Surgical Innovations Group (LSE:SUN) — Full year results for the year ended 31st December 2020

0:02 Good afternoon, ladies and gentlemen, welcome to the SURGICAL INNOVATIONS GROUP PLC investor presentation for the full year results to the 12/31/2020. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted any time via the q and a tab situated on the right hand corner of your screen. Simply type in your question and press send. The company may have been in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your

0:32 investor meet company, and you'll be notified once they're ready for your review. I'd also like to remind you this presentation is being recorded. Before we begin, we would like to submit the following poll. I would now like to hand you over to Nigel Rogers, Chairman David Marsh, CEO and Charmaine Day, CFO of SURGICAL INNOVATIONS GROUP PLC. Good afternoon. Hello and good afternoon everybody and thank you for joining us for this presentation. It's the first opportunity that Surgical Innovations have had to use the Investor Meet company platform and I'm sure many of the people on this are familiar with it. Some of you might be first timers. Including the first timers are both David and Charmaine. But now that we're all used to presenting over the internet, which perhaps wasn't true a few weeks ago, I'm sure that they'll be entirely comfortable with the platform.

1:18 Our presentation should last probably around forty minutes. I'm going to start with some financial and operating highlights. And then I'm going to pass to David, who will give you a brief overview of the company as a refresher for anybody who has seen the company before and as a brief overview for anybody who has seen the company for the first time. He's then going to pass over to Charmaine, who will go through the financial results for 2020 in more detail. And then she'll pass back to David to talk about some of the commercial and operating and strategic plans that we have for the business in 2021 and beyond. As Paul has already said at the introduction, we certainly welcome questions. We've had three pre submitted questions. And I'm going to be hosting a Q and A at the end. So, without further ado, I will make a start on the financial highlights for the financial year 12/31/2020.

2:12 So, we came into the year feeling pretty positive about life. Market consensus forecast for the year was revenue of around CHF12 million and a profit margin of about 10%, so we're expecting to see profit before tax around about CHF1.2 million for the year. And coming into the year in January, we felt pretty positive about the ability of the business to deliver on that and hopeful that we'll be able to see upgrades during the year. Little did we know that a year ago this week, things were going get somewhat tougher and I don't think it takes any explanation as to what's been happening with elective surgery for anybody who watches the BBC. So in the event revenue was actually down about 40% on the prior year, although there was a very healthy recovery in the second half of the year, the low point was passed in May, and we've got some more details to show you on that later on.

3:02 The underlying commercial gross margin of the business improved slightly to 44% of revenue. Our target margin range is typically in the 40%, 45% range. So margins held up well, although the commercial gross margins were diluted by a rapid slowdown during the summer of factory activity, which Charmaine will talk about. A lot of very early intervention was taken to manage the operating expense of the business and to take maximum opportunity to the reliefs that were opened to us by government, particularly the furlough scheme. And so, the operating expenses were well compressed. And as a result, the damage to profits was such that the EBITDA loss of GBP 660,000 was actually close to breakeven in the second half of the year. And the loss for the year of GBP 1,600,000 was pretty much in line with our expectations.

3:54 The business is on a very firm financial footing. We had a great deal of support from both the bank and an equity fund raise in September. And in addition, the business generated its own cash of £1,000,000 from operations. So overall, finished in a healthy cash position, which again, Charmaine will expand upon.

4:14 In terms of the operation and the commercial activity of the business, there was actually an opportunity to just take a breath and as the business suffered such a sharp slowdown and the factory activity went to a very low level in the summer, there was actually an opportunity to do some very fundamental thinking about the structure of the business and its cost base and to streamline and improve a lot of the operational and regulatory processes. And that opportunity certainly wasn't missed. Great deal of work has gone on under the bonnet to make this a very well oiled machine for when times get better. In addition, from a commercial point of view, the business has very broad international reach and the strength of the relationships with our international distribution partners was certainly aided by a need for very frequent dialogue about the impact of Covid in different parts of the world. And again, that proximity of relationship with those partners was not wasted and a great deal of good will come out of that in the coming year.

5:17 Also, Covid has caused many industries to hit the fast forward button on a lot of initiatives. Certainly, aspect of life which I think has changed for the better as a result of COVID is the recognition of the whole green agenda and the need to tackle climate change. And SURGICAL INNOVATIONS has a great opportunity to benefit its business in that area because of the sustainability of most of our core product range. And David will talk a lot about that in his part of the presentation. So, overall, it's been an extremely difficult time for everybody and SURGICAL INNOVATIONS is no exception to that. But that difficult time has been used in a very positive way to position the business for a very strong recovery, which we will come on and talk about. I'm now going to pass over to David for that brief company overview before Charmaine takes you through the numbers.

6:12 Good afternoon, everybody. I'm I'm just going to go through a brief overview to for for those of you that aren't quite so familiar with the business. So SURGICAL INNOVATIONS specializes in the fast moving area of surgery, that's of laparoscopic surgery, otherwise known as minimally invasive surgery. Important points to remember are that we control the process from design, development to manufacturing and beyond into the marketplace through a direct sales team in The UK and through international partners around the globe.

