Inspiration Healthcare Group PLC

LSE:IHC

Earnings Call Transcript

[Operator]

Good morning, and welcome to the Inspiration Healthcare Group plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll.

And I would now like to hand you over to CEO, Rafi Stepanian. Good morning to you.

[Harout Stepanian, executive]

Hello. Good morning to all of you from our side. I'm here with Alan Olby, our CFO. As it's my first presentation of annual results, a few info about myself. I come from a health care industry with over 30 years of experience most of it in respiratory care devices in various care settings from anesthesia to adult intensive care and neonatal intensive care as well as home care respiratory devices.

Throughout my career, I was mostly at GE Healthcare in various positions in product, sales, marketing and commercial management. And most recently, I was the CEO at Breas Medical, which is a global company headquartered in Sweden, manufacturing home care respiratory devices. I'm at Inspiration since January of this year, and I wanted to thank the Board for their trust in me and also looking forward to take Inspiration to the next level of successes.

Our agenda for today, we will talk about a little bit about fiscal year '25 highlights, then the fiscal year '25 financial review from Alan. Then I will cover a little bit about how the business environment looks like, the trends and how we are acting with these trends. And then a final look on the outlook to 2026 and beyond.

Starting with '25, a big title can be that it was a year of a lot of changes at a lot of levels, more importantly, at organizational levels, at the Board and the management team and various parts of the organization. On the positive side, we had appointments of customer-facing roles like the CCO, tech support manager and customer support management. And then we also did some cost-saving actions in the organization with the overhead cost reduction realized at our headquarter team with annualized savings of GBP 1.2 million as well as transferring the Helshan site operations to Asia.

On the more positive side, we had the award of 2 material biggest orders ever in SLE's history, one in the Middle East and the other one with an international humanitarian organization. We will come into the details of both, but they were really big wins that are giving us a good tailwinds into this year. Inventory was getting a lot of increase in the past 18 months. And the good news is that at the end of '25, we stabilized it and now it's on the way to decrease. And from the product perspective, the highlight was that we launched a new series of infusion pumps, which was driving our growth in the infusion therapy segment and also giving us more growth opportunities this year.

On the financial highlights, you can see that the successes came again in the infusion therapy area, where sales increased by 29% and where also Airon sales increased by 81% and both of these segments were above their budget and the plan for the year. We had a good turnaround in H2. And for those of you who remember, H1 was quite tough, and we were with a negative EBITDA. And in H2, we turned it around. And this is a proof of the underlying demand for our products in both the neonatal care area and in the international markets. And then we had a successful fund raise in Q3 last year with GBP 2.7 billion of net proceeds, and we thank our shareholders for their continued trust and loyalty to the company.

In our North America strategy, which follows from last year's strategic direction, the acquisition of Airon, as you know, it was the full year that we were with Airon on board, and it was really successful with them achieving this 80% growth and then also achieving -- exceeding the budget.

In Canada, we got the approval for a host of our devices, and we are still pending the bigger device, the SLE6000. We are waiting for it anytime soon.

And then finally, for the U.S. market access, we had several meetings with the FDA and with their increased demands on certain aspects of the filing, especially on biocompatibility testing and other areas, we retracted the application. We are going through a product development cycle, and we plan to resubmit in the second half of '26.

So with the financial results details that will follow, you will see that it was a big turnaround in H2 in all directions, and this turnaround was stabilized and it was achieved with the back-to-basics initiatives and actions that our Chairman and interim CEO at the time, Troy Davis had put with the management team. And it took the company into the right direction into a stable situation and then into a performing status as we see it now.

So I will hand over to Alan Olby to go through the financial results.

[Alan Olby, executive]

Thank you, Rafi. So the highlights for FY '25 as a whole. As Rafi was saying, the year overall, we had very low growth in terms of our revenues with just 2% growth in headline revenues, which masks the performance of the 2 halves. The first half of the year, sales were GBP 17 million, but an acceleration in the second half on the back of the back-to-basics efforts saw growth of -- sales of GBP 21 million in the second half, which is 25% higher than we saw in the first half. And that was despite not delivering the large Middle Eastern order, which has been discussed for a while and which still was not actually delivered by year-end. So that will help us as we go into the first half of the current financial year.

