SDI Group plc (SD0.F) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the SDI Group plc Interim Results Investor Presentation. [Operator Instructions] I would also like to remind you that this presentation is being recorded. Before we begin, I'd like to submit the following poll. And if you could give that your kind attention, I'd be most grateful. I would now like to hand over to Mike Creedon, CEO. Good afternoon to you, sir.

Good afternoon. So what we're going to cover today is the interim period to the end of October. Actually, I think you know me by now. I'm Mike Creedon, CEO of SDI Group. I just want to give you a 2-minute brief introduction on SDI Group. SDI is a named quoted group of companies specializing in the design and manufacture of imaging and sensing and control products and applications used in many markets, including life science, health care, precision optics, measurement, instrumentation, and art conservation. Corporate expansion is via organic growth within its subsidiary companies and also through niche technology acquisitions. It was floated in December 2008 as a vehicle to buy and build, but it had its problems for a few years. And we've turned the business around and from February 2014, we started to acquire businesses. Today, we've acquired 13 businesses using equity, internally generated cash and debt. The game changer for us was in October 2015 when we acquired Sentek for GBP 2 million, which is 4x profit before tax. We raised GBP 2 million at 8p per share, attracting EIS and VCT funds. We are now trading at, I think it's about GBP 1.95, I'm not really too sure, somewhere around that sort of figure. And this is a pleasing result for me as I see an important function of my job as an Executive Director to create shareholder value, which I think we have done over the past year, I think it's about 90% return, if you look at it compared to last year. So I think it's good for the shareholders, I hope. Anyway, I hope you find it very good. In the agenda, on Page 2, what we'll cover, it will be the Board of Directors group overview, 6-year track record, and the H1 2022 financials, which is of interest. And then we'll close with myself on the operational highlights and outlook. I don't think it's really on Page 3, which is the Board of Directors. So I don't think it's really necessary to go into any detail on this slide. We've provided detailed bios of any of the executive directors and nonexecutive directors, so you can read it at your leisure. But if anybody has got any questions on this slide, please raise it at the end and just make a note of it, and then Jon or I will answer that. On Page 4, I like this diagram, we've used it for many years. As you can see, we're running out of space. So hopefully, in the next sort of number of month, we'll acquire some further businesses. So it's down to the graphic designers to redesign this schedule. All the details on the subsidiaries within this are at the appendix at the end of the presentation. Again, any questions on these from when you've been doing your background research, please raise a question at the end. And again, I'll answer it with Jon. Now the questions I want sort of raised on this is, what does the strength align in our business model? Why are we so strong? Number one is operating a flat structure with our business units, and they all operate autonomously. What we give to the subsidiary directors is exactly the same as we give to the main Board. So it's a very flat structure and nothing is hidden. All businesses are profitable and cash generative. The third point is a diverse portfolio of companies, not relying on the single sector or region. And we can actually see this as we come out of COVID. We've had a good 6 months and last year was a fantastic year as well. And the last point I wanted to make is we give the business units investment for organic growth and also for acquiring other growth opportunities. And this point I'll expand on further in the presentation. So if I can hand over to you then, Jon.

