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

Good afternoon, and welcome to the Surgical Innovations Group plc for 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 view your questions submitted today and publish responses which is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand over to CEO, David Marsh. Good afternoon to you.

Good afternoon, everybody. Thank you for joining this platform. Before I start on our review of 2024, I'd like to take this opportunity to introduce you to our new CFO, Brent. He joined the company in mid-February and has been very ensconced in the audit process and rebuilding the finance team. And I'm very grateful to have him on board. He's done an outstanding job so far. So later on, under financial results, you'll have the opportunity to listen to him what he says. And sort of if you've got any questions, we'll take those at the end.

Great. And then just from my point of view, I obviously be speaking later in the call, but good afternoon to everybody. Good to be here. And nice to meet you all, albeit virtually.

Great. Thanks, Brent. Okay. So if we start the review, I think the company overview slides, all of you know the company very well and this is sort of a historical slide that we go through with new investors when we're presenting to them. So I'll skip through this and get to the detail. We'll start on some of the commercial and operational highlights of last year if I can get the change. So clearly, 2024 was a challenging year for the business and involved a lot of restructuring and a lot of efforts on the management to restabilize margins, streamline the cost within the business and drive efficiencies. But there are a lot of good news stories around the business too. Our own SI branded products that continue to demonstrate good growth based on the sustainability messaging. We saw an overall growth of 6.8%. And in some key markets, we saw substantial growth in double digits. We also saw a strong performance in our OEM sales as we managed to resolve some of the long-term supply chain issues that we had and clearing the back order, which gave us a very strong year, and we see some opportunities -- new opportunities in OEM as well as we move forward. The U.K. had a particularly difficult time, particularly in the early part of the year. But we also managed to review where we were in the U.K. We strengthened some of our distribution agreements with long-term suppliers, in particular, Microline, which was a 5-year deal. And we've also signed a number of new agreements with some key suppliers, some of which come with existing revenue. We've also launched a number of products in the U.K. and beyond. LogiTube was particularly successful. This is a product aimed at the obesity market. And we saw that rolled out into Europe and APAC, and that will continue during 2025. As I mentioned earlier, we had a restructuring program within the business. We completed that during the tail end of 2024. It's helped us align our cost base and drive efficiencies within that facility. And we expect those benefits to drop through into 2025, and we're beginning to see that. So we're heading in the right direction from a cost point of view. And furthermore, the -- or an update on the transition to MDR, sort of the time pressure has obviously receded somewhat with the extension on the deadline to 2028. But we're continuing to push for complete MDR approval, and that should happen at some point in the second half of the year. So we talked about some of the growth in our SI branded products. And that was particularly visible in our European business where we saw growth of 12%. And the sustainability messaging has become key to that. On the background, so to take a step back, at the beginning of 2024, we've looked at the bandwidth that we have in our international team and looked at the opportunities that we had to drive business the quickest. And we felt that Europe was one of those key areas. And so the team spent a lot of time co-traveling with sales team, providing training and showing them the marketing tools that drive sustainability. And we've had a number of wins in Benelux, in Germany and Spain, purely based on the sustainability messaging that we put across. We've seen in Germany, for example, there's a 20-hospital trial for Green Surgery. And that is to -- so the background for the trial is to prove that sustainability can achieve both cost savings, reduction in plastic waste and a reduction in CO2 footprint without reducing the quality of the instrumentation that surgeon would use. And so this, as I said, is across our 20 hospital trial, and is about to start as we speak, and we'll see the benefits of that throughout this year, but definitely into next year. We'll continue the rollout of the LogiTube into the European market. And as we launch an eliminated version of this, we expect that to be a real opportunity for the rest of the year. The U.K., as I said, that's been a challenging year for us. We saw an overall decline in sales of about 11%. That's primarily for at least part of the year when we saw industrial action in the NHS and also the realignment of stock by the NHS supply chain. They took the decision at the beginning of the year to iron out the peaks of purchasing. So they had a more balanced stockholding throughout the year. And that resulted in us effectively getting no orders from them in the first 2 months of the year, which obviously impacted the business. We also look at a strategic decision to move away from working with Cousin Biotech, which was for the synthetic mesh and gastric band. The synthetic mesh business is low margin. It takes - it's low price. It takes a lot of manpower to convert a new account and is sort of a business that has slowed the progress rather than increased. And so we've directed the sales team to focus more on our own branded products and some of our higher-value distribution products. In the background to the elemental year, we looked at extending new agreements with some of our key suppliers. As I mentioned earlier, Microline, that's a new 5-year deal from April of last year. We've worked with some new companies, Aspen Surgical and Cipher, for example, who both have existing revenue streams in the U.K. Aspen Surgical is an interesting company. They have been buying a number of medical device companies over the last 5 years. And they found themselves in a point where they had 12 distributors in the U.K. Elemental was one of those and we've convinced them that we're the