Judges Scientific plc (JDG) Earnings Call Transcript & Summary

Good evening, and welcome to the Judges Scientific Investor Presentation. Questions are encouraged throughout the presentation and can be submitted via the Q&A box situated on the right-hand side of your screen. We are joined today by the Judges Scientific management team. I would now like to hand over to Chief Executive Officer, David Cicurel.

Thank you very much, Rachel, and thank you, everybody, for attending this presentation. And just introduce my colleagues, Brad Ormsby, who's Chief Financial Officer; Mark Lavelle, who's Chief Operating Officer; Tim Prestidge, who's Group Business Development Director; and Ian Wilcock, who's Group's Commercial Director. We'll all have a part of this presentation and also in answering the questions. So if that's okay with you, I'm going to start taking you through the beginning of the presentation, which is really to explain what we do and why we think it's such a good idea to do what we do. So do you mind passing the next slide? Thank you so much. So Judges Scientific is a buying build group, and we're buying manufacturers of scientific instruments. And we think that there's 3 pillars of shareholder value. One is the long-term drivers. So the main long-term drivers of this, one is an exclusive secular process university education throughout the world and even in developed countries like the U.K. And the other one is constant thrist of everybody who's doing something to do it better, optimizing what we do. We all try to optimize everything in our life. And when you're making things, you can't optimize without measuring, and we make a lot of these measurement instruments. So without long-term drivers, you can't have a successful buy and build. The second thing is you have to find deals. We have a large deal pool. When we started in this business nearly 20 years ago, we calculated that there were 2,000 companies in the U.K. alone. And of course, we're looking at deals constantly outside the U.K. So a good pool to find deals. And low capital use, which is a bit less obvious why it's important, but your typical buy and build is this, I'm on a multiple of 20, you are a multiple of 10, I buy you and I multiply my money by 2 immediately. But what we do is different. We borrow money over the years, it's been between 3% and 6% per year. We buy companies, on average, we pay 5x EBIT. So you get 20% on your money. And therefore, you multiply your money by 4. And it's a fantastic model, but you can't pay the bank back with EBIT, you have to pay them with cash. So converting your EBIT into cash is a very important thing. And the fact we use very little working capital enables us to convert all our earnings into cash and repay the bank. So this is our model. And I would say an important thing in that model is that you can do deals and deals and deals and not issuing a lot of shares. And just I want to mention that after the first deal, we have 3.3 million shares. And today, 20 years -- nearly 20 years later, we have only 6.7 million shares. So we've only doubled the number of shares, which is enabled to multiply shareholder money by 100. You think I'm obsessed with shareholder value? Well, I'm completely obsessed with shareholder value because this is really our mission is to create value for shareholders. So the buy-build strategy is based on 2 things: M&A, which is buying the right companies and paying the right price for them. And organic growth, which is making sure that when you own them, they're going to prosper. So in the 19 years from 2005 to 2024, we completed 25 acquisitions. We produced total revenue compound growth rate of 20% a year and organic revenue of 7% compound. And EBIT, we produced compound growth rate of 26% and organic EBIT of 9%. So this is the thing which has really fed the prosperity of the group. And because of that, we've been able to pay a dividend, which goes up by at least 10%. This is our promise to shareholders. Every year, we increase the dividend by at least 10%. We've done a lot more because we've paid on average growth rate. And over these years, we've paid back to shareholders 8.6x what they invested in the company in the first place. So if you pass the next slide, I've already explained who we are. So I won't say that again. And then we pass on to performance -- key messages of the year '24. Sadly, '24 was not a good year. We had headwinds during the year. We bought 2 years ago, Geotek, which is a company involved in measuring cores. 1/3 of that business relies -- and we call it the coring business relies on conducting an expedition. And typically, we have one of these expeditions once a year. And in '24, we didn't have an expedition. So that was a bit of a [ hole ]. So we started the year on the back foot. And subsequent to that, we realized that we also had a lot of headwinds with mixed trading and difficulty obtaining and completing orders during the year. But the main thing which impacted was very weak intake from China. China has been a big market for us. And we were down in the first half, 2/3 in China intake. It got better normal in the second half of the year. But for the year as a whole, we were down 1/3 in order intake and in sales, with about GBP 6 million. So it's a sizable amount of sales that we were missing. And a lot of projects got deferred in '24, of course, hopefully, into '25, some of them have been already completed. That's a consolidation, but it didn't save '24. I have to say the coring revenue didn't happen in '24, but we had a contract with Japan, which started in January '25. So of course, we're starting the year on the right foot. So weak performance means less orders. Cash conversion was in the first half but completely restored in the second half. And we had actually a year where we converted more than 100% of our EBIT into cash. Our order book was maintained throughout the year, but our adjusted EPS is down 24%. So on the other hand, we had a very good year for deals. We had the second best year in terms of the number of deals because we did 3 acquisitions in '24. Our previous record was 4. And in terms of the value of these deals, it was also the second because the best year we spent GBP 80 million and this year, GBP 20.5 million. We've increased and extended our banking facilities. Brad will talk about this. This is a very good thing for future deals. We've strengthened the executive team with the recruitment of Ian in September last year. So welcome, Ian. And we've increased the dividend 10%, which we do when we have a bad year. And now I'm going to pass on to Brad for the performance.