6:48 We hold a number of patents. We hold 32 live patents, we have four four pending. And that includes the fixate device that we manufacture for AMS. Our unique selling points, the the the bit that differentiates us from all of our competition, is the fact that our products are reposable. It's a trademark name. And that effectively means that we have parts of the device that are reusable and parts that are disposable. And that provides both economic and sustainability benefits to the health care market. So it's a bit razor razor blade razor razor blade concept. So the important parts of any device is disposable.

7:33 So, for example, on scissors, the blade would be disposable. On trocars access devices, the valves are disposable. We have, over the years, pioneered a number of technologies, one of them being our flex technology, which was developed to allow surgeons to overcome the challenges of tissue retraction when they can no longer get their hands into the abdominal cavity. And this has been used in other applications as well, inspection in jet engines. So this it sort of helped us branch out into other areas as well. We also sell through our subsidiary, Elemental Healthcare, a range of third party products, particular applications in reconstructive and robotic surgery, but it enables us to bring in unique and innovative technologies to the NHS.

8:28 And Elemental has served that, very well, and I'll talk in detail, much later, in my presentation. So that's the company. And now I'll hand over to Charmaine for the, financial summary. Thank you, David. So I'm gonna take you through the revenue analysis and look at that into further detail. So we've got a table on the the top left hand side there, that's showing the first half compared to the second half. So we've got GBP 2,500,000 GBP $59,000,000, sorry, going to GBP 3,740,000, which is a 44% increase into the second half of the year. If we look at that into further detail in that table below, we can see the revenue as a percentage of the prior year, at the lowest point reached in May, as Nigel mentioned earlier, and averaging around 70% in the second half of the year. And just to kind of point on that slide, which I'm probably going to come back to in a second, that February month related to there was a large stock in order in the prior year, so it just looks a little bit lower than normal levels.

9:32 Looking at the graph on the right hand side, that breaks the revenue down by segment. So we've got three different segments that we report to. We've got our SI branded segment, which is 42% down to GBP 3,400,000 in 2020, distribution down by 26% to GBP 2,300,000 and OEM business, 66% down to GBP £700,000 And we'll look at these in a bit more detail on the next slide. The good news is on the positives that we are actually trading at 11% on the prior year to date, so the sales are picking up. Looking at the next slide, revenue by territory. This just gives a bit more further information on where we are. So we've got a graph on the right hand side showing the half year comparison.

10:17 So if you look at the half year one compared to half year two, you can see that both The UK and The US markets were recovering in the second half. And in particular, if you look at the distribution sales, they were up 75% and in The US market, 103%. The pie chart below shows how we kind of split our revenue geographically, and if you look at them, they're relatively the same year on year, with predominantly you've got 60% of our UK, sales, And then you've got slight change from the APAC region, has grown over 50%. So just to kind of talk in more detail about the APAC region, I know David is gonna go through in in a bit more detail on his slides, but that is really down to the fact that how they've coped with the pandemic throughout. They've continued to order, but also they've got growth and increased market share as well.

11:13 Next slide, please.

11:17 Going on to gross margins. Now we wanted to put this slide in really just to give you a bit more detail on the gross margins considering the year we've had. So as Nigel mentioned beforehand that the underlying gross margin was around 44%, which was 1% better than the previous year. And then there's net manufacturing costs going further down at GBP 1,540,000. But actually, within that GBP 1,540,000, pounds there's underlying additional costs within that segment of about £400,000 Some of it's relating to the CJRS income which is actually offsetting to other income on the income statement And then we've got 120,000 for the remaining balance of nonrecovering recurring COVID related stock provisions. And that really is down to items of stock that were prematurely brought to the end of life just given the year we've had. If you actually take these items out of that net manufacturing costs, overall, you would probably get an underlying percentage of 26% of the bottom line contribution margin.

12:24 And just to point out, the additional costs, as Nigel mentioned, was predominantly due to the fact that we've reduced the factory activity, so we weren't recovering our overheads. But going forward from November onwards, we brought back all our manufacturing staff and have continued to resume factory activity levels to meet the current demand. Next slide, please. Looking at operating expenses. So I'm just gonna point you to the table at the bottom there. So you've got a little bit saying about underlying operating expenses, and that's what I really want to talk to about those ignoring all the kind of non cash exceptional items that get added into that particular pot. So if you look at the underlying operating expenses at 2.55 in the 2020 current year, comparing it to 2.88 in the prior year, we've reduced those costs by 340,000.

13:19 And that is really down to salary reductions and travel and marketing expenses within the year. If you look at the table on the right hand side, we've also mitigated some other bits and pieces as well as we talked about the furlough scheme using the CJRS, so there's 320,000 of costs that are actually sat in that particular operating expense as well, combined with an 80,000 non recurring, non cash cost for holiday accrual. As people have been furloughed, they've got lots of holiday to take, so they're likely to take this back in time rather than being paid in cash. Going forward, if we look at those costs and where we are sitting in the current year, we expect them to sit to be around the 2,019 levels.