right partner to take on the whole of the business in the U.K. And we're gradually bringing that in-house and understanding where the business is and what resources we need to put behind that. Cipher Surgical, they've been around for a number of years. They currently don't have a sales presence in the U.K. and Elemental is picking up that mantle and will begin to drive revenue as product comes online. We also signed an additional agreement with a company called Veol Medical. It's a company based in India, and they have a really good offering for laparoscopic gynecology, and that adds to the other products that we have in our portfolio. And then one of the other things we've done during the year is to strengthen our relationships with our private health care providers as the NHS becomes more and more reliant on the private health care providers to fill gaps in the capacity. It's important for us to be seen as significant partners. And during last year, we signed 2 supply agreements, and we have a number of -- we're in current discussion around a number of other products, primarily with Spire Group, but we're also working with Nuffield and Ramsay as well. So that gives us some real upside opportunity as we move into this year. The U.S. continues to be problematic for us. We saw sales drop 4% and sort of there's a number of reasons behind that. Some of it is around pricing pressure, particularly on laparoscopic scissors. During last year, we saw a lot of influx of low-cost far Eastern Chinese product that were causing us a number of issues. We've been working with our dealers to look at potential volume versus price strategies. And we think that over the coming months, we'll come to a conclusion on that work. We've also been looking for an alternate route to market decisions outside of the Southeastern states. So Adela, our distributor there, covers the 5 Southeastern states in the U.S., and they do a really good job for us, but we're missing opportunity outside of that. Tariffs are obviously going to be something which creates some uncertainty, but we also see some opportunity there as well. As I mentioned, a lot of our competitive product is coming from China. There are larger tariffs on Chinese devices. So that may bring the pricing into a more competitive situation for us. And what we're also understanding and beginning to learn is that a large number of components for U.S.-made scissors come from China, too, and they will be subject to tariffs. So whilst we don't have particular clarity, we are seeing some opportunity around that as we move forward. So our APAC business continues to grow, again, 12% growth in the region, primarily based on the Japanese business, but also we had a good year with our Indian partners as well. And one of the things we're exploring with both those companies is about a narrow and deep strategy, if you like, where they sell sort of key parts of the portfolio, but they don't sell beyond that part. So both of them sell YelloPort's access devices, but neither of them sell LogiCut scissors. So we're working through registration in India for the LogiCut scissors. We expect that in the second half of the year, and that's a real opportunity because scissors are well priced particularly for their market, and so we can see an opportunity to grow quite quickly. In Japan, they sell a competitive product that is more expensive than ours. And so we have the opportunity to transition from a competitive product to LogiCut, and the dealers are quite keen to move with us on that. Our business in Australia and New Zealand, we had some headwinds when the company we're working with folded. We have a new dealer, and we worked through the registration process with them. Slow to gain traction, but we're beginning to see some opportunity there. And hopefully, in the second half of the year, we'll see much better traction in that part of the market. The rest of the world, we saw growth of 10%, primarily Canada and Israel. You may recall, we switched distributors in Canada about 18 months ago and they have done -- the new dealers, AMT have done an outstanding job, particularly in adopting the sustainability messaging, and they are focusing on that and we also see an opportunity there. They currently buy an American scissor. And I think the anti-American sentiment in Canada gives us an opportunity to maybe capitalize on that and swap our scissors even for an American brand. So the OEM business, I talked about on the opening slide. We had a number of supply chain issues, mostly around components supplied into surgical innovations. And we've resolved those sort of worked very closely with AMS on that to then clear the back order and drive growth in 2024, and we expect similar numbers in 2025 as well. So we're cautiously optimistic about how that business in the U.S. will develop over the coming 12 months. We have -- I've listed it here as a new OEM opportunity, not strictly correct in that, this is previously CareFusion. We unbranded an SI product for CareFusion, but it was very small numbers and haven't really -- we didn't really see much growth. So it was a nice to have, but nothing really positive. CareFusion has since been bought by STERIS who are a big instrument trade company, sterilization company. And we've seen our business significantly grow over the last 6 months, and we expect that to continue, and we're also looking at opportunities where we can own brand other products for STERIS for them to be able to put in sterilized trays and grow the business that way. We're also looking at opportunities with our spend. So we sell a number of products to Aspen Surgical, and we're seeing if there are opportunities to expand our offering through Aspen. So when you look at the growth opportunities for next year, around sort of the Elemental portfolio, we've strengthened our relationship with our key suppliers, but we're also looking at some strategic partnerships with companies that have existing revenue in the U.K. So we're in conversation with some primarily U.S.