Thank you, David. And as we move straight on to the highlights. I mean, summary this year has been a pretty disappointing year for trading, but we've still managed to execute against our long-standing buy-and-build strategy this year. So looking at the results, total revenues were down 2% at GBP 133.6 million, combination of 8% decline in organic revenue partially offset by the contributions from our 2023 and 2024 acquisitions. Now the decline in organic revenue was as a result of the weakness in order intake, which we saw towards the end of 2023 and throughout the first half of '24. But during the second half, order intake recovered somewhat, and we finished the year the organic order intake up 7% by the end of the year. However, this also included the signing of a current contract, which wasn't in our comparatives. So without that, organic order intake would only have been up by 2%, which is well below our normal growth expectations. And this, as David has touched on already, was substantially affected by China, though the effect had lessened from the half year through to the end of the year. The lower volumes impacted our profitability. Adjusted operating profit was GBP 27.9 million, down from GBP 34.8 million, a drop of 20%. And we're getting good leverage from our high fixed cost base when we had good revenue growth, but it works against us when revenues decline. And adjusted basic earnings per share was 283.4p, a 24% drop, also affected by higher interest. And moving from P&L to cash generation, we generated GBP 34 million in cash from operations with a cash conversion of 122%. And for the group, we have a proud track record of converting profit into cash, and we've got ourselves back to where we should be this year, although we acknowledge that our working capital still remains a bit higher than we'd like it to be, and I'll talk a bit more about this later. The good cash conversion and cash generation serves to enable us to continue to provide shareholders with a progressive dividend policy increasing every year by at least 10%. And we've increased our proposed dividend to 74.8p per share compared with 68p per share last year, an increase of 10%, which, if approved at the AGM, will provide a full year dividend of 104.5p per share. The good cash generation has also enabled us to invest GBP 5 million in capital expenditure. We have to pay interest more than GBP 3.5 million, pay our corporate taxes of close to GBP 6 million, returned GBP 6.5 million to shareholders in the form of dividends and also acquired 3 businesses during the period, Luciol, Rockwash and Teer Coatings in the second half, which David will talk more about later. Those 3 added close to GBP 20 million to our adjusted net debt. But with that cash that we generated meant the net debt only increased a bit shy of GBP 7 million to GBP 51.7 million by the end of the year. Leverage at 31st December was 1.7x, affected by our weaker profitability, but still with significant headroom in our covenants and a strong balance sheet position, and we were able also to amend and extend our facilities during the year, and I'll come back to that a little bit later. Looking into 2025 and our outlook, we start '25 following the difficult year in '24 with a strong order book, with momentum having returned to order intake and with a Coring contract in progress in H1. And whilst the global geopolitical and economic environment remains uncertain and unpredictable, the group is well positioned to continue its acquisitive strategy and return to growth. So moving on to the next slide. I won't dwell on here too long. It's another performance slide. I just want to touch on a couple of things. One, the effective rate of tax on our adjusted earnings, slightly down this year to 21%. This is a consequence of the last quarter increase in the U.K. headline rate of corporation tax of 25%, more than offset by some one-off recognition of some brought forward tax losses and also the group's first foray into the U.K.'s patent box scheme by a couple of our companies. Those 2 items, both reducing our effective tax rate by around 1% each. And lastly, we do have adjusting items that take us to the statutory results, the largest of these is the GBP 9 million noncash amortization of the intangible assets we were required to recognize when we acquired businesses. So moving on to the next slide on to order intake, as I always say, the bellwether for our trading performance. So to talk you through that, important, we just talk about the graph on the right-hand side of the slide, there's 3 lines on it, a red line, a black line and the green line. To explain those lines, the red line is our internal sales budget. We set this once a year as part of our annual budgeting process. That's our target. The black line is our trailing 12 months of orders and the green line is the last 4 months of orders annualized. What are we looking for? We're looking for the black lines that need to be touching the red line by the end of the year, such that we would have had sufficient orders with which to satisfy our sales budget. And the green line ideally to be hovering around the red line such that we will be at optimal capacity. So what actually happened? Well, if you look at the green line first, you can see it's been pretty anemic in really the second half of '23 and throughout the first half of '24, such that we were down 4% at the half year. But then shortly after the half year, you can see a significant improvement in that line. You then go and have a look at the black line, similar picture. It's obviously not as jagged because it's a longer-term measure. It's improving towards the end of the year. But when you get to the end of the year, which is the end of the graph, there's still a significant gap between the black line and the red line and hence, why we had weaker performance this year. And intake, as David mentioned earlier, certainly affected from an early stage by a big decline in China. Positively, though, we look forward into '25. We have an organic order book. We start the year with over 19 weeks. Order intake year-to-date slightly ahead of the previous period. And with the Coring contract in progress as well, we expect a good start to 2025. So moving on to the next slide. Profit bridge. And this slide reconciles between the 2023 and 2024 profit contribution of our businesses before central costs. They are the big green blocks either side of the slide. Reconciling between these, you can see the effect of the weaker performance this year with a much larger organic decline than organic growth, really improvements at some of our businesses, but more than overshadowed by some significant reductions at a few. And then lastly, a small block for the effect of our more recent acquisitions. Really not the picture that we expect to deliver every year and one which we certainly expect to reverse in '25. Moving on to the next slide. So balance sheet and cash flows. As I mentioned earlier, I'm pleased that we've returned -- the group's returned to its historical norms for cash conversion. So we generated 122% cash conversion, although this was also enhanced by a full prepayment on our coring contract that started this year, it was paid in full before the end of the year. Without this, cash conversion though would still have been 105%, which is aided by a really strong performance in the second half. And just to remind you, at the half year, we're only 63%. So a good performance and a good return to our norms. So it's the first tick in the box for us in terms of getting back to where we expect to be. But at the same time, we still have higher working capital. Pleasingly, we've gone back to 19% of working capital as a percentage of annual revenue, having been as far up and as high as 25%, but we still have some way to go to reach our target of being back at 10%. And quite openly, we've still got some work to do over the coming next couple of years to help continue to chip away, particularly in inventory where we certainly got GBP 7 million, GBP 8 million more inventory on a like-for-like basis than we had prior to the supply chain issues. Leverage at the year-end was 1.7x. We still have significant headroom in our covenants, plenty of borrowing capacity and the continuing support of our banks at Lloyds, Santander and Bank of Ireland who supported us in amending and extending our facilities in the middle of the year. So if we move on to the next slide. As a reminder for everyone, when we acquired Geotek in '22, we refinanced the group's facilities for GBP 100 million facility, which was due to mature in May '26. And that was a GBP 25 million term loan, a GBP 55 million revolving credit facility RCF and a GBP 20 million accordion. Now we extended the facilities by a couple of years. They now mature in July '28. So that gives us good runway and also increased them from GBP 100 million to now GBP 140 million overall facility with a GBP 90 million RCF and therefore, no more term loan, which means that we don't have to repay as much as we're quite happy to and also a larger GBP 50 million accordion. And no change to our covenants. So overall, this gives us greater firepower to continue to execute our acquisitive strategy and continue to buy the businesses like Teer Coatings that we think are life for this group. We move on to the next slide. Return on total invested capital, another key measure for our group. And just to explain about this graph, ROIC is quite simply a function of the multiples you pay for the businesses you acquire. So when you start on the left-hand side, our first acquisition of FTT, where we paid close to 5x, we start at around 20% and improving ROTIC thereafter requires improved financial performance and/or buying businesses at lower multiples. And as you move across the graph, you can see the effect of buying businesses at higher multiples. And when we acquired GDS and Scientifica in 2012 and 2013, respectively, which were then very large deals for the group, that cliff edge effect of paying a higher multiple. Move further across as we've got bigger, made another 6x acquisition of THT in 2020, not a big change to our ROTIC and smaller acquisitions now make minimal difference. And then, of course, you move on to '22, and you can see the effect of acquiring our largest acquisition of Geotek when we paid 7x and another cliff edge effect. Of course, this year, ROTIC has declined as a consequence of the weaker performance. So we ended the year at 16.5%, which is absolutely not where we expect it to be, and we expect to return promptly to over 20%. And certainly, I'd like to see that even by the half year. And we've got to continue to push hard to work our way further back up to what we see as a target to aim for 30% ROTIC over the medium term. Not an easy target for us, but something which we should aspire to. So moving on to the next slide. [indiscernible] slide just talking about diversification and there's 4 pie charts, I'll talk through them. You can see from the left-hand side, there is no one single company in our group that we're overly reliant on or is overly dominant. Our businesses manufacture instruments for different end markets and so we're diversified by scientific application. There's no one single region or country that we're overly dependent on given that we're exporting more than 85% of our revenue. And when you look at our end market, 20%, 25% is geotechnical, which is a bit lower as a result of no coring contract this year, 20% to 25% in industry optimization and around 40% to 50% in the life science/semicon. And we amalgamate this because the research performed either at university or in industry and the techniques used and the instruments used are similar across both of those sectors. So we amalgamate those. So on to my last slide. This really summarizes some key financial statistics about the long-term success of our group and revenue, profits and earnings per share have all grown strongly over the history of our group, although this year has clearly been a challenging year for us, but we still have a long-term organic CAGR for revenue of more than 7% and EBIT of more than 9% on the same measure. And for us, we see this in the short term, the medium term and the long term as more than sustainable. Dividends have grown by at least 10% per annum throughout the history of the dividend. We're increasing the dividend to 74.8p and the full year of 104.5p per share with compound growth in excess of 20% for the dividend. And lastly, the group's continued focus on cash generation serves to insulate the group through difficult periods of trading, enables us to repay acquisition debt quickly, make space for more acquisitions and continue to fund progressively increasing dividend returns to shareholders. And on that note, I'll pass you back to David to talk through our strategy.