Gross margins have declined from 47% to just under 43% last year, and there are a number of mix effects impacting that, which I'll come on to in a minute. In terms of EBITDA, we were just above breakeven for the year as a whole, significantly below the prior year EBITDA of GBP 2 million. But again, as a tale of 2 halves with a loss of GBP 900,000 from the first 6 months and a profit of GBP 1.1 million in the second half. And that, I think, demonstrates quite clearly the leverage effect that we have on sales grow because our operating cost base is relatively fixed as sales come through, the business becomes much more profitable in the Media.

Our reported operating loss on a statutory basis is GBP 14.7 million. There are a number of one-off charges within that, the most significant of which is a noncash impairment charge against goodwill and other assets from previous acquisitions, having reassessed where we've ended the current year, looked at the future cash flow forecast, we've had to take an impairment charge against those assets recognized on previous acquisitions. The Airon assets are unaffected by that, but it has readjusted the balance sheet and taken down our noncurrent assets that are reported on the balance sheet.

In terms of cash flow, again, operating cash outflow compared to an inflow from the prior year. And this is really on the back of the restructuring costs, which were incurred during the year and very low profitability. Working capital remains high, and I'll talk about that when we talk about net debt in a minute. Overall, net debt increased slightly to just over GBP 8 million at the end of the year. That really represents a high watermark. And as we go through the first half of the current year and we deliver some of these one-off contracts and start to see working capital unwind, that will reduce and the balance sheet will deleverage.

Turning to revenues and just putting a bit more color on the moving parts within sales. Although we had headline growth of only 2%, there are some significant movements within that. The first 2 bars here represent the neonatal business, both in the U.K. and internationally. The U.K. business saw sales decline by just over GBP 1 million, where we're experiencing ongoing budget pressures in the NHS and difficulties in getting capital spend committed. But we also had a sales team restructure in the first part of the year to refocus and reenergize the team, which paid dividends in terms of performance in the second half where sales improved. And we go into the new financial year with a wider pipeline of opportunities and better behaviors and more rigor in terms of the sales activity. So we expect to see U.K. growth recovering in the current year.

In the international business, 2 factors here, which have both had a drag on revenues for the year. It's the end of life for the SLE5000 and the earlier SLE1000 ventilators, which are no longer manufactured. We sold the final capital units during last year, and that meant we saw a reduction in revenue from those products of GBP 1.5 million. The rest is a general underperformance linked to the behaviors and the lack of activity in the international team. It's something which was starting to be addressed in the second half. And again, we saw much stronger sales in the second half of the year. But there's quite a lot of work to be done here in terms of refocusing the international team, getting closer to our partners. SLE has a very strong international network, which is been neglected a little bit over the last years with lack of travel. And there are a number of strategies in terms of putting resource back out into the market and getting closer to our customers, which we will see an improvement in performance in the current year.

Airon obviously was a positive contribution. We owned Airon for the full 12 months. And as Rafi said, they exceeded their budget and showed very strong growth on the time before our ownership. So that added just over GBP 2 million to revenue. And the Infusion Products business showed growth of just over 30% for the full year on the back of market share gains in the home care segment where the Inspiration infusion team have done a great job and really growing market share over recent years. The new pumps from Micrel represents an opportunity for the new year, and there is a very clear strategy of pursuing growth into the NHS with these pumps, which represents quite a significant opportunity as we move forward.

Looking at the income statement overall, the real key message here is around the margins, which have declined to just under 43% for the year off the back of changes in mix. First of all, you have strong growth in the infusion products, which as a distributed product carry a lower margin for us. So we've grown our lowest margin segment of revenue. We also saw, as just described, the U.K. business go backwards. The U.K. business is a direct sales into the NHS. So our highest margins are from the U.K. business. And then the international business as well, the mix of products and markets where we saw contributions last year were from some of the lower-priced markets in places like India and Southeast Asia.