-based companies that have sort of an organization or a distribution partner in the U.K. that they are not particularly happy with. And the Elemental team, sort of it's a well-trained team that covers the U.K., we have good relationships in the private sector, we have good relationships with the supply chain, and that will enable us to develop these partnerships and take on more products that have a revenue stream are ready. We're also looking to expand the SI products into key geographical markets. And I talked earlier, and I'll cover in the R&D slide as well about some of the products we're bringing to market, the illuminated LogiTube, for example, is a key product that helps us drive the market in obesity and also where we haven't actually launched the LogiTube, the conventional LogiTube in some key markets, too. So we'll roll that out. But we're also looking to -- around this strategy of narrow and deep. So sort of making our products more attractive for our dealer network by finding pricing comparisons, by showing quality comparisons, by using the sustainability messaging to drive the business. So as I talked about in India, in Japan and also in Canada, broadening the SI products are sold in those key markets. One of the things that we've sort of been working on a lot, and we're seeing sort of opportunity is to leverage the distribution network that Surgical Innovations have. So sort of we operate in 47 countries. We have a portfolio offering for these distributors. But it's trying to add value to the portfolio, trying to make surgical innovations to be more important to those distributors and also to provide opportunities to bring third-party products to that -- to those distribution network. And so we're in conversation with a number of companies, Cipher Surgical being one of those, where we have a U.K. operation, and we have a distribution agreement for the U.K., but we're also looking to see where we can license that product to sell through our distribution network. And so it's been encouraging to see the number of opportunities that we have coming down the pipeline to capitalize on this. As I mentioned, one of the key things for our business, particularly the U.K. business, is working with the private sector. We've been strengthening our ties with health care providers, and we see that as a real opportunity going forward. And now our relationships are getting to the point where some of these private health care providers are coming to us and saying that they have a significant spend in a particular area. And although we don't have it in our portfolio at the moment, can we help them with identifying opportunities. And so the relationship is getting closer and closer, private sector is becoming more important to us and it's enabling us to capitalize on the NHS' use of the private sector to reduce waiting list. And with all of this, I think the key opportunity that we have is the sustainability as a core value and the competitive advantage it gives us against all of our major competitors. And so I talked about some of the opportunities we have in Europe. We're even seeing opportunities in countries like India where sustainability is becoming more important, and it gives us a different conversation with health care providers. Normally, when you go into a hospital or a private health care provider, you're talking about price with procurement. We're talking about the benefit and the reduction in plastic waste and reducing the CO2 footprint with sustainability teams. So you start to have a different conversation before you're talking about price. Clearly, you've got to be competitive from a price point of view, but it just changes the dialogue. MDR, this slide is very similar to the one last year. We're still making progress. The urgency is reduced and sort of the work with BSI sort of they're taking longer over these submissions because they have more time. But we fully expect to be MDR approved across all product groups. We've just got one remaining, which we expect to close out during this year. We continue to undergo certification for MDSAP and ISO13485. We've recently successfully completed our MDSAP audit. They seem to come around on a regular basis, but the team did an outstanding job, and we only have a number of minor nonconformities. So from an R&D point of view, obviously, last year, we were containing costs and managing the business. From that point of view, it did see a reduction in the spend on R&D. We were down to about GBP 250,000 for the year. So with the projects that we looked at and we focused our time on were the ones that could drive value within the business in the quickest way. We looked at sort of a number of projects around materials that could take cost out of existing products, one of them being the YelloPort+, and we're looking at moving from silicon to TPE as part of a core component. We are making significant progress on that. It's always harder to mold a different material like TPE, but we're getting there, and we expect that to be added to the product later in the year, and we expect that to take about a GBP 1 out such that cost by YelloPort leads. In terms of new product development, I talked earlier about the illuminated version of the gastric calibration tube. So to take a step back and give you an overview of what a calibration tube is, it's used during a gastric sleeve and it's inserted transorally through the esophagus into the stomach and then resting in the duodenum. And it gives the surgeon a guide to want to make sure that the stone is the right side; and two, to make sure that when he's resecting the excess stomach, he is resecting it in a straight line and that is not taking too much too little of the stomach away. And the device we have is a really good device, the standard LogiTube. But with a lot of bariatric cases, for obvious reasons, there's a lot of fatty tissue around the stomach. It can be hard for the surgeon to identify the exact placements of the calibration tube. And so this illuminated version which fluoresces in the abdominal cavity allows the surgeon to understand the exact placement. So it provides greater digitalization and safety. And that product because it's a Class I product we expect that to launch in the second half of the year. And then a number of smaller projects that we've done. So the -- we talked last year about a cutting shield in trocar for gynecology, and we work very closely with the Oxford Trusts and their team. And they wanted something which was sharp enough to cut through the abdominal cavity and not sharp enough to penetrate organs once you're in the oral cavity. And so we worked very quickly to redesign the tip. So it sits in a group within the safety shield and is a much safer product for surgeons to use. And now that is opening up more of the gynecological applications and so that was a really rapid response to a market need that we addressed very, very quickly. So now I'll hand you over to Brent to go through the financial results of last year.

