems to be working really well. So improving working capital, we talked about reducing inventories. We've talked about managing suppliers and those are ongoing. So when we look at our inventory levels, we've reduced that to GBP 1.7 million already this year from a starting point of about GBP 2.2 million. So we're managing that much more effectively. And we're also managing our cash really tightly. That's ongoing and will remain ongoing. Sort of it's a key part of the business. And the finance team have done a really good job around managing those -- managing the cash effectively. I talked earlier about improving the supply chain management and sort of what does that mean? That's sort of building relationships with suppliers to improve terms to improve pricing around that to look at different opportunities that we have to change suppliers if we need to and making sure we're getting really good value from all of our suppliers. And sort of that's about moving to a leaner supply chain. So making sure that the suppliers we have are working in our interest as much as they are [ in ]. So executing this -- sort of the strategy. So as we develop the strategy and sort of when Alex comes on board, he will sort of look at this more closely and adjust it to be more relevant to the business. But this is ongoing. We continue to develop the strategy. We're focusing on the important parts of the business, the customer, the core competencies within the business. So this is work in progress and will continue to be work in progress for the coming years as we -- the business improves, that will always be looking for opportunities to improve further. And then it's focusing on the key drivers of the business and where we can obtain growth. So sort of I talked about our NHS relationships. It's really important that we continue to grow those. It allows us to attract new distribution products for the U.K. market. It improves our sales channel as well. We're strengthening those with new dealers. We're strengthening what we're doing in the U.S, and we have some really good initiatives going on with our dealer network. We're trying to sort of make sure that we're not reliant on one or two markets. Obviously, the U.K. is always going to be crucial to us. But when you look at our dealer network, we have a number of key distribution partners, and we need to spread that risk out further as well and by going into new markets as well and developing that business. New products are always the lifeblood of any company, and we're looking at opportunities, as I said earlier, about working with third-party manufacturing companies to improve our portfolio, to improve our pricing and to drive the business. And then there are things around clinical leadership as well, we can develop products and opportunities blind, but we need to have clinical inputs, and we're working closer with some of the key hospitals around the U.K. and also looking to develop relationships with some of the universities. We've worked more recently with Leeds University around materials. But there's a number of opportunities that we can work there. And of course, the U.S. remains a commercial -- a key commercial strategy for us. And by developing the network of dealers, I think we will be able to grow that business significantly over the coming years. This is my favorite slide. I love talking about new products. So what MDR has done has allowed us to bring some of the products that we've had in the pipeline for a while to market. They're going to be -- so for example, we've launched the LogiTube Lux in Europe and the U.K. That's our recent launch, and we expect that to develop revenue in Q4 and beyond. We're about to launch the Logi Grasp and Logi Dissect in Q4. I think it will be the end of November that those products launched in the marketplace, and we're already building initial stocking orders from our network of dealers. And that will sort of enhance our range on the Logi range of instruments. So it's just adding to that range of products that we can put through our sales channels and make us more important to those dealers. The YelloPort Balloon, this is a line enhancement, but it's a key line enhancement for us. So it's about port fixation to stop them slipping out of the patients during surgery. It's a key request from our clinicians that use our product that we develop something around port fixation. And this is something that we've done in partnership with a third-party manufacturer. And we're looking to add to a 5-millimeter version in 2027 as well. And then further down the line on that, we're developing some technologies, which we think are quite -- quite smart around port fixation as well. So we're not standing still having brought products to market. We're not standing still and just waiting for the sales to grow. We're looking at initiatives that we can improve the product portfolio all the time. And I've talked over the last 18 months or so about some cost down projects, and this is an example of one. So the YelloPort+plus universal valve is a key product for us. We sell 10,000 plus a month. The first part of that project produced a cost saving of GBP 1.50 per device, and we're seeing that through now into margin. And second part is an additional GBP 1 of saving. And that's done through redesigning manufacturing process, materials and also a redesign of the product. And that project will move on to other parts of the business as well. So I will now pass you over to David Anderson that will take you through the summary of the financial review.