14:05 However, we would expect to see a slight increase in that with the additional investment that we put into product development and sustainability. Next slide, please. So looking at the overall net results, the adjusted EBITDA loss for the year was GBP 660,000, and that was predominantly in the first half of the year with significant improvement in the second half. If you look at the table on the right hand side, you can see around £200,000 in the second half of the year. Now this is relating to the non recurring, non cash COVID related costs that we've been talking about. So £120,000 related to stock provisions and £80,000 related to the holiday accrual. So overall, results in an underlying EBITDA breakeven point.

14:50 And just to make a point as well, going forward into the current year, we don't anticipate to have any non recurring items in the current year. Overall, taking us down to an adjusted loss before tax of GBP 1,610,000. And then if you look at the outlook for 2021, we expect to be profitable at adjusted EBITDA level from Q2 onwards. Going into the financial position and looking at the balance sheet. So we talked about having a hiatus and making sure that we had enough cash to get us through the pandemic. So we effectively managed working capital. So we did this in a number of ways. So we depleted our stock holdings to release the cash. So the cut the inventory levels at the end of the year were 2.17 compared to 2.93.

15:39 The debt is at £960,000 were significantly decreased, and we have had effective credit control measures in place with little over dues and bad debts. And then trade creditors, we've continued to manage and control costs as we go into the current year. Looking at the bottom half, we've looked at the we've talked about cash and how we've got plenty of headroom within the business. So currently, at the end of the year, we had 5,780,000 headroom, and that's including a 500,000 RCF limit within that balance. And then supported by that, we've got bank borrowings of 2,180,000 with a CBILLS loan included in that number that we took out in May to bolster the the cash balance, and that is due back in May 2022.

16:30 And on top of that, we also went into a placing. So we raised funds of around a net of 2,000,000, and we've generated looking back those managed working capitals, we've generated cash from operations of over 1,000,000. And this takes us to an adjusted net cash of 3,100,000, excluding those lease obligations for IFRS 16. So where does this take us into the next year? So 2021, we would look to increase that working capital requirement as we start to ramp up activity and optimize that working capital. And also, we anticipate to invest in capital expenditure as well. And David will talk about some of those projects that are ongoing and up for review. I'd like to now pass you on to David.

17:20 Thank you, Charmaine. I have to remember to unmute myself. So going into the the rest of the year, Nigel mentioned that we went into 2020 in this positive frame of mind, And that positivity still remains in the business, really. It's it's we we kind of see COVID as just press the pause button on the business, but we're still back in a really strong position. And the reasons for our positivity are are a numb a number of reasons. First of all, there is an ever increasing backlog of elective surgery that does have have to be tackled at some point, and we believe that we're in a really strong position to take advantage of that. And I'll talk about some of our account wins and the strategies that we have in place to win new business.

18:09 Our continuing drive for sustainable solutions in health care is now resonating at the highest levels both in the NHS and within our global health care providers. And we're seeing a real uptick in the interest around sustainability, and that is beginning to impact our sales too. We have a number of options of expanding our product range. And over the lockdowns, we have reviewed our r and d profile and our new product pipeline. And we have got quite an exciting range of products, which we believe we would we'll be able to deliver some of those in the middle of this year and going through into 2022 as well. So we've got some really significant opportunities there.

18:56 You will have all seen the, announcements with regard to our, international network, particularly related to The US where we strengthened our distribution outlets through Adler and MicroLine. And, again, I'll talk in details on those. From a operational agility point of view, we we as Nigel said, you know, we we use this hiatus in manufacturing to improve a number of aspects of our business. Simple things like taking the opportunity of downtime to upgrade our assembly room and our clean room to make them MDR compatible puts us further along that pathway and will save us time later on. We've also looked at a number of upgrades within the facility as well, simple things like putting a new roof on courtesy of our landlord, but also to make the the whole operation more efficient and also a better environment for our our our team in Leeds.

19:58 And we continue to search for innovations from third party partners for our UK business, Elemental Healthcare. And you will have seen the announcements at the end of last year about the DEXA robot achieving CE Mark, and we we have a number of other new opportunities as well coming our way over the coming months and years. So if we look at The UK market, clearly, 2020 was a challenging year for for all of our markets and none more so than The UK. So about this time last year, the government, quite rightly, with not not understanding what was coming down the road, gave the mandate to cease all elective surgery.

20:43 And you can see from the graph on the right hand side that sort of sales disappeared almost overnight. And, you know, so they continued like that for a couple of months. However, what we did see and what is encouraging and what is encouraging us for for the future is the return to normal levels of of activity. From a sales perspective, we returned to twenty nineteen levels in September and October and slightly ahead in October. And we dropped back slightly in the second lockdown, and we have dropped down in the in the third lockdown for January and February. But we believe that the opportunity to rebuild that business is is is significant and should be rapid as well. So we we talk about the backlog of patients and the treating, and there are varying numbers that you will see on the on the news and in the newspapers.

21:37 And they all seem to be fairly consistent at about four and a half million people awaiting treatment of some sort in the NHS. However, that doesn't take into account the fact that there are about four million people that didn't go through the triage process last year and are waiting to be added to that waiting list. And that data comes from a paper in the King's Fund. The reference is at the back of the presentation that you can take away.

