Inspiration Healthcare Group (LSE:IHC) — Interim Results

0:00 Good morning, and welcome to the INSPIRATION HEALTHCARE GROUP PLC Interim Results Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions can be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where appropriate to do so. Before we begin, I'd like to submit the following poll.

0:27 I'd now like to hand you over to team at INSPIRATION HEALTHCARE GROUP PLC. Good morning. Good morning. So welcome to our fiscal year twenty seven first half interim results. I'm here with Alan Olbia, our CFO, and we'll go through the results with you and take your questions at the end. We will first go over the highlights of the first half of this year, followed by a detailed financial review from Alan. After which, I will cover some of the business direction and what were the achievements in the first half of the year versus our plans and strategy that we had launched at the beginning of the year.

1:15 Our, presentation follows the same structure, of our, strategic presentations from last year and this year, June. And we want to show the progress that we have done versus the goals that we have set for ourselves and for the group. For the first half in operations, we have a very strong underlying growth in the... All the segments of the business, specifically SLE, which is our core and bigger part of the group. SLE underlying business, excluding the one off export orders that we had last year, grew more than 30%, specifically both in The UK, our direct market, and international.

2:05 In The UK, we also grew our service revenues, and this continues also as a as a momentum for the international business. We had a very good momentum in SLE in Asia Pacific Region and also won some important deals in Western Europe and growing Western Europe as well as part of our, strategy that we have set. Aaron had a very solid performance as well, with the the tailwind of a big, order from a GPO, a home care health care provider, where where we also delivered... Got and delivered the first, order. We ramped up our production, without adding further resources to satisfy the demand, and this was done based on a lot of efficiencies that we have gone through in the last 1.5.

2:57 And then lastly, in the third part of the business, infusion, as we had announced back in June, we have done a a very smooth transition to Mikrell, and we are continuing to, handle the, sales, and the invoicing of the business throughout this year, which is also, up to expectations and up to plan. Post periods, we are happy to announce that, based on the performance of the first half of the year, we have a very good momentum, and we are upgrading our full year outlook. More deal... More details in the next few slides. And then we also got the credit approval for the RCF facility for the next three years, and this shows the confidence that the banks have in our financial stability.

3:48 From product strategy point of view, our entry to US market is our primary goal for our R and D team and the project that we are working on to get it... To get the product ready for FDA submission, still on track to be ready for submission late twenty seven calendar year and clearance in early twenty twenty eight. We have repositioned and relaunched another subacute product that we have in our product range called SLE 1,500, and we had a good going in both in The UK and international business, you know, increasing the sales of this product. And finally, for consumables, our projects are on track. We launched a couple of items at the first half of the year, and we are on track to launch the more important items in q four this year, starting with The UK and then launching to international in the first half of next year.

4:46 Organizational wise, we showed our dedicated regional management focus. And after we had

4:55 recruited a person for Asia Pacific, we have now recruited a person person for Latin America and also very recently one for Middle East and Africa. This shows our focus on the regions and being local and driving, the opportunities, which is already giving a lot of, fruits in Asia Pacific as we will see later. We have appointed a new CCO very recently in q three, and this allows for the full ownership of all customer facing functions under one ownership and then getting all the teams to work together towards what we want to achieve as a strategy in marketing, clinical marketing, and focusing on the sales both internationally and UK under one leader. We reorganized the service almost a year ago, and you will see in the numbers, detailed financial numbers that our service revenues grow... Grew. And this was due to the reorganization of the service leadership, but also reorganizing it under the commercial leadership of the same commercial team.

6:01 Efficiencies in operations, we cannot give enough details here on this, but throughout the year and throughout this year, we have been working on re... Re... Redesigning our processes in all our functions from forecasting to supply chain to manufacturing, and all these efficiencies are giving fruit now. And both impact our bottom lines now, and they will impact it more in the future as we are also doing more organizational streamlining that we launch now to get ready for next year's performance. So more details on each of the segments that we have for the business in SLE, INSPIRATION HEALTHCARE and EARON later in our presentation, where we want to show what we achieved in each of the business segments separately and in more details. But this is a highlight to kick off the meeting, and I will pass on to Alan for the financial details.