Thank you, David. Good afternoon, everybody. A number of these, David has already touched on in terms of revenue and gross margin. And the adjusted EBITDA small profit for the period and in terms of operating a small operating loss for the period. Cash -- operating cash flow generated cash in the period of just over GBP 200,000 as opposed to using cash in the previous period. And then net debt is the same number as at the year-end. Next slide, please. Thank you. And just breaking out the revenue analysis, which really pictorially represents what David was talking about earlier, a small reduction in the SI Brand the headwind of growth in APAC with -- sort of the tailwind of growth in APAC was a headwind of issues in terms of the U.S. and other parts, distribution increasing somewhat and also OEM, again, just pictorially representing what David talked about earlier. Next slide, please. Thank you. In terms of operating expenses, so an increase in the sales and marketing expense that reflects the investment in that team that was concluded towards the end of 2025. 15 people in the sales team now, 15 people at the end of 2025, and that's really what's driving that increase in the sales and marketing, our investment in that team to generate the revenues coming forward. Admin expenses down through cost reductions and operating matters and then research and compliance broadly similar. Our headcount at the moment is 93 people in the business. We started the period with 92 people in the business. And then in terms of the balance sheet, again, as mentioned earlier, inventory has come down from GBP 2.2 million to GBP 1.7 million, which is a nice reduction. We're targeting and continue to target that inventory at GBP 1.5 million. In terms of collection days and payables, our collection days are holding steady sub-60 days and our payable days are sub-40. And the profile of that debt is very good. We have hardly any debt which is overdue. It's a really good, neat profile -- picture. In terms of borrowings, we paid down the last installment of the CBILS bill of GBP 150,000 in the period. So that has gone. And in terms of -- we continue to draw down our invoice financing facility, although the amount was drawn down reduced from December to the end of June. And our net debt is broadly similar to what we had at the end of December. Thank you David, back to you.

Thank You. So just in summary, the investment in the sales is beginning to deliver a clear momentum in the U.K. and across our key markets. And part of that is the sustainability messaging continues to drive opportunities, as I described, one particular one in Austria, which is a significant opportunity. MDR certification has transformed the business. It's allowing us to be far more flexible, more rapid in developing opportunities in terms of new products and working -- bringing SI branded products in from our suppliers, and that will allow us to continue to drive the business. And part of that is leveraging our distribution network to drive the opportunities. We've already added a number of third-party products into that network. We're looking at opportunities to further enhance that. And so it's maximizing our sales channels to the full and being able to drive sales. Being awarded our place on the MIS3 framework. As I said, that went live in August. And that's a really important framework for us to be on. It allows us to drive not only SI branded products through, but also third-party products and allows us to add new products to the framework agreement as we develop them and as we take on additional third-party products. And it emphasizes the amazing relationship that we actually have with supply chain. So we've been on this now for -- I think this is the third iteration of the framework agreement from the invasive surgery. And we are one of the key companies that they look to when there's a shortfall from other suppliers. So outstanding relationships, and we continue to leverage that. We're driving our margin improvement, cost projects, price increases through the supply chain and through our dealer network. And we're driving operational efficiencies throughout the business. So we'll see that continue to improve during the rest of this year and into next year. So that concludes the presentation so far. We'll go to questions.

Thank you David and [ Alex ].

Thank you for updating investors today. [Operator Instructions] For your reference recording of today's presentation will be available on the Investor Meet Company platform shortly after the meeting has ended. As you can see, we have received a number of questions during today's presentation. Alice, at this point, if I could just hand back to you to read out the questions, give those to the team where appropriate, and I'll pick up from you at the end.

Thanks, Charlie. So we've had three questions submitted, two of which I think was largely covered. The first one was, can you elaborate any further on the U.K. sales organizational changes?