22:04 We're well positioned to take advantage of this this uptick in surgery as they address the backlog. During the year, we've won a number of new accounts, and I will touch on detail on those because they're, a bit later because they're around the sustainability argument. And you can see that the NHS has now published its, net zero, carbon targets, to achieve them by 2014 sorry, 2045. We've continued to strengthen our partnerships in The UK. You will have seen on Monday that we announced new three year distribution contract with MicroLine, and that's an ongoing and continuingly successful relationship that we have with that company. And, of course, we've extended that now into The US. With the DistalMotion Dexter robot product receiving Seamark at the end of December, we are putting together a pipeline of potential orders, and Adam and his team have worked really hard on that.

23:02 And we believe that we should be in a position to have at least two robots placed in The UK by the end of this year. We are building a sales team structured, both clinical and sales, to support that activity as we go forward. And there are additional third party opportunities, again, which I'll touch on a bit later, that we are looking to pick up. So for The UK, we are beginning to see some signs of recovery. Over the last couple of weeks, there's been an uptick in orders, and we believe that this is a consequence of the NHS beginning to resume

23:40 elective surgery, albeit at a suppressed level, but we anticipate that that presumption to continue during q two and towards the end of the year.

23:53 Moving on to The US. So The US was impacted by COVID as were most regions in in the world. And you can see from the graph that it's a bumpy bumpy pathways, particularly through the middle of the year, and then leveling out towards the end. December, we saw a number of interesting challenges which saw a decline in in the business. One was the change in distribution channels. So we had C Star partnership with Surgical Principles,

24:22 and that obviously, we lost the the normal year end business we would have achieved from them. And, also, we had an unexpected cause of delays where US customs were short staffed because of COVID, and so it was taking longer to clear product through. So we obviously couldn't ship in the same volume that we used to.

24:42 So we've talked about strengthening our international route to markets and, in particular, in The US. And so now we have two key dealers in The USA. The first is Adler, and they carry our scissor and flex instruments. Adler had been a dealer for Surgical Innovations for a number of years, primarily for 11 states in the Southeast of the country.

25:07 And they've now built a network of similar businesses to provide US coverage, total nationwide US coverage. And they have a highly motivated sales channel. They tend to be commission only salespeople. They're very motivated by the quick sale that the scissors can provide. And more importantly, Adler have some excellent relationships, some with some of the key GPOs in America, particularly the likes of HCA and the veterans hospitals.

25:38 So moving on to MicroLine, you will have seen that we signed a five year deal with them earlier that this year. So where we're at with that is that we're in the process of shipping their initial demo stock, and we have a full rollout of sales training in April. So that will be done virtually. But, again, Adam and his team have built a a really positive virtual training program that will help in that regard. And this really leverages the the relationship that we have with MicroLine. You know, Elemental has been selling the product for almost since their its inception in 2007, and I've my relationship with the company goes back to 1996.

26:24 They have a direct US sales organization, and they have a a range of complementary products. Hence, the reason it works so well in The UK as well. And they have a shared ethos around system reposable products and sustainability. We have seen in The US both, particularly from Adler, a very, very strong start to the business, and we expect that to continue as they win more of the large GPO accounts that I'll talk about later.

26:54 So the APAC region has continued to grow really well for us. We've seen growth in in the last year of nearly 50%. That's primarily because of our effective partner in Japan and also the way that Japan seemed to have managed the COVID epidemic over there. They really have just continued on throughout. And so that so we're we've been grateful for their support.

27:19 The environmental messaging that we've talked about is beginning to have impact in places like Australia and New Zealand. And in the interims, we talked about the

27:30 the the fact that our Australian dealer has now got sustainability as a key element of framework tender agreements. So we're looking for that to be a a an uptick for us during 2021. So across the APAC region, we see that as a really positive for us this year, with some significant opportunities in the region. Moving on to Europe, it will come as no surprise to anybody, who watches the news that Europe is is sort of an inconsistent as it struggles to manage the COVID pandemic. We are seeing some areas that are positive. Benelux, for example, is doing well,

28:12 and France is hit and miss, but it is is is sustaining its business. But particularly Southern Europe, we we are struggling with. And I I think this will continue until they get their vaccine program rolled out. I think where we see the biggest potential the soonest is where in countries where the the vaccine programs are effective. In the rest of the world, we we are struggling for visibility. It tends to be particularly, The Middle East tends to be tender based business. And a lot of the tenders were paused during last year, and we're not sure when they will step back up again. So we're we remain sort of uncertain about that area. Although, there are pockets, Israel and Canada, for example, are performing well, and we expect that to continue.

29:05 So this is a slide which you will have seen on a number of occasions, and it's it's sort of the around sustainability messaging. And it's it's focused really on the activity of Elemental in The UK and the good work that they've done and continue to do about driving that message of reducing plastic waste in the

29:26 If we move on to the next slide, this is this is sort of one of the real successes that had come out of that initial program. So Elemental worked with an organization called the Center for Sustainable Healthcare, which is based out of Brighton and Brighton Hospital. And a number of academics there took data we provided to them to analyze the effects of what they call a hybrid system, we call a rep disposable system against single use equivalents. And they took they they used the modeling on laparoscopic cholecystectomy, so the removal of gallbladders. And what they found was that the carbon footprint of using reposable devices is less than a quarter of the single use devices.