7:00 Thanks, Rafi. So first of all, in terms of the highlights for the half year, we've revenue for the period of 22,000,000 against 24,000,000 last year. And many of you will remember that last year was boosted by £6,500,000 of one off export orders, which are not being repeated. So we're focusing very heavily here on the underlying performance when those one off revenues are taken out of the prior year comparatives because that's the repeatable business that that we're looking to manage. And on an underlying basis, revenues have grown 26% over the first half. And as Raffi's highlighted, that's growth in all areas of the business, both SLE, INSPIRATION HEALTHCARE in The UK, and Aeron in The US.

7:49 Gross margins have fallen in this period down to 41.9% for the period for a number of reasons, some of which are transitional and will fall out as we go forward. And I'll explain those in a minute. But despite that lower gross margin, we've maintained adjusted EBITDA at 1,200,000, so almost in line with last year despite there being a headline reduction in revenues. We continue to manage our inventory levels as closely as we possibly can. There was a small increase in this period, which is really down to timing of deliveries ahead of summer shutdowns at one of our major suppliers. But underlying that, the inventory reduction continues, and we expect to see another step down in inventory as we go through the second half of the year and into the next financial year.

8:44 Our operating cash flow, which became positive last year, remained so. It is slightly lower than it was because we have had lower revenues, but we're still generating operating cash both with profits and managing working capital. And that has enabled us to leave our net debt levels at roughly the same level as they were at January, 5,200,000 net debt at the end of the half. So turning to a bit more detail on the revenues for the period here and looking at the underlying revenues from last year, which is the middle column in the bar chart, you can see the twenty six percent growth in the underlying business without those £6,500,000 of of one off export orders from last year.

9:30 The highlight here really is the SLE products, which is the key growth driver for the business. We've seen 35% growth on an underlying basis in SLE through the first half. And that's strong growth both in The UK and Ireland where we're selling directly, but also in the international distribution business of SLE products. In Ireland, we've won two very significant tenders in the first half and now that puts us in every level three neonatal intensive care unit in The Irish Republic. And we're retaining our market leading position for the HFO ventilation segment in the NHS as well. So good performance in our direct sales. International growth of 37% is is very encouraging, and this is really where we're reaping the rewards of the back to basic strategy, getting close to customers, and having distributor managers more locally in the markets that we're looking to to target. And that's why we are going further and appointing somebody to look after Middle East and Africa as as we move forwards.

10:34 In The UK, the INSPIRATION HEALTHCARE business grew 9% mainly because the infusion products, which were declining last year due to an overstocking issue at a key wholesaler. That issue has resolved itself, and the wholesaler is back to normal ordering patterns. So we had a bit of a tailwind on the infusion products in the first half. As we know, that revenue will cease beyond the end of this financial year in January.

11:03 And then, Aeron, the smallest part of the group, but strong growth of 40% with the initial order from the long... Sorry, the leading health care provider in The US, which was all delivered over the first quarter. But also, we're starting to see international sales for Aeron products now, is coming through from the SLE distribution channel, and that was one of our key priorities for growth of Aeron this year and as we move forwards.

11:31 And then looking at the makeup of sales, we're still very significantly dominated by capital sales in the SLE segment, 69% here, which is fairly similar to the levels we've we've seen recently. But within the recurring revenue, the consumables and service segment, we're starting to see the benefits of the targets and the strategies that we put in place to grow those recurring revenues with service revenue growing by 21% during the period. Consumables at the moment remain flat compared to the same period last year, but with the launch of our premium consumable products in The UK towards the end of the year, we expect to see growth coming from consumable products as we go forward from here. In terms of the rest of the income statement, I highlighted that gross margins were down a bit on the same period last year.

12:22 A number of factors driving this, one was the one off export orders actually increased margins by over 1% last year. So on a like for like basis, margins would have been around 45%. But we've then seen lower margins in the infusion products driven by NHS purchasing practices in The UK and also a much stronger performance from the infusion products in this period compared to last year. We've also seen growth in some of the lower priced international markets within the SLE business, and so that has acted as a negative mix effect on margins. And finally, as we are continuing to bear down on our inventories, we're consuming some more expensive components that were acquired during the pandemic when supply chains were disrupted.

13:12 And that's causing a temporary decline in in the in the margin as as those expensive components wash through sales. That's expected to carry on for the rest of this year and into the first quarter, first half of next year, but that will wash through and and margins will start to recover. And as we obviously transition away from the infusion products business, we we will see a a better margin mix in in the next financial year. I think the only other point on the income statement is to highlight the the nonrecurring credits. This stemmed from resolution to dilapidations liability at our old Quirden site, where we've reached a final settlement in the first half. And those telepitations liabilities have been fully settled in the second half.