That's great. Thanks, David. So looking at the financial highlights. So despite the challenges encountered at the outset of the year, the financial performance of 2024 was actually broadly comparable to prior year '23. So as you can see, revenues were flat to the prior year, landing at close to GBP 12 million. The strong sales growth in SI branded and OEM products was offset by a reduction in our distribution product line. Reported underlying gross margins fell by 730 basis points to 30.6%, really as a result of the business updating its standard costs in Q1 of last year. So the business can really better reflect and understand the cost of manufacture. And by having that understanding and understanding its margins across the portfolio can drive better decisions around pricing offerings and so on and so forth. And I'll speak to that more in later slides. Adjusted EBITDA landed at GBP 0.5 million, so GBP 50,000. So that's below the prior year, really as costs associated with restructuring activities and some higher levels of inventory provisioning created headwinds. As a result, of course, of the adjusted operating loss being below prior year levels, the adjusted loss per share fell from 5p per share last -- in 2023 to 7p per share in 2024. So really, in summary, I described 2024 really is a challenging year. I mean the rationalization of our cost base was a tremendously difficult exercise, but was essential. It was necessary. But importantly, we're now confident that as a result of taking these actions, we're better positioned to deliver improved financial performance in the current year 2025. Okay. So here, you can see on the screen the mix of our sales revenue across the last 5 years, including 2024. As mentioned earlier by David, SI branded sales performed well in the year. They grew by 6.8% to GBP 6.3 million. And the OEM top line also saw a good year's performance, growing by 6.6% to almost GBP 2 million. Our distribution business did face challenges, however, reducing by close to 15%, down to GBP 3.6 million. So really overs and unders across the portfolio, but holding to prior year's levels overall despite some of the challenges that David has spoken to. And I think it is worth noting that whilst we're talking here about 2024, of course, if we look at the 4-year CAGR for revenue, you can actually see since 2020, the full year CAGR stands at a buoyant 17.2%. So whilst 2024 was a challenging year and saw flat sales year-over-year, we are expecting to recover the momentum as we move through 2025. is very slow. Okay. Looking at the margin analysis. And I really want to use this slide to speak to some initiatives that are undertaken across 2024. And apologies if this becomes a bit accounting heavy, but I think it's an important point to stress as I move through this slide. So as mentioned, in Q1, a full review and update of standard cost was undertaken. And it's this update that has resulted in the underlying gross margin decreasing to 30.6%. So this was an essential step is by knowing the cost to manufacture goods, we ensure we have full and accurate visibility of sales margins by product, by customer, by region. And this insight ensures we might proactively manage our portfolio in a manner which delivers the strongest possible margin. So for example, to inform pricing decisions and negotiations with clients, it can establish where we strategically discontinue low-margin offerings or maybe promote further high-margin offerings. So whilst the gross margin reported in 2024 decreased to 30.6% as a result of these updated standard costs, you will notice at the bottom of the table that the contribution margin improved 10 basis points to 28.8%. And really it speaks to almost moving sand, you might say, within our P&L. It's because by updating our standard costs, -- we now report a lower gross margin, but we do now recover direct and indirect manufacturing overheads fully. And this is evident when you see the net cost of manufacturing line in this table, which was GBP 230,000 in 2024. So we almost fully recovered overhead costs into the cost of materials versus 2023, where actually we were light by GBP 1.1 million, which meant we weren't recovering enough costs into our cost of sales. So that explains kind of why you're seeing reported the different kind of figures in this table. As a result of restructuring -- as a result of restructuring activities in the year, we saw total average headcount reduced by 13% year-over-year and comp and bend reduced 14%, most of this reduction being within operations. So this exercise concluded in 2024. So 2024 did see some benefit from this activity. But we will continue to see more of this as we progress through 2025, where essentially we'll have 12 months of lower costs, which will in turn drive improved margins. And of course, on a more general basis, our approach to managing and improving margins continues to be of paramount importance and will continue to be throughout 2025. And really, much of the activity across 2024 has really positioned us to better expand margins in this current year. Okay. And here, we can see the year-over-year comparison of operating expenses. So you can see from the chart, this includes sales and marketing, G&A, regulatory compliance. So year-over-year adjusted operating expense increased very slightly from GBP 4 million to GBP 4.1 million. Sales and marketing and research and regulatory were broadly similar year-over-year, albeit admin expenses increased from GBP 870,000 to GBP 1 million. And really, that's a result of costs associated with restructuring activities impacted expenditure in the year. I mean as voiced on the previous slide, 2024 was a year where we sought to rationalize our cost base. And so whilst much of this impacted direct operations, the support functions and the associated operating expenses were also impacted. So again, we'll see the full year benefit as we move through 2025. And so throughout 2024, the business proactively and carefully managed its overall cost base. And of course, we will continue to do exactly the same throughout 2025. We took some pretty key steps last year. But of course, it's the start of a journey, you might say. We have to continue that momentum, continue to rationalize our cost base and whatever shape or form that takes to ensure that we maximize our margin opportunities. So looking at our financial position at the end of 2024 and how this compares with the prior year. So what you can see is 2024 saw modest levels of capital expenditure and a slightly lower level of investment in product development. As a result of restructuring activities in the year, there really was a pause on CapEx and a similar investment in new product development. It slowed naturally as we took stock and responded to some of the restructuring activities. There was a pause on, say, investment in CapEx and R&D. Again, it was a necessary step. Intangible assets reduced to GBP 5.4 million. This was impacted by a GBP 1.1 million impairment as a result of the SI Limited business, which is its own cash-generating unit and the resulting impairment of, say, GBP 1.1 million, which is driving this reduction. Total working capital remained at the same levels of the prior year, albeit with an uptick in inventories and both receivables and payables. In terms of receivables, there was a bit of an uptick towards the year-end. We also saw a higher level of overdue receivables, which is not so surprising when you get to a year-end position, but it's something that we've been tackling as we move throughout 2025 to make sure overdue AR balances are, of course, as low as possible. So we have the money in our bank and not tied up in invoices. Cash and cash equivalents reduced to GBP 0.2 million, although the invoice financing facility was largely unused at the year-end. So our cash balance was impacted by, say, the overdue AR balances. And of course, throughout the year, there was some impact as a result of the restructuring activities and the need to make onetime payments as a result of those activities. So that had an impact that created a headwind. So throughout 2024, there was a drive to reduce the levels of inventory held by the business. I'd probably say that we didn't kind of achieve the savings that we had aspired to achieve as we progress throughout the year. And naturally, we'll continue this initiative as we drive into 2025. Of course, it's a tight rope. We want to ensure we have sufficient inventory to respond to customer demand on a timely basis to ensure there are no stockouts. There's no unnecessary delays. The flip side, of course, is you tie too much in inventory that is essentially money that is no longer available to yourself for other purposes. So we walk that tight rope, and we'll continue to scrutinize that as we move through 2025. So that moves us to the summary and outlook where Dave will speak to the final slide.