30:12 So if you took that as as every lap coli done in The UK in over a year, that would be the equivalent of saving 30 metric tons of plastic waste, about 3,600,000 plastic bottles, or the equivalent c o two of driving 1,200,000 miles in a standard family car. That's driving around the world about 500 times. In addition, they did a cost analysis which proved that the product, using a disposable device saves the NHS by about 50% compared to single use devices, giving it saving of £11,000,000 per annum just on lab coleads. So if you put out an image around that, that would be the equivalent of employing an extra 450 nurses. And, there were times in the last year when we could certainly have done with them.

31:03 Moving on to other initiatives that we have going on in our sustainability program. So in conjunction with the Royal College of Surgeons of Scotland and England, the Centre for Sustainable Healthcare and the n NIHR, we have a platform for a greener surgery challenge, which is to promote green surgery or or green greener initiatives to reduce plastic waste in the operating room. And this is a challenge which is happening throughout the year and comes to fruition in September, October time when the winners will be announced. But it's effectively getting a number of OR ORs to put together initiatives on on reducing the amount of plastic waste. We've also seen recently the publication by the NHS.

31:50 They aim to be the first health care provider to be net zero by 2045, and they have introduced a range of sustainability teams into each trust, and we are working very closely with all of those. And the new initiative that we're working on is the in conjunction with the Sustainable Healthcare Coalition. And they're working with a key a newly converted hospital to produce a case study to work with the NHS supply chain to provide a template for cost effective and sustainability options in the ER. So these programs are really useful and all very well and good, but at the end of the day, we need them to drive revenue. And so how are they driving the revenue?

32:37 So there's no question that the speed of evaluations and their account conversions has been slowed by COVID. But looking at The UK, since the summer, there have been three major university hospitals converted. There are 12 ongoing evaluations. Some have already started. Some are about to start. Some, we made the decision to pause to ensure that we could get continuation throughout the process

33:00 for an ex for a successful outcome. We're also working with one of the largest private health care groups in The UK and now restarting some regional evaluations on the April 1. This particular group have announced the £16,000,000 initiative into

33:18 green initiatives, and they are planning to be net carbon zero by 2030. And elemental and surgical innovations product is a key plank to that strategy that they've got. Internationally, we are seeing sustainability becoming more and more key. We are seeing in The EU, it's being adopted as the unique selling point, and we're seeing some campaigns in Benelux and France coming to fruition. I spoke earlier about Japan and Canada and New Zealand, and they're really embracing sustainability. And in The US, we're seeing some some of the major GPOs are converting purely on on the the sustainability argument and the cost benefits our product provides. And in one particular GPO, we're seeing the roll first rollout of of the hub, which includes about 10 hospitals in that hub.

34:08 And I think in the in the whole group, there are about a 100 hospitals. So you can see that our level of optimism around sustainability and cost effectiveness of that is really beginning to pay dividends. We mentioned earlier about new product developments and the and the pipeline that we have. And part of our review on our r and d process was to look at options which would give us quick wins and those which were longer terms options for us. And so in phase one, which is defined by the the regulatory pathway still being under the MDD, so it makes it much quicker, We've got a number of options which we anticipate to launch in the summer of this year. So one of those is a five millimeter trocar extra large, which is primarily aimed at the five millimeter sorry, at The US market as they adopt to new energy devices which utilize instruments greater than five millimeters.

35:05 And it will also allow us to introduce an optical trocar. This is key for The US market, but also for the Japanese market where, anecdotally, our our partners in Japan tell us that about 40% of five mil access devices are optical devices. We're also planning to relaunch a low cost disposable range of the sectors and graspers to complete the logic range. So our scissors are the logic cut, and this is the the the completion of that range. And we're looking to reengineer a product that's already in the market, the logic flex, to allow us to adopt a wider range of procedures going forwards. In the the longer term strategy, our products which will fall under the regulatory pathway of the MDR, And so the validation process is slightly more complex around that.

36:01 Some of you will be aware that we have been working on a range of illuminated devices, an Eisenhower rectal retractor and a breast retractor. And we're currently reconfiguring those to see if we can make them into a disposable product. So if you take the the black retractor in the middle, that is a breast retractor. The idea would be the handle would be reusable and the blade would be the illuminated blade would be a clip on device. We're also exploring different options because that marketplace has changed rapidly over the last eighteen months. And we're exploring the opportunity to have maybe LED devices which can be attached to existing medical devices or a standalone device which can then flex into a wound or something like that. And we believe there are those that number of opportunities there as well.

36:54 So if we look at some of the, distribution opportunities that we've got. So I talked earlier about the DEXTER robot and the CE Mark, coming in December 20. We have, we we do have or Elemental have been working on building a pipeline an order pipeline, and there are sort of quite a few interested hospitals. It's quite a pipeline of interested hospitals that we've worked with, some of who who have already been to Switzerland and trained on the system. And we're expecting to be able to place two devices this year and next year, significant increase on that as well. And to aid that, we are in the process of recruiting a clinical and sales team to to build that pipeline of orders.