The focus for this year and moving forward is to grow our share of business from the higher-margin markets such as Western Europe and North America, where we are underrepresented and there is a real opportunity. In terms of overheads, the cost base was flat on the year. We've tried to control costs quite strongly. As Rafi said, there have been some cost saving measures put in place, which were really towards the end of the year, and we'll start to see some benefit as we go into the current year. But despite the inflationary environment in terms of wages, which are a very significant part of our cost base, we managed to keep costs in line and no higher than the prior year. Below that, we have the nonrecurring items of just over GBP 12 million.

As described a minute ago, there's a noncash impairment charge against goodwill of just over GBP 10 million. Also in there are restructuring expenses linked to the changes in the Board, changes in management and the closure of the Hailsham site during last year. And there is also a charge for the Airon contingent consideration. As you may recall, there was an earn-out of up to $1 million that was due if Airon met certain sales targets. Those targets have been met and in fact, exceeded given the performance over the last year. And so that $1 million becomes payable during the current year, and that has been expensed through that line. And below that, obviously, interest costs have gone up slightly on the back of increased net debt. And there is a tax credit linked to R&D tax credits, which have been booked and recognized in the year.

Finally, net debt. This shows the bridge of the increase of GBP 2.3 million over the year. As I said earlier, there's a cash outflow because of very low operating -- very low EBITDA generation. Working capital has remained level and has not yet reduced and the restructuring charges, which come through contributed to a cash outflow. Working capital is expected to come down during the current year. We have got on top of inventory during last year, which peaked in the middle of the year. It reduced slightly over the year as a whole, given the phasing of our revenues and high receivables at the end of the year, the balance sheet date, working capital remained unchanged. We do expect to see some significant unwinding in inventory and working capital, which will lead to positive cash generation during the current financial year, and we would expect to see net debt reducing and the balance sheet, therefore, deleveraging as we go through the current year.

I'll now pass you back to Rafi to talk about the current overview and the outlook.

[Harout Stepanian, executive]

Thanks, Alan. For those of you who are new to Inspiration or those of you who are a reminder, we currently serve 3 distinct markets in the health care industry, and our focus is always on providing innovative solutions and differentiating ourselves from the rest of the market sizes in wherever we are in the segments where we are because we are focusing on very fragile patients, especially in the neonatal intensive care area and also our specialty ventilators, they are life support devices that are quite highly regulated and focused on pioneering therapies for the patients.

The biggest part, of course, remains the neonatal intensive care, where we have our own brand of ventilators devices with our own IP. We have a dedicated in-house R&D team and of course, state-of-the-art manufacturing facilities in South London. We also, in the neonatal sector, also sell third-party products to complement our solutions in the intensive care. The specialty ventilators are mostly the Airon ventilators. And again, they have a unique technology that is geared towards transport ventilation and in MRI environment, also our own brand and IP and also in-house manufacturing and service center in the U.S. Most of the sales of these products are based in U.S., and it's an opportunity for us to grow them outside North America.

And then finally, last but not least, infusion therapies, which grew to be around 29% of our revenue last year. And this segment is where we distribute high-quality and innovative ambulatory pumps from Micrel. We have a dedicated sales and support team, customer support team in U.K. and Ireland as well as a dedicated service center.

Here, we talk a little bit about the trends in the market, what we see and how we are facing them. The first 2 boxes show a little bit of the trends. The first one is mostly headwinds. The regulatory environment is still very restrictive, especially with MDR, and it had an impact on our numbers last year, as Alan mentioned. It's still also difficult to get into the European market with the new MDR regulations that were put in place in the last couple of years. The component challenges much better than in the past 2 years, but still there are some hurdles with end-of-life components that our internal teams, our R&D is always continuously working on replacing.

Price pressures around the globe with the changing economic dynamics. And we have some new entrants in the neonatal ventilation market as well as in the pumps with the market attractiveness that there is, which brings me to the tailwinds where we see that the underlying demand of the markets where we are present is still strong. And it's a health care device segment that is still growing because of growth in preterm births and also infrastructure buildup in the rest of the country in, let's say, in Asia and Africa. And then, of course, to be winning in this kind of environment, you need new technologies and innovation and new therapies all the time.