Thank you very much, Brad. Good strategy. We go straight next to the next one is Rachel. And as we said before, there's 2 sources of growth. One is M&A, merger & acquisition by new companies. And the other one is organic growth with a much harder work to get these companies that we own to produce more profits. So we pass on to the next, which is about acquisition. And I'll talk briefly about that. We -- what counts is to have good discipline. So we have discipline in what we buy. We want to buy strong exporters in the global niche markets that we try to find companies that are actually leading niche markets, but there's little competition with solid EBIT margin. A lot of people ask me about how do you manage to get 25% EBIT margin? And the answer is because we try to buy companies producing 25% EBIT margin. So that's a bit less difficult than people think. But it's not easy to find them. And they need to be generating sustainable profits and cash flow. But you have to be disciplined on the price that you pay. We've paid 3 to 7x EBIT according to size. Actually, the outliers are the 3 of the 7x. But apart from that, all the companies have been bought, but with 4 of 6x with an average of 5x EBIT, i.e., producing 20% on our investment. And we allowed to go up to 3x EBITDA, and we paid over the years between 3% and 8% interest on that. So if you get 20% on your money, you can see that it's a winning formula, but it was even more winning if you have growth. So -- but the deal are long to do, we call it the incubation period. They're erratic. Sometimes we pursue for a long time, we don't manage to close them. But we try to provide absolute financial certainty for the seller. And with the exception of the first deal, every deal was financed entirely before we signed heads of agreement. And then we are honorable in the process and we never renegotiate the heads, and we treat people always with respect. And this has enabled us to do a lot of deals which we had lost and where we were the underbidder. And when we are the underbidder, we always end up doing the deal when people misbehave. So we've done a lot of deals where we were the successful underbidder. And of course, we buy these companies, reduce debt and reinvest in further acquisitions. So this year, we did 3 acquisitions, 2 small ones. One is Luciol, which is a small company in fiber optics in Switzerland that is very synergistic with the company we already own, which is called PE.fiberoptics and has a completely different cycle where it's not cyclical and PE.fiberoptics is very cyclical. So it's very interesting for them to be making similar product but addressing different markets. And Rockwash very synergistic with 1 of the 3 businesses of Geotek because it's about the digitalization of shippings and one of the 3 businesses of Geotek digitalization of cores. But I'll talk a bit more about Teer, which is by far the largest deal we did last year. If you don't mind passing please Rachel to the next one. So the company we always call [indiscernible] but we've now done the Teer because that's the brand name which is being used. And it's a company which does -- which is involved in coating. They are very expensive and sophisticated coating. A lot of things that we use in our everyday life are coated like your phone. This is where it doesn't scatch or your glasses, which also don't scratch and sometimes have a different properties. But these are very, very sophisticated coating. These machines that you see on the left, it costs something like GBP 0.5 million to GBP 1 million. And on the right, you see the whole which Teer Coating uses to actually coat for other people. So we have a service business as well as an instrument selling business and it's about half-half. And the coatings that we do are very sophisticated. It's not only the machinery, which is sophisticated, but the recipe, which is used for each client to have the most successful coating and it's used in very sensitive industries like medical, defense, Formula 1 and also Mint, which is everybody likes to think that [indiscernible] to make coins, which are all exactly the same. So the company is making beyond GBP 2 million a year, and we pay the 6x multiple. And now we're going to talk about organic growth. And can I ask you, Tim to deal with this one and Rachel to move to the next one and the next one. Thank you so much.