37:40 We've also taken the opportunity to enhance our women's health portfolio. So we have sellers breast pockets, which we've spoken about on a number of occasions, and that was successfully launched to the UK team in quarter four. Unfortunately, it coincided with a decision by most breast surgeons to just concentrate on mastectomy and then do the reconstruction at a later stage. So part of that backlog of surgery will be to pick up those those cases as and when they they they arise, which hopefully won't be too far away now. We've also added to our range of uterine manipulators, and this is a device primarily for laparoscopic gyne oncology, but also for hysterectomy as well. And then we've also added a device called a t lift, which is an in situ retraction device, and it effectively just holds organs up to the abdominal surface and enable surgeons to to have a clearer operating space.

38:40 So, operationally, we're working on a number of programs. I talked earlier about the refurbishment program of the assembly room and the clean room and the facility in general. We are working on a number of efficiency programs, and we're looking at automated platforms for the scissor line and for the packing line as well. And we believe that they can take some cost out of our scissor manufacturing and provide a number of efficiencies. From a QARA point of view, we had a quite an onerous regulatory process despite lockdown. It seems regulators work whatever the conditions, but our team dealt with that very successfully. I think it was six or seven audits that we underwent, and we passed all of those with no no major issues.

39:26 We've continued to streamline our quality management system to make the company more effective, to make all of our processes more effective, and this allows us to bring new technologies to the market more effectively as well. MDR is a big a big thing that we we need to to work on. We have until 2020 May 23 to do that. We're well down the pathway, but that is something we are continuing to work. Although, we do hope to have our first class one device approved May of this year. In addition, we've also worked with AMS on the five ten k application for fixate. We've completed our end of the PMA work, and we're expecting a full submission to the FDA in 2022.

40:14 So we're looking forward to seeing how that pans out going forward. From an OEM point of view, clearly impacted by COVID, most of the medical OEM devices that we use are for elective with all of them are for elective surgery, but we are seeing a return to forecasting and growing demand from all of our OEM partners. We're building relationships with a number of new partners, particularly in the field of robotics. You know, we're we're utilizing our expertise in instrument design to support some of the robotic companies. And now, hopefully, in the coming months and years, there will be some interesting information coming to the market around that. Key to our OEM relationships are AMS.

41:01 Fixate sales were impacted, and I think AMS reflected that in their results. But we are seeing an increased demand now, and we're working with them as well on their, as I mentioned, their five ten k application. Our industrial OEM business, that was severely impacted. As you probably are aware, we designed an inspection device for jet engines. If planes aren't flying, they don't need to be inspected. And so we have seen very little activity in that area last year, and we don't expect to see very much next year either. So last slide, I promise. And just to give you an an overview. So we as I said, we do remain really positive for 2021.

41:49 We've had a positive start. The business is up 11% over prior year, despite the COVID challenges. We have some very buoyant, a very buoyant order book and forecasting schedule coming from our our dealers and our OEM partners, which is good. And we expect to see that continue through q two and beyond. We have an exciting strong pipeline of new products coming in 2021. And, again, that will continue into the new year, and that's on the back of our investment in both headcount and, in general, in r and d. As Charmaine alluded to, we've built a very stable financial platform for the business, and we're well positioned to take advantage of the recovery and growth as elective surgery restarts and health care providers address the backlog.

42:40 And importantly, we've strengthened our partnerships in The US. We believe that what we have there now is is the strongest it's ever been, And we think that going forward that The US will continue to grow in leaps and bounds. So thank you very much for your attention, and I'll hand hand you back to Nigel for questions and and answer session. That's great. Look. Thank you very much, David. Nigel and, thank you very much indeed for your presentation. Ladies and gentlemen, do you please continue to submit your questions using the q and a tab situated in the top right hand corner of the screen? I just want the company to take a few moments to review those investor questions submitted already. I'd like to remind you that a recording of the presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard on the Investor Meet company platform. I'd also like to remind you that your feedback is important to the company, and immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations.

43:37 Nigel, perhaps I could hand back to you as we've received a number of questions both presubmitted and during the meeting itself. If I could ask you to read out the question where appropriate to do so, that'd be fantastic. Thank you. Yes. Of course. I will. Thank you very much. And I'll answer one or two of them myself and obviously refer some of them to David and to Charmaine. First of all, thanks for all of your questions, particularly John A and Jag, from whom we've had a number of questions, which is great, and also the pre submitted ones. I've actually clicked a few of the questions through because they've already been answered as part of the presentation. But it will be certainly good to follow some of them up now. I'm going to start with a couple of financial questions. If you could stand by, please, Charmaine. So first of all, a question from John A. How much does the company spend on R and D per year as a percentage of turnover, please?

44:26 Okay. If we typically look at 2019, given that 2020 wasn't a normal year, you're probably looking around 11%. Going into 2021, that's probably gonna be around 13% given revenue levels aren't up to the same period as 2019. Thank you. Next one, I'm just going to broaden the question out a little bit. Jon A's question is, what is the typical margin you're making on distribution agreements that you have? But I think perhaps it might be worthwhile just expanding on how our blended gross margin of 40 to 45% overall works for different parts of the business, please. Yep. So typically, the OEM products are around 30 to 35%.