Thanks, Brent. So when we look forward, so 2024 was obviously a challenging year. But looking forward to this year, there are sort of a number of opportunities, which I've worked through and I've spoken about in my slides. We do have a really significant opportunity to utilize our distribution network. Sort of it was something which I've always understood, but sort of when I talk to particularly U.S.-based companies, the frustrations they have dealing with the U.K. and Europe and not really understanding the market and the fact that it's sort of polarized despite the European Union, and they just want somebody that's going to come in and take that away from them. And I think with the international team that we've got with a focus on our European business and the direct operation that we have in the U.K., that is a real opportunity for us going forward. What we are seeing in most key markets, the U.S. bit probably being the exception is a real increase in demand for our own SI branded products. And it's primarily around the sustainability message that we have. Health care providers globally are more and more being targeted by government to reduce plastic waste to reduce their CO2 footprint. And there are very few companies in that sector that can help reduce those metrics. Surgical innovations is one of them, and hospitals are beginning and health care providers are beginning to see that. So that is a really important message for us to maintain and keep driving through as we speak to our customers. The U.K. business, sort of it's -- 30% of our U.K. business is SI brand. The rest is key suppliers. And this model has proved really successful over the years and continues to do so. And the key to that is being building your relationships with existing suppliers. And I think sort of the new long-term agreement with the likes of MicroLine show that we sort of -- we are held in higher steam by our suppliers -- sort of this deal with MicroLine goes back to 2007. And so it really shows that our model in the U.K. is working. I talked about the opportunities that we have within the private sector in the U.K. That -- the private sector is going to become more and more important as the NHS has, in the past, struggled to deal with the waiting list that they have. I would say -- and sort of when I said earlier today, a few people raised their eyebrows, I would say that the NHS is in better shape today than it has been for a number of years. It's no way perfect. It's no way working its way through the backlog of elective surgery, but it is in a better place with our relationships with the private sector and with sort of the work that they're doing within the NHS, I think they're at least stabilizing the position. And because of our relationships with these private health care providers, we have an opportunity to capitalize on that. And then probably the most important thing that we achieved last year was around the operational efficiencies by streamlining the structure, driving costs down, improving the bottom line performance and giving the sales team more competitive products -- that positions us really nicely to go into 2025, and we're beginning to see those benefits drop down to the bottom line. And so I think 2025, we're cautiously optimistic about where the company is going. We're in the right direction. We've got the right tools to get to where we want to go. And I think it's -- now it's about capitalizing on those opportunities we have. So thank you very much, everybody. That concludes the presentation. We'll go to questions.