Thank you very much, David. Thank you. Okay. Yes. So my plan here, I'm going to give an overview of our strategy for organic growth and the tactics that we deploy to deliver that strategy. I'm going to primarily use this slide and a brief introduction of the following slide. I'm going to hand over then to Mark and Ian, who are going to go into a little bit more depth around the tactics and also give some examples of how we've implemented some of those tactics. So using this slide, I think one of the first points to understand, and David has already referenced in terms of our acquisition strategy. Despite having a difficult year last year, we still executed our acquisition strategy and acquired 3 business. And in terms of our organic growth strategy, an important point to emphasize is that we remain committed to it, and our commitment remains undented even though we had a difficult year last year. In other words, what I'm going to present here is the strategy that we have been deploying and we continue to deploy even though last year was a difficult year. Short-term fluctuations happened from time to time. Our strategy is a long-term play to deliver sustainable growth and shareholder value. Think about the fundamentals of our organic growth strategy, one -- another important point to make is that they don't just start after acquisition. So if I look down the left-hand side of this slide, the first 3 areas that I emphasize, strong leadership teams, robust governance and finance controls and also looking to fill capability gaps. It's important to realize that we start thinking about those and having an open dialogue both prior to and during an acquisition process. So it's not something that we consider only after the company is acquired, although post acquisition will also continue clearly to emphasize those points. So it's worth highlighting, for example, that Teer Coatings, it was known to us during the acquisition process that we need to look at new leadership. And also, that organization was the first company, the first acquisition for which Judges had to do a mandatory National Security Investment Act exercise. And so it was important to understand the governance controls that were in place there and whether we needed to help fill any capability gaps there once the company came on board. So those are aspects that absolutely start during the acquisition process before the companies come on board and then clearly continue once the companies are part of the Judges' organization. And together, really, those things help us to establish and cement the foundations of what's going to help the companies really operate within the Judges' environment, which is -- which comes to the autonomy and accountability. We are, in essence, a federation of semi-independent businesses. And the autonomy of those businesses is clearly key and important to our model and autonomy through accountability for the results that those companies are generating. And it's those things, the strong leadership team, the robust governance and finance controls and making sure that capability gaps are filled allows us to be confident that those 2 things are possible. Once the company is acquired, that's really when the elements on the right-hand side of this slide really come into play. So other elements that we look to do, leveraging group-wide experience, promoting excellence and encouraging ambition. I think important there to emphasize that, yes, that's clearly part of my colleagues' role and my role, but it's also that we look to leverage expertise around the group. Everyone else who is a leader in other companies within the Judges' group have real expertise in terms of their own functional areas and in terms of the markets that we serve. So although there might not be direct synergies necessarily between all the businesses or some of the businesses within our group, they still face very similar challenges and problems. And so those are the types of opportunities that we seek to make sure that we utilize across the group. So together, those things, leveraging that group-wide experience, promoting excellence and encouraging ambition enable us to then build out the really important elements, again, fundamental to our long-term strategy, that long-term focus and sustained ambition for growth within the group. Important to reflect, I think, that on my colleagues' role -- my colleagues roles, Mark's and Ian's roles and my role, we all share a portfolio of the companies. And therefore, we are accountable to the plc Board, and we're accountable to David, our CEO, for the P&L of our respective portfolios. But we don't run the individual companies. We don't manage the individual companies. That is absolutely all done with high-caliber, strong local leadership teams that have been established and built up through the sorts of tools and processes that we talk here. So our roles are very much to work with leadership, leadership teams, leaders of each of our portfolio businesses with a focus on the key fundamentals that we talk about here. In essence, the talent and being confident that we've got the best talent in place and they're continuing to build the necessary talent to enable the organizations to grow, but they've got an ambitious and strong strategic vision that they're executing operationally very well and broadly speaking, accountability, which is where the robust governance and finance controls coming. So we can move to the next slide. So aligned to those focus areas, this image is broadly the same as we've used in previous presentations. And we talk about these -- the 4 pillars, strategy and ambition, operational excellence, talent development and finance and governance. And you'll increasingly hear us talking about this structure as a toolkit. We haven't quite decided not to call it yet, but you will hear the name toolkit or the word toolkit. So what do we mean by that? Well, it's not -- it's more than a loosely defined menu of optional extras. It's more than that. But it's not a rigid structure of mandatory business processes. It does contain mandatory elements, but it's not something that we absolutely enforce on companies in terms of everyone operates in the same way. So it's a mixture of tools, processes, best practices, some of which are mandatory, others of which can be applied to different levels of different companies. And it leverages that group-wide experience and capability. And we see it as absolutely key to the scalability and long-term growth of our model. Okay. I'm going to hand over to Mark now, who's going to go deeper into some of these tactics with examples. Sorry, back to Slide 22, please.