What are we doing about this is in the last 3 boxes on the right. Our first and short-term focus is on developing our existing products. We are relaunching the SLE1500 with new features and to cover the gap of the SLE1000 that we had to stop last year. We are launching new capabilities on the higher-end SLE6000. As mentioned before, we are launching new pumps in the infusion therapy segment. And at the end of the year, we plan to launch a new range of consumables, which feeds into the next box of margin improvement, where we want to see both consumable and service sales increasing in order to give us flow business and a higher-margin business.

We are also working on better product and geography mix to win more in higher-margin areas with higher-margin products, which brings me to the last box, which is market development, where, of course, our utmost focus is on North America to break into that market with our ventilators, neonatal ventilators. We are short-term, strengthening our Asia Pac presence. And we are focusing as well on market share gain in Europe, where we are much below our fair share of the market in neonatal ventilation. We -- this year, we will continue the back-to-basics approach, which has not stopped since last year, and you saw the results in H2 last year. So we are focusing still on getting into the details and looking into the basics of each of our functions.

The headlines are there. The first one, of course, is drive sales, and we touched upon these topics already, but it's about increasing our geographic spread and footprint, more focus and more engagement with our distributors all over the globe. We have just finalizing recruiting of an Asia Pac manager. As I said previously, win fair share in Europe with increased marketing and focused marketing efforts. And then, of course, also use the Airon opportunities that we see with our vast distribution network outside U.S. And in the background, we are getting ready for the neonatal segment launch in U.S. And of course, increased recurring revenues from service and consumables, which has been a theme from last year, but we are getting closer to that with a good strong plan in our service team and service offerings and also the launch of new range of consumables at the end of this fiscal year.

On the profits, it's multi-track, if you like. And the first, of course, is operational efficiency. We are putting a lot of efforts on revamping and overhauling our ERP system to gain efficiencies in a lot of the processes where we still are doing manual work, improve the product margins, of course, with the emphasis on the mix and the regions. And then customer-centric culture with everybody in all the functions to increase efficiency and speed and increase customer satisfaction. And with -- having said that, all about efficiency, we are always reviewing our structure for efficiencies and also to focus our resources in the right area where we have the bigger impact on our profits.

On the working capital side, big reduction in inventory expected this year with the shipments of the bigger orders that we mentioned. We are managing tightly our CSO and DSO days and definitely also improving our supply chain management. It's tied to inventory, better planning with more forecast accuracy from the sales teams and also using the overhaul ERP system.

Finally, looking at the future strategy to sustain all the stuff that we're doing with the back-to-basic is reassessing, reclarifying the vision and strategy of the overall company, where we want to be in 3 years from now or 5 years from now. We already engaged a key opinion leader as a consultant, a very well-known doctor in the field of neonatal ventilation and is supporting us to also create a clinical advisory board, which will feed into giving us ideas for innovation and development for the future.

We are in the process of recruiting a medical director to also strengthen our internal processes and compliance. And then we definitely -- all those will flow into focusing on innovation and having more competitive and unique products out there in the market, while also rationalizing the product offering because we have a lot of also products that we distribute, not make ourselves, we distribute them, and there is a long tail of stuff that we sell today that are not adding much value to the bottom line and by draining resources. So we are also in the process of rationalizing them.

So back-to-basics showed the turnaround in H2. We are continuing it and where it is going to take us in driving results is we have really a positive outlook for fiscal year '26. We have a very strong H1 with the 2 large Middle East deals and the humanitarian organization deals almost on track now and through finalization. The pipeline of opportunities is quite strong, and we have confidence in both H1 and full year delivery at market expectations. The other financial indicators are going in the right direction with net debt reduction and working capital improvement. And as I mentioned, the inventory decreasing coupled with the fact that, as I mentioned before, the underlying demand for our products is strong, and it's a market segment that is growing despite the pressures on health care budgets globally.