14:01 Turning to sort of cash flow and net debt. The main story here is that net debt has remained stable over the first half. As you can see, we've been generating cash from the profit and working capital management that continues, and we expect to see further step down in inventory and therefore working capital inflows in the second half of the year. But we continue to invest in the... In our r and d projects, particularly for the FDA and overhauling the electronics in the SLE 6,000 ventilator. And that's along with some option fees paid for a newer ventilator technology that we're assessing contributed to just over £2,000,000 of capital spend during the first half. The final point, and I think most importantly, probably looking forwards is that we have just received credit approval for a three year extension on our RCF facility. This facility was up for renewal in the first quarter of next year, and we can look to extending that initially just for a short time. But with the changes that we've made in terms of structure and cost saving actions that we're implementing to...

15:09 As we plan for life without infusion products and the strong underlying growth, which makes us a more stable or a bigger business going into next year, we've been able to agree a full three year renewal on that facility, which takes us out to 2029 on the existing terms, same covenant measures as before, which demonstrates the support we have from our bank and the belief in the medium term plans for the business. And that hopefully removes any concerns around liquidity and and financing as as we move into the the business as a fully focused neonatal products business without the infusion products next year. And I'll now pass back to Rafi to talk more about the business.

15:55 Thank you, Adam. To continue forward, we have a couple of slides from our previous presentations just to remind the the audience of of our strategy and how we're executing on the strategy. So in mid to mid to long term, focusing on the mid, which is this financial year, I mean, driving the sales, our results are a good proof of what we are doing there. And the expansion that we had expected or planned on in Asia Pacific is happening. Latin America will be next. Europe is growing, and more and more, we are focusing also on our consumables and service as the results show. We will continue on driving and delivering on this strategy in the second half of the year and beyond and then move on to the longer term strategy of a healthier p and l and more profitable and clear road map of where we're heading.

16:59 More details to come on each of the business segments. But, again, as a reminder, this is how we positioned ourselves a year ago with SLE as the core and the bigger part of the business and, INSPIRATION HEALTHCARE, our direct team and the distribution business in The UK, and Eron as our pneumatic ventilation, provider. In all of these segments, we had set initiatives and strategies and actions at the start of the year. And in the next three slides, I will focus on each one separately and, of how we are delivering on our strategy. For SLE, again, with the pain of repeating it, growth, was very clear, 35% on underlying business, meaning we didn't have any big, opportunities or deals happening during these periods.

17:55 And this was all organic through focus on sales and proper focus on our distribution channels and great job done by our UK and Ireland team. As Alan mentioned, we are now in all level three neonatal intensive cares in The Ireland, and we have... We still maintain our market leadership in The UK as well for neonatal and high frequency segments. In international, the highlight was Asia Pacific after our focus, which started last year. Strong growth also in Europe where we doubled versus last year. And then we launched the service as a product in The UK, driving the service revenue numbers with the team reorganized with new leadership.

18:43 And we are in the, mid of launching our proprietary consumables in q four of this year to start driving revenues as well for the year to come. In parallel to all this, we are always continuing to assess if there are new product opportunities to complement our range, our ventilation range, and nonventilation range always in the neonatal care area. The focus on consumables will continue after launching our first wave. We are also working on the second wave of consumables for next year. And then on top of all the ones which are achieved and finalized, as you can see here, that we are in the background, of course, continuing also with the r and d project on the submission to FDA, plans for around a year from now.

19:42 On the, INSPIRATION HEALTHCARE, as, Alan mentioned, we grew 9%. This was mainly driven by infusion products, which recovered from the last year's slump.

19:57 We passed on the team and the sales management to the Miquel direct team, and we are managing the, sales invoicing, etcetera, until the end of this year as planned. The jet ventilator monsoon four, sales are growing, and we also have a good pipeline for second half and next year.

20:20 And we also got the first order for the new transport incubator that we had launched earlier this year, which will continue also to provide us opportunities for next year and more growth coming next year. And as in SLE segment here also for the... Our UK sales team, we are continue still looking for opportunities to find new products in the neonatal space, so we can, act as a distributor and increase our, revenue and profit sources, for the market. And, last but not least, we have Aaron. We grew the sales 40%. This was, on the back of an order of 150 devices from a leading health care provider in US.