Excellent. Thank you very much indeed, Tim. So I'm just going to talk a little bit about the 2 gray boxes, and then Ian is going to have a chat about the green ones. So we just talk about talent development, first of all. So it's important to remember that the businesses we own are truly remarkable businesses. Most of them employ something on the order of just 40 people, and yet they manage to be world market leaders in a particular niche. They've usually been started by an entrepreneur, somebody who's an absolute expert in the subject, either an engineer or a professor. But in common with many businesses, as you grow from half a dozen people to 10 to 20 to 40 people, one of the challenges that businesses face is that leadership becomes increasingly important. And most of the people who have founded these businesses aren't necessarily experts at leadership. And some of you may have read a book called What Got You Here Won't Get You There. And that's very much this point that in order to enable these companies to continue growing, the skills, et cetera, that many of the senior people in the organization have need augmenting with some really good leadership skills, the ability to select a great team and to lead that team, keep them motivated, develop them, et cetera. So what we've done is to develop our own bespoke leadership training course that's very much focused on autonomous businesses like this. And we take a cohort of 12 people, senior people across all the different businesses with various different roles to try and have a real mixture. We take them away for 2 1-week sessions, which are fully residential, and we teach them a lot about leadership, but also they teach each other. And it's great to have a few MDs there and a few sales directors and production, R&D, et cetera, so that they can benchmark themselves against each other, but also benchmark their teams against the other people they meet. And that is enormously productive. And in fact, we've got one of those running this very week, and Ian and myself are off there this evening and tomorrow to contribute to that as well. We've got about 80% of our senior team through that, but there'll always be a few people who haven't yet been on it because of retirements, recruitments and replacements. And when I talk about recruitment, it's also important to think about how people have tended to recruit. Now many small businesses really struggle to recruit in an objective fashion because the interview process is not something they're particularly used to, and they tend to just, frankly, recruit people who are like themselves. So we again give the company some tools, which enables them to do some objective assessment of the candidate pool that they get. And our involvement in that is very much ensuring that they keep the bar high enough. Again, many people go through a process, they get to the end of it. They've got a short list of 3 people, and they pick the best person. But that best person may not be good enough. And I've certainly on a few occasions said, I think you should go around again because even the best in this short list is not good enough. So ensuring that we keep that bar really high with people we bring into the organization is really important. If we talk about operational excellence, then we do quite a bit of that in terms of production. So we have some really excellent metrics, really a few very simple metrics, which ensures that the company focus on meeting customer needs, getting deliveries sorted on time. We don't have a huge number of them that they have to randomly try and comply with. The point is we'll give them a few key metrics. And as long as they hit those, they have plenty of scope to deliver to them as they can. But we also spend a lot of time making sure that they cross-fertilize with each other because, again, with small businesses, you have many people working in them who've maybe never worked anywhere else. And it's -- if you've been there 10 or 15 years, it's very easy to get out of touch with what the latest benchmark is and what the latest improvements have been in production or anything. So we do try and make sure that, that operational excellence is continually challenged and the bar, again, is continually raised on that. But as I say, not just in terms of production. We do the same thing with sales to make sure that people's knowledge of sales processes, which includes picking great distributors can be improved. And we've got some great examples in that. In particular, recently, we've made some really good changes to our distribution network in China, which we think is going to pay some good dividends in the future, using people across China that we already know and can operate for our other businesses. That's all I wanted to say. So if I pass across to Ian, and he'll talk about the green boxes.

Well, thank you, Mark, and good evening, everyone. So as David mentioned, I was delighted to join the Board in the autumn. I just completed my first 6 months. And I think it's just worth reflecting for a second what a great business is. Obviously, I knew Judges externally by reputation. Our business is able to drive long-term growth and profit growth, obviously, trades at very high profitability, but also and most importantly, businesses which has acquired very well over the years and has the ability to acquire well and grow businesses. And our organic model here is really ultimately how we do that. And now I'm on the inside, I can reflect on some of the details as to how we actually do that. So on the top left, we look at the strategy and ambition. So as we've said and particularly as Mark has just emphasized, having entrepreneurial, creative minded, growth-minded leaders in place in each of our businesses is essential. And then as part of that, we work with them to develop an ambitious strategy, which is going to deliver market share growth and overall growth. And we will also did some deep dives into certain areas. So recently, I, for example, ran a workshop on microscopy market, where we can look at external data sources, external market information to make sure we are really driving a compelling strategy so we can deliver some long-term growth. The second example I would use on the top left is investment in new products. So obviously, we encourage each business to have a compelling market-driven product road map, which drives the innovation and will drive growth. We invest quite a lot in R&D, as we've indicated there. And we've also focused quite recently on particularly IP and patents, as Brad mentioned earlier, and that's led on to some patent box advantages as well. In the bottom right, obviously, well-run businesses need to have a certain level of financial controls and governance. And I think I should emphasize here, this is not -- these aren't controls and KPIs and stuff for the sake of them, absolutely not. These are controls and these are measurements which any well-run business would have. And we really focus on empowering the individual MDs, the individual leadership teams to run their businesses in their own way with best practice. That's fundamentally what that is about. But some examples of the processes and controls that we've worked on recently are around order forecasting and pipeline management. So best practice around how to manage future opportunities and then do forecasting of future performance is one area we worked on quite closely. And then just covering off one area around governance and ensuring our businesses are well run would be around export control. Now this is a complex area for those who know about this area. It's quite a complex and changing landscape. So we work with our business to ensure that they obviously deploy the latest data, that is external information and have internal processes to review all of those areas and ensure they comply with the regulations. So yes, those are the 2 green boxes for me. I shall hand back to David to give us a future outlook.