[Operator Instructions] And David, Brent, you can see we have received a number of questions throughout today's presentation. If I may now hand back to you kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you at the end.

Okay. Thank you. So first question, what steps, if any, have you taken to avoid supply chain issues in the future? Have you increased stocks of components, for example? Good question. So we did when there were the sort of the global supply chain issues, we did increase inventories as a whole to avoid any issues that may have caused. But the ones you're talking about here, I think, relate to the challenges that we had in our OEM business, and they were components that were supplied by third parties and also by the -- by AMS. So we had a number of components which were out of sync. Part of that is down to the fact that tooling was quite aged. Part of it was because the way that inspection was taken sort of a number of years ago wasn't as accurate as it is today. I think last year, I talked to you about our automated measuring systems that we've -- we bought into the facility, and that began to flag a number of measurement issues that we had. And so these -- so we started working with our suppliers. And as I said, we fixed those. And we measure sort of a bigger sample of components as they come in to the facility now than we have before to ensure that we don't have the same challenges. We don't carry a larger stock of those components because we had enough stock, they were just out of sync. We've corrected that, and we've enhanced the way that we inspect product coming into the facility to make sure that it is within spec. Next question is, do you need to engage somebody in the U.S.A. to help you find more distributors in other regions of that very large market. Again, that's sort of it's a very sensible question. When you look at the U.S., it is clearly the world's largest health care market, and we need to do better. We have a number of key contacts within the U.S. that we are working with to identify distribution partners. We're a little bit choosy on the kind of partner that we want. What we don't want to do is to go down the road where sort of we got very optimistic and excited, spend money on training, spend money on having the team working with them and then find out actually they're not the right partner. So we have been a little bit slow, cautiously slow in finding distributors, but we do have enough contacts in the U.S. to be able to build the business. Overall, it's about bandwidth of the whole facility. Next question is probably one for you, Brent. Why has the commercial margins got so worse over the years after focusing on cost savings? Is this due to wastage?