21:13 Our run rate of consumables are increasing, which is quite positive. And with a bigger installed base from this 150 devices, it will continue to increase in the future. More importantly, we have started the sales of air on products into the international markets, which is a very promising sign, and it is going to continue growing as we utilize our distribution channels globally to open up new markets for the Heron products. In The US, there was a lot of work going on in h one on reengaging with a lot of new channels, One primary one being the emergency segment where we have never been present before, and this concerns, ambulances, fire departments, and the like. We have signed up, agreements with a couple of nationwide, emergency segment, providers and also,

22:15 going into more GPOs and going into, the the veterans market segment with the Eron products. So more opportunities as well for Eron. Back on the long term strategy and focus on SLE, which is, again, our core and the biggest segment of our group. This was what we had puts a year ago, and the middle line is the mid midrange timeline where we're focusing on core, which is the SLD. And this is where all the themes that you have seen, last year, we have delivered on them, and we are continuing to deliver on them. US market penetration, again, is the FDA submission that, we are working on. Extension in EU is... Has started and will continue.

23:12 We will expand more in the bigger markets in Western Europe. We are about to launch our main, consumable... Proprietary consumables now, And the service business is already, strengthened and showing growth, and we'll grow it further.

23:29 And then the very long term strategy and the vision, as we had, that comes from the previous slide flows into this, which is the longer term strategy where we want to be a more comprehensive, solution provider, in neonatal ventilation, in devices, consumables, AI, and decision, tools, education and services. Some signs of, this turnaround you can already see in our results of h one, we will cons and to have more devices, more consumables aspects of neonatal care from delivery room to step down, through all the path of the neonates through the initial hours and days of their lives.

24:28 Just to close and then go to your questions, the outlook from the h one outlook, as I mentioned to you, the highlights based on the first half results and also the outlook and the pipeline that we have. We have confidence in our current financial year numbers, and we have upgraded our expectation and forecast to 43,000,000. And we expect the momentum to continue also for fiscal year twenty eight. The the growth of service revenue plus the launch of consumables will drive more recurring revenue as we had planned, and this will also fuel more working capital.

25:15 And as we are working on inventory reduction, that we will have a lot of good momentum in h two, and we will report back hopefully in February and when we have our full year results published. On operational and organizational changes, as we mentioned, we have done a lot of internal reorganization in the past month. We are continuing to do so because of all the efficiencies that we built in in our processes in the past year. And we are doing a lot of other cost savings as well, both in... On the organization and nonorganizational in order to have a very healthy profile...

26:02 Financial profile and profitability for next year's post the infusion exit. And finally, for short and mid... Midterm product road map, as explained in the details in the previous slides, Our r and d is continuously working on product enhancements for the existing product range for the 6,000, for the 1,500. We are constantly working on our consumable launches. So after we launch our first wave this year, we will be working on the next wave for next year, US markets access projects. And then on top of all this, we are continuously looking for additional neonatal products that we can add to our profile portfolio to give more innovative and more comprehensive solutions to our customers and also increase our financial performance.

26:58 So it's all about execution, and the the plan is there. The strategy is in motion and working, and the team is delivering on the strategy. So I want to start thanking the the INSPIRATION team first with all the hard work that is being going on and all through the changes in the past, year. And then thank you for your support, to the company and, our vision and what we're trying to do for, the neonatal community out there. And I'll open the floor for questions. Fantastic, Rafael, and thank you indeed for your presentation. Ladies and gentlemen, do please continue to submit your questions just using the q and a tab situated on the right hand corner of your screen. I'd like to remind you the recording of the presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

27:55 Rafael, as you can see, we've had a number of questions from investors, so thank you for those. If I may just ask you just to click on that Q and A tab, where appropriate to do so, just read out the question and give you a response and I'll pick up from you at the end. Okay. Thank you. I'll pick up the first couple here. First one is how much of the $7,000,000 distribution revenue is Infusion Therapies? And what gross profit and EBITDA does it contribute? So the revenue from infusion therapies was just over 5,000,000 in the the period here. We're not able to disclose the absolute gross margin that the Envision products make. But what we've always said in the past is that as a distributed product, it's lower than our average gross margin. And I can say that it's in the range of 35 to 40%.