Thank you very much, Tim, Mark and Ian. And we move on to the outlook, another 2 pages, please. That's it. So the outlook for this year, where we started the year with a healthy order book, which is about the same size, a bit bigger than the one we started with, it's a good thing, but mostly coring contract, which we would have preferred if it started in '24, but it started in January '25. So that's a very good thing that we have this thing in Japan. Organic order intake is slightly ahead of '24 year-to-date. But certainly, as I think Brad explained, we could see definitely a change of direction in the chart, the green line, you probably all remember that. The environment still is difficult, macroeconomic and political environment. We have things which could influence the rest of the year. But it looks like every year, there are always clouds in the horizon. A lot of people are really worried about tariff. We're also worried about tariffs, and we could benefit from some tariffs and counter tariffs. But there's also the budget cuts in American Research could have an influence on our business. But generally, we feel we should have a much better year than last year. And we believe that we are happy with the market expectations as they are now. So the next page explains really why people should have our shares, what's great about these shares. Well, we repeat the shareholder value pillars, long-term drivers, large deal pool, low capital to use. And of course, I should add that our obsession with shareholder value and the belief that this is the reason we go to work every day is good and not uniformly shared by all public companies in the last few years. We have a robust business model. We pursue it with discipline. We try to buy only companies which are immediately earnings enhancing. We're well diversified by geography, by scientific application, and we've grown the dividend at least 10% according to our promise for the last 18 years, 10% a year. And actually, we've done much better with a compound increase of 22%. And with this, we go on please to the next page, Rachel, which is Q&A.

[Operator Instructions] We've had a number of questions pre-submitted and submitted live. Our first question, is it reasonable to expect one coring expedition per year going forward?

Yes. Well, I'll answer this one. Thank you, Rachel. Yes, it's not entirely reasonable because we've seen that in '24, we didn't. When we bought the company, we said typically, there would be one a year, but we made it clear that it was not necessarily one a year. It will be nice to have one a year, difficult to have more, although it's not impossible, but physically and given the limited customer base for these expedition, which is just 4 governments, which is the U.S., Japan, India and China. And the fact there's only 4 boats capable of doing that, and now there's a fifth being built in China. So having more than one is not very likely but it could happen and having less than one is also something which unfortunately can happen as we've seen in '24.

The next question, most, if not all, of the instruments you sell have shelf life of years, which would indicate sales are very lumpy as customers wouldn't return to make another purchase with such frequency. However, if we look at your organic sales and order book over time, it's constantly on the positive side. Are you constantly finding new and more customers or your current customers return more often than one would expect?

Mark, can I ask you to answer this one, please?

Yes, certainly. I think that it's certainly a combination. We have a number of different customer bases. There is quite a pool of our instruments, which go into R&D. And we've seen the enormous growth in universities and particularly the research departments of universities. China had a target to build 1,000 new universities, which is pretty difficult to comprehend, but they're well on the way to that. So lots of countries are investing both in the government, but also in commercial R&D. And we're just seeing more and more of that. And as economies grow, we see a disproportionate increase in that R&D to try and get the edge. In terms of repeat purchases, we certainly see many businesses coming back. The business expands, they want to open a new office, a new research lab, et cetera. And we do get the odd new entrant to the market and old company closing down. So it comes from a mixture of different areas. And the other point, of course, is that the old instruments don't tend to get recycled, frankly. So if a new player comes along, they buy new, but the existence of old instruments doesn't hamper that. So for instance, we have a number of companies who've benefited from trends in green technology, be it wind farms or electric batteries of one sort or another. And those have obviously been doing pretty well recently. But we also see some of those happening in advance of market conditions because clearly, today's R&D is maybe 5 years times products. So not all of the trends are visible on the marketplace. Tim, I don't know whether you've got anything you wanted to add to that or...

Yes. I mean I think you've covered that really well. It's just emphasizing, I suppose, that our -- any instrument sale that we make is not necessarily the replacement or just the replacement for an existing instrument that's out there. Clearly, that's included. But the secular drivers, as David referenced on the first slide, the underlying growth drivers that the demand for research in academic and industrial environments is growing or has grown and is growing in the long term. And so the overall opportunity for us tends to be growing in the long term. And as well, as you pointed out, there is a level to which those scientific techniques or discoveries then find their way being deployed, for example, in more industrial applications. In other words, the application for the instruments or the peripherals to those instruments that we tend to manufacture becomes broader over time. So that sort of explains the increasing opportunity for us.

Maybe I can just add in one final comment. Of course, quite a lot of our businesses will sell via OEMs. So we are getting multiple orders from OEMs when we're not selling directly to the end user, and that is a driver of big growth for us as well. So it's a mixture of end user sales and OEM sales often.

Great. The next question is, if the Geotek Coring contract is coming in 2025, why is there an impairment in Geotek? Is the Coring contract/rest of the business not performing well?

Thank you, Rachel, and I'm going to ask Brad, who's an expert to do the accounts of the holding company.

Yes. Thank you. And firstly, can I thank the person who submitted that question for reading my report. I always fear that most people get to the end of the Chief Exec reports and just switch off at that point. So thank you. I think a couple of points really. We have to perform an exercise. If you look at an impairment test, we have to perform an exercise, particularly when a business hasn't performed as well in the current year. So in Geotek's case, when there wasn't a coring contract last year, its performance was lower. And consequently, our auditors will look more, more conservatively at future cash flows from that. So we're in an interesting situation where when you look at the group and the group's goodwill and any intangible assets that are related, we have significant headroom across all of those for every single one of our businesses. However, when you then look at the parent company investments, particularly in Geotek, it's substantially higher. Now for accounting reasons, that was whilst we bought the business for approximately GBP 80 million, including its earn-out, we have a parent company investment of around GBP 100 million, and so a significantly higher valuation that we're having to justify. And then when you do these impairment calculations, you're using very high weighted average cost of capital of around 16%. So you have very high discount rates. So you need to be able to justify significant ongoing cash flows from this business over a long period of time, but they get discounted at significantly higher discount rate. On top of that, our auditors will then look at that and go, given it had a not so good year, what else might happen to this? And so they will then perform a form of sensitivity testing to that. And when you then get to that point, quite often, they will create and find a reason that they think that the carrying value of your parent company investment, which is higher than what you paid for it, may actually be impaired. So in this situation, we've ended up going from an investment carrying value in our parent company, and that's not the group, but the parent company of GBP 100 million that's gone down to just under GBP 92 million as a result. But that GBP 92 million is still above the enterprise value we paid for the business in the first place. If that doesn't sound slightly illogical, then I'm almost sorry at the end of my answer to have explained it this way. But it is a slight accounting quirk, if I'm honest about it.