So yes. So if we're talking about the content of this deck that's just been presented, I'm just kind of trying to understand when we refer to commercial margin, where we're looking at gross margin or contribution margin on the financial margin side that was just being presented. So really answering broadly. So I think as you can see, a certain movement between the gross margin and the contribution margin is really how we're dissecting the cost, how we're cutting the pie. And it's pushing more cost into the cost of inventory, which means gross margin reduces when we sell the goods. but it means that we're recovering the cost of our indirect overheads into the inventory. So overall, contribution margin has increased slightly. In terms of overall margin for the business year-over-year, we have generated savings, certainly, as mentioned, as a result of headcount. Really, there have been some onetime type expenses, nothing that we would call exceptional or traditionally would call exceptional and would revise our accounts for, but more along the lines of -- as a result of executing some of the restructuring activities in 2024, we incurred certain cost elements which were necessary to facilitate the restructuring. So they created headwinds for certain. And also, we saw some higher levels of inventory provisioning across the year, which were out of kilter with maybe what we've seen in previous years. And some of that was due to ending a partnership with one of our clients, which meant that a certain amount of inventory we just had to make a onetime provision for. So a bit of a spike, quite unusual, but that's kind of contributing to some of the dilution we're seeing in the year to our margins.

Thanks, Brent. Maybe just next one is for you as well. What impact will the increase of employers national insurance have upon margins?