Thanks, Mike. So we like to show this chart so far because it's always going in the right direction. So revenues up very sharply over the last 6 years, but also in this half year against the previous year. Same thing with operating profit. And finally, cash generated from operations is also sharply up last year over the year before, and that's the one area this half year that is slightly down on a year ago, and we'll talk to that in a few minutes. So very strong financial growth over the last 6 years and also this last period over a year ago. As Mike said, we've done 13 acquisitions since 2014. 6 of them have been combined with existing units and 7 have become new stand-alone operating units to add to the 2 that we had originally back in 2014. Share prices on the right, it's gone up generally over the 6-year period. It's been a bit wobbly over the last few months, but generally, the direction has been up in response to the improving financials. Move over to more in detail on the interim financial results. Again, very strong upward movement in sales and all operating profit or profit indicators. And again, a slight reduction in cash generated from operations. It's all about working capital and we'll talk about that in a while. Zeroing in on the P&L, our financial highlights. What I really want to discuss, I think, there are 2 or 3 things to do with revenues in particular. So revenues increased in the period from GBP 14.1 million to GBP 24.7 million in the latest half year. It's a 75% increase. Now organic increase was 42% and the remaining 33% was from the acquisition of Monmouth Scientific and of Uniform Engineering, which we completed in December and January of last year. Going into the organic growth of 42%. The biggest part of that was from the contracts we've been having for cameras going into PCR machines used for testing for COVID. We've had a major customer who's been providing us with an order and then a new order and then a third order and then a fourth order, culminating in a big order for cameras in February, I think, of last year, which we've been shipping really from about April onwards, so for the whole of this last half year. And we're still shipping in November and December, but it's more or less coming to an end now. So that provided us with a big boost in our Atik Cameras unit. And we thought it was good a year ago, but they continue to get better. So it's 159% up this half year on a year ago when the pandemic was more or less starting. The other businesses in the group, so that's excluding Atik Cameras, increased 22% over a year ago. And perhaps more interesting than that, because obviously there's a recovery there from the pandemic a year ago, is that they are 16% higher than 2 years ago, which was prepandemic. And that's been very broadly across the group, some higher than others, but all of the businesses that we owned 2 years ago have increased since then. So I think we can say that we're in full recovery mode and have recovered. There's still perhaps a little more to go in 1 or 2 of the lines of business. But equally, there may be some elements of bounce back or stocking of customers in some of them as well. But then we're pleased with the 16% increase across the board, excluding Atik Cameras, which was exceptional over 2 years ago. The acquisitions of Monmouth Scientific and Uniform Engineering contributed GBP 4.6 million to our sales in this last 6 months, and that's slightly higher than we were budgeting for. So we're pleased with their performance as well. And the combination of all that sales growth in particular has caused really the increase in operating profits and net profit across the group. I'm going to move on now to growth drivers. This is not only about the half year. Let's move on. And Mike will talk to this slide, I think. If you unmute.

Sorry. Apologies. So we're looking at this page. What we are going to do here is just pick out a few bullet points of interest that haven't been discussed in the earlier slides. First of all, on the gains side, we continue to invest in our businesses to generate organic growth. An example of this that comes to mind is Atik Cameras, which does stand out. It is the golden egg of the business. Over the years, we've increased the facilities both in Lisbon and in Norwich. I think we actually did give a little case study on Lisbon in the annual report. I don't know if it was this year or the year before, just to show that I think we're on our fourth move in that premises. We've had the first floor. We've just taken the ground floor of that building now. So we've got the full capacity for growth in future. To enable us to increase our capacity, what we've actually done is in both these units we've increased the staffing to support Steve Chambers and Rui Tripa, the founders of the businesses. These include an R&D Director and a Business Development Director to support Steve in the U.K. And in Lisbon, we've actually employed a stronger management team, which includes a Finance Director. And she is actually going to look after the books of both the U.K. and Lisbon and also some general management to support Rui. So that's on the organic side. We'll expand on this as we go through the slide. And then I think everybody, we can see the questions coming through, and I think M&A is of interest to everybody. So I'll just sort of discuss it here and I'm sure we'll discuss it in the Q&A. I just wanted to make one point which is not included on the slides. I mean sometimes the financial community try to put pressure on us to complete a larger number of acquisitions and larger sized acquisitions. I just wanted to run through our process. We have a very strict due diligence process and we do not take any shortcuts to satisfy short-term gain of shareholders, which eventually will come to light when returns from investment are not as expected as we've seen in the past with other companies. I think the classic one is HP Autonomy. You will also have to realize the businesses we are buying, in most cases, are being managed by the original few shareholders. And what they want to do is make sure that the staff is going to a good home for staff and it continues to grow under SDI. And finally, when we do or reach agreement with a seller, we hand it over to the heads of terms to the lowest and that causes further delays. And I hope this sort of explains our position regarding M&A for SDI Group. It is quite a lengthy process. We've completed 13 acquisitions. And what we don't want to do is to upset the apple cart because you know what happens, we have to do public warnings, et cetera, and that's what we don't want to do. So we want to take our time and make sure the acquisition is the right one for the SDI Group. Where are we with the current acquisitions? This will probably answer quite a few of the Q&A questions. We have a strong pipeline, probably the strongest for a number of years. Pricing is still the same. And currently, we're not seeing any signs of high multiples. Currently, the deals we're looking at, I think 4 is gone, I think we're looking at sort of 5x to 6x profit before tax. In the last financial year, we acquired 2 businesses: Monmouth Scientific and Uniform Engineering. And we are hopeful that we can announce acquisitions in the current financial year. But again, it's dependent on the factors I've discussed earlier. I think that covers that page in some sort of depth. We can expand on it in Q&A. So we want to go through the financials now, Jon.