Our brands are very well known. The Inspiration Healthcare brand is very well known in the U.K. as a provider of high-quality neonatal products. And the SLE brand is very strong internationally with a history spanning more than 40 years. So basically putting more pressure and more rigor into the processes of managing the sales will give us the results that we first showed in H2 last year, and we are going to show in fiscal year '26.

Operational and organizational, we really are going back-to-basics there with a detailed approach to each of the functions. KPIs, goals on functional level, personal level, driving customer-centric culture, being better for the customer, faster deliveries, more responsive and rigorous nature of the transactions and driving ownership and accountability in all the teams.

And finally, looking a little bit further after fiscal year '26 is the midterm product road map where our R&D team is now has a clear goal of what to deliver and the focus in gaining access to the U.S. market, which is like half the market of the global size. And of course, the consumables launch that we mentioned at the end of this year. So the plan is there, and we are continuing very rigorously the back-to-basics initiatives, and it's all about execution this year.

Thank you for your attention and being here. Now we leave the floor -- open the floor to questions.

[Operator]

That's great. Rafi, Alan, thank you very much indeed for your presentation. [Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides published Q&A can be accessed by our investor dashboard. Rafi, Alan as you can see, we have received a number of questions throughout today's presentation. If I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you both at the end. Thank you.

[Alan Olby, executive]

Thank you. I'll take the first one. The question is, have we completed the Egyptian deal and the other deal mentioned in February?

So taking the Middle East contract for Egypt first, it is split into 2 shipments. The first of those has been delivered, and we are just in the process of presenting the documents requiring the letter of credit to get payment as we speak. The second shipment is being prepared. And once we've received payment for the first one, that will be sent. Whether it falls into the first or second half, difficult to say at the moment, everything, as we know, seems to take a lot longer in this particular market.

The other deal with the humanitarian aid organization, 2/3 of that contract has already been delivered and paid for. The final shipment is in transit at the moment, and that is also expected to fall into revenue in the first half of the current financial year, which supports the H1 weighting that we expect to see to results this year as set out in the outlook just a minute ago.

[Harout Stepanian, executive]

I'll take the second one. How do Trump tariffs affect our business, including are we better placed to win business than our EU competitors?

There is no impact at the moment because Airon, which is mostly sales in the U.S., the sales and the supply chain of Airon is based in U.S. So we were less impacted by any tariffs. And it remains to be seen where we are in 1.5, 2 years' time when we launch our other products in U.S. if we use the Airon facilities to also manufacture locally. But currently, no impact on our performance there. And our main competition there is also U.S.-based. So there was literally no impact as such. And I'll take the next one, too then.

What are key R&D priorities for fiscal year '26 are the new innovations beyond the consumables range SLE platform enhancements.

Yes, those platform enhancements and the consumables are already quite sizable projects with all the restrictions in the regulatory environment that we see, every product launch that we have is a cycle of at least 12 to 18 months even to enhance the current offerings. I think with the focus that we have on launching new features on the SLE1500 and 6000, we are already going to get a lot of traction and growth on those 2 products, specifically in Europe for the 6,000 and globally and U.K. for the 1,500. But the major portion of R&D work during this next 12 to 14 months would be to prepare the FDA submission. So that's where the most of the work is. We expect that by the beginning of next fiscal year, we will have the next road map cycle clarified.

[Alan Olby, executive]

Should I take the top one. There's a question here. Is there any operating relationship with Mennen Medical who are now, I think, our second largest shareholder. There is no operating relationship with them at the moment. They're obviously based in Israel. They have a number of products in our space. There have been some initial conversations about distributing our products in Israel, but we already have Teva as our local distributor who have been performing for us for a number of years. So at the moment, there's no operating relationship at all with Mennen, just a regular line of communication.

[Harout Stepanian, executive]

Thank you. Who are the entrants to the neonatal market that you mentioned? How are your ventilators differentiated from theirs?