45:12 Distribution business is around 40 to 45. And then we've got our own SI branded products, which we've got our own UK market and a direct sales force in through Elemental Healthcare. So they'll be around 60 to 65%. Overall given that blended margin of about 40% to 45%. Thank you, Charmaine. David, if I could pass a couple to you. We have a question which I'm just trying to locate concerning Brexit. I think it was one of the pre submitted ones actually, which was if you could just outline any current or future impact to the business that you expect to see as a result of Brexit, please? So currently, we or at the start of the year, we did see a number of challenges at the orders for some of our shipments going both ways, actually.

46:06 That seemed to stabilize very quickly, and we have no current issues. Long term, we don't see that that recurring. I mean, I'm assuming that sort of as long as we can come to agreement on vaccines, then we won't fall out with European Union and we'll we'll be fine. In terms of long term, realistically, we don't anticipate there being any challenges. Medical devices are zero tariff and, you know, sort of the customs seem to be working their way out. So issues like that are ironing themselves out, and we we just see business as normal. Yeah. And, of course, from a regulatory point of view, we did take the precaution of registering all of our CE marks with BSI in Holland, didn't we? That's been in place for some time now and working very smoothly.

46:58 David, I'm going to also pass a couple of questions to you from David C, please. So, what percentage of your overall sales are to the NHS? I guess, by reference to the geographic analysis we've already seen on the slides, it would just be useful to try and explain how The UK market works in terms of a split between NHS and private hospitals. And a follow-up question as to how that's developed over the years and perhaps how you see it developing. Yeah. I mean, it's it's it's an interesting one, actually, because, historically, the private sector in The UK has been primarily interested in single use devices. So Elemental's health care business was and and still is because health care in The UK is primarily through the NHS.

47:46 So about 85% of our business is, our UK business is in the NHS. Having said that, we have been working on a number of initiatives around sustainability, and cost effectiveness of our disposable devices. And the the UK team have done a a really good job in changing the the mindsets of some of these private health care providers. And the the one I I mentioned earlier was sort of the the largest UK private hospital group. I think they have about 40 hospitals in their organization. And they, you know, sort of they they are committed to reducing their carbon footprint and plastic waste in the operating room. And so they've turned to us for guidance and, you know, sort of we we are hoping that we'll once they are released from their obligations to the NHS under the COVID regime, we're hoping that we're we're be able to begin evaluations in those accounts.

48:50 Thank you. Yeah. There's three or four questions, David, which I'm going to put over to you, which are asking for some quite granular detail. I suspect that you won't be able to answer them in quite such granular detail as perhaps the question I would like. But I certainly think that some generic responses to provide a direction of travel perhaps rather than a number will certainly be interesting. So, John A, first of all and this is perhaps one way you can be a little bit more specific, I imagine. For the sustainability initiatives, for example, the three university hospitals converted, how much does a hospital conversion mean in terms of revenue and profitability? Certainly, in revenue terms, I think it would be reasonable to try and give an outline of what sort of spend a hospital might have, having conversed.

49:44 Okay. Yeah. So, typically, we would and it depends on how extensive a range a a hospital buys from us. But, typically, a hospital that would buy our lab co lead kits, so that's four four tracheal valves, a clip cartridge, and a scissor blade. They they would probably do about a thousand cases a year, and an average price for a kit is around about £100. So that would be about £10,000 per hospital. We then add in the other products that we have. So you'd add in suction irrigation, and diathermy probes and all sorts of, manner of other kits as well. And so you could you would expect a reasonable sized hospital that's buying a broad range of product from Elemental to to be about 20 to 25,000 per annum.

50:43 Thank you. Along a similar vein, there's a question from JAG S asking for the revenue on deck that you would expect to see on a Dexter. If if you if putting putting a a DistalMotion Dexter robot into a hospital, what sort of revenue would we expect to see that generating? Yeah. On the on the business models that DistalMotion have worked with Adam and the team on, it's it's about 130,000 per annum from each robot, and that's on a minimum number of cases. So there there is no there's no outlay for Elemental in that respect other than to buy the disposable elements and then pass on. So there's a rental which which and then a a disposable cost as well. But it's about a 130,000 per per robot.

51:35 Super. Thank you. And from JAG S, when do you anticipate confirmation of USA GPOs taking products? So you you mentioned that we've got evaluations going on. Is that Chuck s would like to know when we expect to see that starting to convert into revenue? They've they've already started. So we are seeing that that first half are already starting to roll the product out, and we are seeing an uptick in revenue as a consequence of that. And and similarly, expected launch dates for the new yellow port range extensions? So we're we anticipate that the five mil XL, the larger version will be around about August time and the optical trocar in September. And the Logi range to be probably towards the beginning of quarter four.

52:28 Jolly good. Right. I now have three or four questions from John A, which I'm actually going to group together and use as an opportunity to wrap the session up. So, I can see that from the time, I think we've got sort of five or six minutes left. So, John has asked a few questions here, which I'm going to group together. First of all, could you explain us your path to profitability on a post tax basis? And why now is the time to invest in the company? That sounds like a good question to finish on. He's asking whether we'd commit to additional Investor Relation information on the company website, including videos? And also, can you discuss why you're reaching out to investors now?