Yes. We have 9 operating businesses, but we group them into 2 segments for financial reporting purposes, that's Digital Imaging and Sensors & Control. I'm just going to go into a bit of detail mostly on sales on by division. So in Digital Imaging, turnover increased by 65% to GBP 11.4 million. And the biggest part of that has been the effect of the cameras going into PCR machines of our Atik Cameras business. But we've had good growth in the other 2 businesses in that segment, so Synoptics and Graticules Optics. And they both average 22% sales higher than a year ago and 14% higher than 2 years ago. So good growth in both of those businesses over 2 years ago. In Sensors & Control, turnover was up 85%. Now a big part of that was the GBP 4.6 million at Monmouth Scientific and Uniform Engineering. But the other businesses, and here we're talking about Sentek, Astles Controls, ATC and MPD, they were 17% higher than 2 years ago as well. So you can see there's been a fairly broad-based recovery and in fact growth from the prepandemic period. So we've been very pleased with that, both because it's good, it's in line with our usual expectation of probably around high single-digit percentage growth per year and also because it's very broad-based across all of our businesses. Moving on to the income statement slide. Here, I won't, I think, go into detail over this one. My favorite of the profit indicators is adjusted diluted earnings per share. It's up 59% over a year ago. So we're pleased with that one. One more slide is a sales bridge from 2 years ago to 1 year ago to this year, this half year. So we started 2 years ago, that's the period from April 2019 to October 2019, we had sales of GBP 11.4 million. We added GBP 1.8 million of revenues in 2021 half year through the acquisition of Chell Instruments. And then we had organic growth for onetime COVID-related shipments, and that's both at Atik Cameras and MPB of GBP 2.9 million. And then the rest of our businesses declined by GBP 2 million. And you have to remember that then we were in the period April through to October of last year in the depths of the pandemic and almost everyone was down. So that brings us to GBP 14 million, which was our sales of last year. This year since then, we've added the sales of Monmouth and Uniform, an extra GBP 4.6 million. And then the organic growth from COVID-related contracts has added a further GBP 2.8 million. Now that's all in Atik Cameras, less the growth that we had in the previous time in MPB. So Atik Cameras has GBP 5.7 million as COVID-related contracts in this last half year. On top of that, our other businesses, and I've mentioned that they've all grown over the last 2 years and over the last year, increased by GBP 3.2 million. So that brings us to the GBP 24.7 million of revenues over the last half year. I hope that's clear, but we can answer questions on that, too. Moving on to the balance sheet. I won't really go into detail on the balance sheet at all, but highlight on the right-hand side, the cash situation. So in terms of cash, we have as of October of this year GBP 1.1 million of net cash, that's cash less of bank borrowing. And we had bank borrowing of GBP 2.4 million and actual gross cash of GBP 3.5 million. Then on 1st of November, we signed an agreement with our bank, HSBC, to increase the size of our debt facility with them. So now we have a completely revolving facility of GBP 20 million on top of our GBP 1.1 million of net cash. So that gives us plenty of firepower for acquisitions. And in fact, the debt facility is entirely there for that purpose. So all of our businesses are cash generating. We generate cash every month without fail. So we don't need it for ongoing business. We need it to complete acquisitions. And it's there so that we don't have to dilute shareholders when we make acquisitions in the near future. So it's GBP 20 million. On top of that, we generate cash every month as well. So we've got ongoing cash flow to use as well. So I'm hoping that this will give us plenty of firepower for upcoming acquisitions and we can do that. Just a word about the facility. So it's a revolving facility. It's for 3 years. We can extend it for another GBP 10 million and another 2 years with the agreement of our bank. And the difference