Yes. I mean, really, it's going to be nominal. And what I mean is -- so of course, the impact, I don't know exactly, but I would expect it to be in the region of maybe up to 100,000, no more. So it will have an impact, but it will be a relatively nominal impact. And it's also worth noting that actually, in this year, we've also introduced a salary sacrifice scheme in our payrolls to actually try to offset some of that NI burden that would otherwise have impacted the P&L.

Okay. Next question. What metrics do you use to evaluate the success of new distribution agreements? Is it volume targets, share of wallets, geographical reach? All of those, to be honest, it varies from country to country. So when we have a distribution contract with a new distributor, there is obviously a geographical territory, which tends to be the country they're based in. There are some exceptions to that. And it's primarily around volume targets that sort of share of the wallet, that's when they've been a distributor for a number of years and have been able to build the business up. But in the early days, it's around volume targets. We also look at things like the amount of access that we get to their sales team for training, for co-traveling the amount of usage that they use of our marketing tools, particularly around sustainability. So there are sort of there are a number of different measures that we use to work with our distribution partners to work out whether they're being successful. When I talked about geographic reach, we have some dealers that cover more than one country. So the Benelux countries, for example, are covered by Duramed. And we've recently completed agreement with some of the Scandinavian countries for Duramed to take over those because they've got sort of a bigger reach up into those regions. The key for us is how we measure their growth going forward and making sure we can identify that sort of Benelux continues to grow and then these other territories grow separately rather than everyone combining it and thinking they're doing a good job. Final question is, have you made an assessment of the potential impact of the punitive sale of CMR? Well, the reality of that is it won't affect us at all. The relationship we have with CMR was a design relationship where we designed an access device. By the time that was concluded, we bought that product in-house, and it's now an SI branded product, Yellowport Elite. We work in conjunction with CMR in some regions so that the sales teams will work together when a robot is being installed. We'll work with them to get the robotic cases. The bigger the more attractive part for us is actually the non-robotic laparoscopic cases because that's the higher volume. So the impact to Surgical Innovations, thankfully, will be relatively small. I mean, on that note, sort of the price tag for CMR is quite a chunky price tag. I wish them well in trying to get that. But they do state that this is sort of an exercise to see whether there is a potential partnership with a bigger party that they could work with. So there's a long way to go before they are acquired as well. So that concludes all of the questions.

That's great, David. Brent, thank you for addressing all those questions from investors today. And of course, the company can review all questions submitted today, and we will publish those responses on the Investor Meet Company platform. But before we redirecting investors to provide you with their feedback, which is particularly important to the company, David, could I please ask you for a few closing comments?

Yes, of course. So thank you, everybody, for joining us today. I think sort of the key points that I would like you to take away are that whilst 2024 was challenging, we did use that opportunity to restructure the business. We're certainly a leaner business, more cost effective. And those benefits of that restructure, we are beginning to see in 2025. We are looking at sort of -- so commercially, we're aggressively pursuing new distribution opportunities for the U.K. market, but also leveraging our distribution channel to take third-party products to all of our partners around the world, but primarily in Europe. And we've continued to see that our sustainability messaging is -- resonates with health care providers across the globe really and provide a significant opportunity for the business to have a different dialogue with those providers. So we're not just talking about price. We're talking about reduction in CO2 and reduction in plastic waste. And it does give us an opportunity to have a completely different dialogue when we walk in the door. So for 2025, we are cautiously optimistic. We think we've made the right changes in terms of reducing costs for the business, driving efficiencies. We're looking at bringing some quick win product development. We're looking at taking cost out of our current product portfolio to improve margins further. So I think sort of by the time we sit in front of you this time next year, it will be a really positive picture for us to be able to talk about. So once again, thank you very much for your time. We do appreciate it and for your questions as well. As always, always good questions.

That's great. David, Brent. Thank you once again for updating investors today. Can you please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete and I'm sure will be clearly valued by the company. On behalf of the management team of Surgical Innovations Group plc. I would like to thank you for attending today's presentation, and good afternoon to you all.