I'm super grateful, Brad, that you explain this. And I hope our audience has found interest in.

Thank you very much, Brad. How much of total revenue is recurring? Are these efforts to increase recurring revenue and possibly to reduce future cyclicality and protect downside?

Brad, you want to take that?

I'll take that as well. In terms of how much of our revenues are recurring, we're not necessarily aiming purely just to try and pivot the group at all into a more recurring revenue environment. We are a capital goods business. So we sell instruments every year. That's our core purpose. So that's the first thing to say. Now having said that, we do have revenue streams that are service related. And some of those services are recurring annual contracts. So some of it may be servicing, but most of it come from multiyear contracts for service work such as, as we've talked about before, digitization of course. So we're looking at somewhere in the region of it's less than 10%, between 5% and 10% for recurring revenues. We have repeating revenues as well for some of our revenue where we have consumables. So we have a couple of our instruments that have some consumables. That's maybe 1% or 2% of our revenue as well. So it's not a significantly high proportion of what the group sells in a single year. And we're not necessarily saying, right, we should be pivoting towards recurring. Very nice to have recurring revenues because they're repeating and they're consistent. But our overall model and our strategic model is to buy instrument businesses. If we're lucky enough to be able to add some recurring revenues to that, and that's fantastic.

I just add a point to that, which I think is really important, which is that our instrument businesses are very much niche businesses, and we try and avoid competition. So if you apply that mindset to service businesses, you've got to be careful that what you're not doing is actually [ competing with your own customers. ] So for instance, if we're selling a lot of instruments to laboratories and then we set ourselves up as a laboratory, we're competing with our customers, and there's actually hundreds of laboratories. And therefore, that's actually not a particularly attractive business to be in. So we tend to look at performing services when there are very few or no other people performing those. And then our service business is very much aligned with the same concept that our manufacturing businesses, avoid lots of cut-throat competition and just focus on where we've got a really, really strong niche.

The next question is on acquisition pipeline. How is the acquisition pipeline looking? Have valuations changed given the macro conditions? And over the next 5 years, what probability would you assign to being able to deploy 75% of your free cash flow?

Yes. Thank you, Rachel. I think I'll deal with this one. I would say that first, we always have a pipeline, and we never comment on the pipeline because this is something which is always exciting and therefore, price sensitive. And we only talk about the deals we've actually closed. So I know some other companies do talk about the deals they're going to do but we prefer not to do that. So the other question is, of course, are we able to identify changes in the pricing. I have to say not really. And I would think -- could be a bit surprising but of course, private equity should be very sensitive to interest rates. And you could have expected that in a period of higher interest rates, private equity is actually the big competition in larger deals, deals of over GBP 1 million EBIT a year would be less aggressive in their pricing. But the problem is they have a lot of dry funds -- dry powder. And I think if they pay a bit more for their debt, whether if they have more dry powder, they're still quite keen to these. So we haven't observed any change in the pricing structure really over the last 20 years, that has to be that said. And then there's a question is our free cash flow, well, can we spend 75% of that? I have to say we prefer to think in terms of our deal equity because, of course, if we buy a company, say, a small company making GBP 0.5 million, and we pay a multiple of 4x. Typically, that's what we would pay. That's, for instance, the example of Luciol, that we bought this year. Well, really, the bank will lend you 3x the factor than GBP 0.5 million. And you only have to spend GBP 0.5 million of your own money. So you can buy really -- you can use more than 100% of your free cash flow to do deals. But I don't want to correct your question. And I would say, yes, I think we would be able to spend 75%. And -- but it depends on opportunities that we're very, very, very fussy with deals. We've done only 1.3 deals a year in the last 20 years. And we've still created shareholder value by multiplying shareholder value by about 100x if you include the dividends. And so it's not the number of deals that you do or even the money that we spend but is making sure you're buying sustainable businesses at reasonable multiples. But it's not at all impossible to spend 75% of our free cash flow, yes, in the next 5 years. I think it's entirely realistic.

The next question is as U.K. businesses are facing higher taxes and wage costs, how will this affect your U.K. order book?

Well, I think -- I would say, first, we have to pay more taxes, and we have to pay more national insurance. And in our release, we said that we estimated that the decision of the last 2 governments, which is, one, to increase corporation tax from 19% to 25%. The last tranche of that was, of course, in 2024. And the increase in national insurance, which is starting in a few days. I would say these 2 things we estimate will cost us something like GBP 3 million a year. So GBP 3 million a year it's like 10% of our profitability. And it's a pain to see the government pinching that from us with much -- not much effort, okay? But we have to live with this because this is the government, so we have to comply with what they say. So talking about our customers is different because a lot of our customers are government funded in various places because we only do really maybe 10% of our true sales are in the U.K. We say 15% in our account, but we have a lot of OEM business, which is done with U.K. companies, but the goods are reexported as part of a more complete system. So we depend on many different countries and many different fiscal regimes. But of course, a lot of universities don't pay tax. And so the question doesn't apply to them. And of course, you have then -- you have commercial companies which are trying to launch new product or test new products or test the compliance of their product with standards which are compulsory or not compulsory. And those -- they need to do what they need to do. They're not -- I don't think the taxation will have a big impact on order intake.

The next question is, could you discuss any impacts of the Chinese government's volume-based procurement initiative on JDG?

I have to say I find it...

Can I take this one?

You're going to take this one, yes please, Tim. I'm grateful you can answer that.

So our understanding anyway is that, that relates primarily to pharmaceuticals. So forgive me if you've understood that wrong, but that's our understanding that it relates primarily to that. So there is not -- although we have scientific instruments and certainly, some of those play into research and might be related to that. To the best of my knowledge, we haven't seen any sort of impact. Might be secondary if it's through OEMs that we sell to, for example, but nothing material as far as we're aware.