28:42 And when we announced that the contract was terminating in January next year, we said that the infusion products have been making a con... An overall contribution of around 25% of sales to our bottom line over the last couple of years. So hopefully, that gives you a bit of a better guide on the impact there.

29:06 Next question was how long until inventory unwinds? How do you look to balance this and growth going forwards?

29:14 Obviously, the reduction in inventories has been an ongoing topic for a number of periods now. It it peaked at £15,000,000 just over a couple of years ago. We've made some significant inroads into that. And although it's not moved during the first half, we will see a further step down as we go towards the end of the financial year. I think we'll probably be taking just over £2,000,000 more out of inventory over the next six to nine months. Partly that's due to liquidating the balance of infusion products, but also the ongoing efforts to streamline, you know, supply chain and and manufacturing, etcetera. And I think by the time we get to the end of this year, that will represent a normalized level of inventory.

30:04 There are still some specific parts within that that we can look to optimize, but equally, as we're looking to grow the SLE business and grow our consumables business, there will be some upward pressure on inventories from there. So I think once we get to the end of this year, we expect to see inventories flat line over the next twelve to eighteen months.

30:29 Next question is around consumables and attach rates. I was gonna ask if you wanna take that one. Yeah. I mean, the attach rates that we target and ideally, aspirationally would be 100%, of course.

30:50 But we are targeting to have an attach rate of around 30% next year on our UK installed base, and then the international would be following after that. So it... We are at the start of the journey. We can have aspirational targets or also the practical ones, but we have done a lot of marketing and

31:17 sales efforts there, and we have a good value proposition for our customers to try to switch as many of them as possible in the next two to three years. Thank you. Next question is another one around the impact of the infusion products. Should the infusion products be signed as a discontinued business so that we can clearly understand the effect of its removal? We have looked at this, and I think the the answer is because it's a distribution contract, it's not a more formal part of the business. It doesn't meet the accounting definitions of of discontinued operations, but we have tried to set out what the impact is likely to be by disclosing what the revenues were historically and what the operating margins on that business were.

32:05 And just as a reminder, in the last full financial year, the infusion revenues were £10,000,000 with an operating margin of around 25. The next one is what is the cash cost of The US neonatal ventilation program through h two f y twenty eight, is it capitalized or expensed, and does the renewed RCF facility cover it alongside MCREALTH transition without new equity? So, we are capitalizing the costs associated with the US FDA application and the overhaul of the electronics within the product, which is one combined project. Our existing and our... And renewed RCF facility and our ongoing cash generation cover the costs of that project and the rest of the business. And so there is no expectation.

33:02 There's no requirement for new equity to fund any of the plans that we've been talking about And the renewal of that facility for a new three years demonstrates our ability to transition through this period of losing the infusion business. But with cost saving activities that we have underway at the moment and the underlying growth in the SLE business, we can continue to fund all of the development projects and as well as the ongoing business without any additional capital.

33:36 And the final question I think, is there acquisition interest from the largest shareholder? I think you'd need to ask them that question. Fantastic. Thank you very much indeed. I think you've covered off those questions that we've had through. And, of course, any further questions do come through, the team will be able to review those, and we'll publish responses where appropriate to do so on the investment company platform. Just before redirecting investors to provide you with their feedback, and it's particularly important to you and the team, Rafi, if I may just ask you for a few closing comments. Yes. Thank you again for all of you who joined.

34:11 We really appreciate both the support of our shareholders and the interest of potential investors and share... Future investors and future shareholders. And, again, I want to thank back the whole INSPIRATION group team and... For the very solid performance in the first half of this year. And we remain to... Very positive for the exit of the year with an upgraded revenue and upgraded profitability profile. And as we discussed, we are focused both on the short term deliverables and making us more agile and more profitable and on the long term road map of becoming a more comprehensive neonatal product provider in the market.

35:08 And glad to have you today, and hope to speak to all of you soon. Thank you. Fantastic. Thank you very much indeed for updating investors today. Can I please ask investors not to close this session? It should be automatically to provide your feedback in order that management team can better understand your views and expectations. This will only take a few moments to complete, and that's greatly valued by the company. On behalf of the management team of INSPIRATION HEALTHCARE GROUP PLC, we'd like to thank you for attending today's presentation. That concludes today's session, and good morning to you all.