53:15 And will you continue to do so? And he's obviously quite enthusiastic for us to do that. I'll take that one first. We have previously run sessions for private investors, typically in a bar in the City Of London after our days work presenting to analysts and institutional investors. And that has some advantages. It's nice to see people face to face. But at the same time, it's obviously geographically quite limiting for people if we're only able to do that in London. And I think this platform that Investor Meets Company have offered gives us a much better coverage for people who aren't able to travel in and see a face to face session. So, we certainly will be committing to continue to use this platform. And my experiences with the companies is that typically it helps to build a following. And each time we present, we end up having more and more attendees. And I think it's an excellent platform and certainly one that we will continue to use to connect with private investors.

54:13 As far as the website's concerned, we do keep that under constant review. I do think video materials are helpful. But at the same time Sorry. Can I just that that depending on what you mean by videos, there are videos available on the SURGICAL INNOVATIONS LIMITED website that you can access? So you you can see if if it's a product related, if if that's what Right. So not in the investor area, but in in the the trading area of the website. Yeah. Absolutely. In terms of a path to profitability, then I guess, you know, perhaps, I'd finish where we started there, which is that we came into 2020 with a market estimate for the year of GBP 12,000,000 of revenue and making a profit of just over GBP 1,000,000 at around 10%.

54:58 And that would certainly be our first milestone in terms of rebuilding the company's profitability. And we can see a very clear path from the $05,000,000 a month that we did last year in revenue to the 1,000,000 a month that we expect to do quite soon. That pathway is very clearly marked in terms of the way ahead. Perhaps less clear is just how long it will take us to walk along that path, bearing in mind the continuing uncertainties with COVID. But we certainly expect to see a position whereby we could exit this year at that sort of rate, even if we don't actually achieve it for the year as a whole. But because of that uncertainty in terms of timing, that is the reason why we're not yet ready to give formal guidance to the market on numbers for 2021 because it does depend how quick that climb out is.

55:50 I've had one more pre submitted question, which I'd like take at the same time whilst we're talking about Investor Relations. And that was relating to the fundraise. I think a degree of disappointment by smaller private shareholders that they hadn't had the opportunity to participate because it was done by a placing and really questioning the Board's decision as to why there wasn't a retail offer at the same time. And the response to that is, first of all, I'm sorry if you were disappointed. But secondly, it was for good reason. In that, if you look at the mechanics of the fundraise and when the annual report's available, you'll be able to see the numbers. It's actually a very expensive exercise raising money. The costs of that fundraise were around about 7% of the money raised, which is quite a healthy slice to the lawyers and the investment advisers.

56:44 And those costs would have been substantially higher to extend it into a retail offer. It would typically double the cost of the fundraise for probably not raising a huge amount of extra money. And so, it was really felt to be in the best interest of the shareholders as a whole not to incur those costs. In fact, the fundraise was done at a price of 1.6p. The prevailing price the night before the fundraise was 1.8p. So, it was a fairly modest discount that was made available to the PLC. And in fact, the shares had traded at or around 1.6p for several months before the fundraise and did so again for several months after the fundraise. So, those smaller shareholders who perhaps felt as if they had missed out would have had the opportunity to buy in the marketplace and probably could have taken the allocation that they would have received anyway.

57:36 And I hope that explanation does something to solve the damage that might have been done in terms of investor relations. But I'm afraid raising money on the market is not a cheap deal for companies of our size. I'm conscious that there are one or two further questions. The opportunity will be taken to answer those questions and we'll publish the Q and A through the IMC platform sometime over the next forty eight hours or so together with the transcript. So, with that, I think our time is coming to a close and I'll pass back to Paul. Thank you very much. Thank you, Nigel. Thank you, Nigel, David and Charmaine, for addressing those questions. And of course, as Nigel just said, you can review all of those questions if any further questions come through. And, perhaps before I ask investors to give you a bit of feedback, can ask just for a few words just to wrap up, please. Yeah. Firstly, thank you everybody for attending.

58:30 As Nigel said, we think this is a good platform to, to be able to give our message to you. It is a message of optimism. You know, we believe the company is really well placed to take advantage of the addressing the backlog of surgery and rebuilding confidence, you know, sort of in the in the NHS. We've got a good pipeline of products. We've got a really good dealer network, and we are are are very, very optimistic for 2021 and beyond. So thank you for supporting us, and thank you for being here today. Thank you. Fantastic. Nigel, David, Charmaine, thank you again for updating investors. Please do ask investors not to close the session as you'll be automatically redirected for the opportunity to provide your feedback.

59:16 If you've accessed the meeting from our website, the feedback page will appear. But if you've accessed the meeting via the link sent to you in the email, you're simply asked to, look back in to give your feedback. It only takes a couple of seconds and would be greatly appreciated by the company. On behalf of the management team of SURGICAL INNOVATIONS GROUP PLC, we'd like to thank you for attending today's session. That concludes today's session. Thank you, and a very good afternoon.