Thank you very much, Tim, for saving the day for me then. Rachel?

The next question is, did I understand from Mr. Prestidge that the 3 execs are focused on each specific business within the portfolio?

Tim, it's for you.

Again, if I've understood the question correctly, so we each have a portfolio of businesses. In other words, of the businesses within the group, we split those out between the 3 of us. So we each have a portfolio of businesses that we work with. So no, it's not all 3 of us on every business, if that makes sense.

The next question is, is your gearing you solely for acquisition purposes? Or is it used also the capital expenditure at the companies you own? And how is this determined?

Okay. This is a financial one. So it's for you, Brad, please.

I guess there's 2 things. A simple answer would be yes. We're really only using it for acquisitions. But let's just make sure it's clear about why because our businesses are profitable businesses. They generate a good profitability, good margins and turn those profits into cash. And the group's model is to be fed that cash such that it can repay the acquisition debt. But if you're then thinking about what do our businesses need to do, but in a normal year, their investment as a whole is in R&D and some investment in pure CapEx. And most of that on normal circumstances is not that big. If we talk about 6% for R&D, that's usually through cash flow. Any additional CapEx usually through cash flow as well because our businesses will always retain a certain amount of working capital in order to be able to continue to operate comfortably, and that usually would include their expectations of CapEx. So from that perspective, if we're approving CapEx, it will be through the annual budget and then through their regular meetings with Ian, Mark or Tim about depending on how they're performing as to whether or not it's appropriate at that time for them to enter into that CapEx. But basically, that should be covered by their own cash flow. Now where we may, as a group, need to be involved is perhaps if, let's say, one of our businesses needs to move for growth and instead of being able to find a building that it can move into rent, it actually needs to buy. So in a situation like that, they're never going to have enough capital to be able to afford to do that primarily because we've already had most of their excess money via dividends, et cetera, up to group. So in a situation like that, we're happy to then loan back to them in a circumstance when we think it's the right thing for them to do to be able to move to a separate property and make that big capital investment. And generally, the answer is yes because they will come to us with a sensible, well thought through business plan for this, and we'll be able to see the long-term benefits of it.

Thank you very much, Brad. Rachel, can I ask you, do you have a lot more questions in the pipeline?

Yes, we have -- I think we've still got a number of questions, David, at least 10.

At least 10. Can you pick the best 2, the most interesting in your view because we will have to break this...

Absolutely.

I think not to answer questions, but -- I think they will probably keep coming if we carry on, but we can't abuse the hospitality of the room we're using.

No worries at all. So the next question in that case is, how do you believe tariffs will affect your sales to the U.S. over the mid-term outlook?

Okay. So let's deal with this one, and then you can have 3 because this one is going to be fast. We believe that tariffs is not an enormous set for us. And we've tried to quantify the worst of the worst. But what you have to see is the tariffs at this point, although the threat of tariff was all encompassing and was for all product everywhere. But in fact, it's a lot more limited now French wine and about Canadian aluminum and it's not about everything everywhere. And the enormous set was, I believe, personally more tactic than a proper strategy. And what you have to see is that we are in -- we're sitting on the fence in the U.K. And if there's a lot of tariffs -- a tariff war, say, between the U.S. and China, of course, we will suffer in our sales to the U.S. But if we have an American competitor, they will find it difficult to sell to China. So we may benefit from that. So we don't think it's a clear-cut case. And we think that in any event, it will not have a very significant impact on Judges.

The next question is, is there any possibility of a second Geotek Coring contracts in 2025?

If there -- well, there was one in the pipeline that we have talked about it, we can't talk about it. But the truth is it's difficult to do 2 in a year, and it's not terribly likely that it will happen. And so we shouldn't count on it. And frankly, I would prefer if the next one was at '26.

The final question is if we are achieving a return on EBIT of approximately 20%, would it not be beneficial to not pay a dividend and use those funds for acquisitions or paying back debt?

That is the question I'm being asked very often, and I have a very long answer that I will keep for another day. But I would say there are several things. First of all, we want people to be able to make money not only by selling shares, but also by keeping their shares. If we're telling people to make money, you have to sell your shares, then we're encouraging them to sell their shares. We see the only way you can make money. When you are only making money by selling shares, you're, of course, dependent on 2 things. It's the performance of the company, but also the state of the market when you do sell the shares because maybe the company is doing very well, but you're not doing well at all. And we had this example in 2008, 2009 when our shares were 60p, the company was doing very well and some of the original shareholders needed the money and they were selling -- everybody needed money in 2009, and they were selling shares, and we hadn't really -- it was not our fault, but they were losing money. So we prefer having a progressive dividend. And we believe that the value of shares is very connected to the discounted value of all future dividends. And this is why we make the promise to pay a dividend increasing 10% per year. Like this people can calculate the discounted value, and they would see that although dividend is not enormous, it's -- when you discount the progression of 10%, it's quite an enormous value. So that's why we pay. We realize we're big fans of Berkshire. So I've been to Omaha quite a few times. We have a lot of shareholders that are Berkshire shareholders, they all think the same. We shouldn't pay a dividend. And I must have been a great admirer of Warren and [ before ] Charlie, and they didn't like to pay dividends. But I have to say they love to receive dividends. So I think our shareholders also deserve to receive dividends and to keep their shares for however they want and make money on the way there.

Thank you very much, David. That's all we have time for on the questions front. So I will hand back over to you, David, for any closing remarks.

Yes. Well, first, thank you very much, Rachel, for organizing all this. I'm really grateful to my colleagues, Brad, Mark, Tim and Ian, and I'm mostly grateful to all the people in the audience who have put up with us for all this time. And so I'm trying to put an end to this, but it was a pleasure to answer all your questions. Bye.

Thank you for joining us today. That concludes the Judges Scientific investor presentation. Please take a moment to complete a short survey following this event. I hope you enjoyed today's webinar.