The more visible one is a company in Italy called GINEVRI, who is working with another Japanese company as a joint venture, and they have launched a ventilator that does high-frequency oscillation. How are our devices differentiated is that we have 2 or 3 unique features. One of them is high-frequency oscillation, which other companies do as well, but ours is recognized in the market as one of the higher standard or gold standard, if you like, with the mechanism that we do it. Plus we have a unique parameter of automated oxygen control for the neonates, which has a lot of advantages for the users and the patients which is still quite unique in the way the algorithm controls the oxygen.

So we still have 2 or 3 important features where -- which puts us ahead of competition. And given the right marketing and focused efforts, we should be more competitive in the market than we are today.

[Alan Olby, executive]

Next question is, we mentioned shifting towards more recurring revenue by consumable and service revenues. What proportion of total revenue do you target for recurring revenue by FY '27?

I think the point to mention here is that we need to focus on recurring revenue because it provides stability to the business and the capital sales will always be lumpy by nature and unpredictable. And also recurring revenues in terms of service and consumables should be higher margin. You can see that the margins of the business have declined this year, and we need to get the margins back up towards the historic levels as quickly as possible.

We're not going to put a specific target on recurring revenues other than to say we're very focused on driving recurring revenues as significant growth opportunities because the number of ventilators that are using our consumables are below what they should be, and we see significant opportunity in focusing on those. But given capital sales being lumpy and unpredictable, it may well be that if we have successful capital sales that would push recurring revenues down, but we do expect to see and be able to show recurring revenues growing year-on-year as we move forward.

[Harout Stepanian, executive]

Next question. You referred to discontinuing products due to regulation, also new entrants to the sector. So is there a net increase in competition despite the increased regulation?

Yes and no. Yes, in the sense that there is more aggressive competition in the neonatal segment. And in general, no, because also a lot of ventilation companies exited the market, specifically in the U.S. for various reasons because they went through mergers and acquisitions and they have quality product recalls like Philips or like CareFusion. So there are a lot of companies also exited the market. So it's not as straightforward, yes or no. But in the markets where we are present today, there is increased competition in the neonatal segment specifically.

[Alan Olby, executive]

Next question is around more detail on the impairment charge, in particular, GBP 10.3 million against goodwill.

I think what to say here is this is -- first of all, this is a noncash accounting charge, which relates to the valuation of goodwill and other assets that are on the balance sheet as a result of historic acquisitions. The business has underperformed and revenues and profitability has gone backwards over the last 2 or 3 years now. And what this really reflects is a catching up in terms of the view of future cash flows and value of the assets as they are today.

The market cap of the company before this morning was around GBP 17.5 million, but we had a net assets on the balance sheet significantly in excess of that. So I think the accounting charge here is catching up for the performance of the past. It's not reflective of our projections or forecast of the business moving forward.

[Harout Stepanian, executive]

And we have a last question. What European countries are planning -- are you planning on expanding into?

It's not about really expansion to new markets. We were present in those markets through SLE and Inspiration Healthcare over many years, but it's a matter of they were not being active and our partners were not really active. So it's reactivating and being more rigorous in chasing opportunities in those markets and high on my list is France, Spain, Italy and also to a lesser extent, Germany because some of our toughest competitors are German manufacturers. But the short answer would be France, Spain and Italy. But in general, rigor on overall European market.

[Operator]

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

[Harout Stepanian, executive]

Thank you. Yes, I would like to thank you for your time and for your interest and support. We had a big number of participants to this call. We look forward to more successes and more positive growth in the future. We know and we have said it many times that we have gone through a challenging period of -- including a lot of changes for the organization and for the company.

Finally, with the back-to-basics approach, we have put the company on track in a stability status. And now it's -- we're crossing over to performing, and we intend to continue in this performance and have a much stronger fiscal year '26 and beyond. And again, a big thank you for all the shareholders and for your loyalty and belief in the company and the purpose of what we do every day. Thank you very much.

[Operator]

Fantastic, Rafi, Alan, thank you once again for updating investors today. Could I please ask investors not to close this session as you will 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 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, and good morning.