between the facility we had, apart from size, the difference between the facility we had up to now and this one is that the bank has been very good in recognizing that our acquisitions are very much part of our business plan and that we complete them successfully and they've been willing therefore to relax some of the conditions that were around acquisitions until now. So that makes it a really good vehicle for us to help with acquisitions and complete them quickly. Move on a slide. This is a net cash debt bridge for the half year. I won't go into very much detail on this. I want to highlight 2 items towards the left-hand side regarding working capital. So we had strong operating cash flow before movement in working capital and 2 other items. Atik Cameras, customer down payments for the PCR machines, COVID-related contracts, we used GBP 1.1 million of those down payments. So that's customers paying cash before the period started, which we've been using or we've been invoicing and shipping, but without receiving further cash because we'd already received the cash prior to the period beginning. That was worth GBP 1.1 million and is a reduction in our cash flow this year. But of course, it was very favorable to us because we brought the cash in, in prior periods. Now at the end of October 31, we still had GBP 1.8 million of customers' cash in hand, and that will presumably be used during this half year. So in the half year we're in now, we're going to see further decline in customer down payments on our balance sheet. The next item is the rest of working capital was also negative for us in the period. Now it usually would be negative in a period of growth. In this case, we have allowed our businesses and, in fact, encourage our businesses to bring in more stock than they would normally have on hand to cope with the supply chain challenges that I think everyone knows about. So the GBP 1.2 million of other movements in working capital in the period are mostly stock related, and they are partly for Atik Cameras who was gearing up to ship further cameras in November and December, but also due to a general increase in stocks around the group to cope with supply chain difficulties. Finally, near towards the right-hand side of this chart, you can see GBP 2.5 million of cash outflow for acquisitions. And this is the GBP 2.35 million final payment for the acquisition of Monmouth Scientific that we made in June. So that was fully paid out in June, GBP 2.35 million. And finally, we made a small acquisition of GBP 150,000 for an activity called Clean Tent, and we'll discuss that in a slide or 2. Move on to, there is a cash flow statement here or summarized at least. I'm not going to go into the details of the numbers. They're there for you if you take that back later on. And we're going to move on to operational highlights and outlook, and Mike is going to take this slide.

Well, thanks, Jon. So now we got on to the last remaining pages. What we're going to do here is just look at a little case study. So Monmouth was acquired in December 2020 from David and Lisa Pomeroy. David then advised me the following day that one of his fabricators was for sale, Uniform Engineering. And we acquired them in the end of January, I think, 2021. If we look at these recent acquisitions and case study of life after being acquired by the SDI Group 1 year on, let's go through both of them individually. First of all, Monmouth Scientific, the year of acquisition, the product mix has now been normalized from that as expected with the COVID related biosafety cabinets reduced from the exceptional levels of the previous year. Now we're getting to our standard mix of biosafety cabinets, laminar flow cabinets, cleanrooms, fume cabinets. We have a wide range of products within the Monmouth Scientific portfolio of products. The building at Monmouth, new building, that's progressing at a rapid speed. And now we're expecting to move into that building at the end of the financial year, which is exciting news for us. And you can actually see, I think within the presentation, we've got a lot of diagram of the building now. So it's 2 units. One is an engineering, a workshop of about 10,000 square feet and 38,000 square feet is the main building. And then what we did recently as well is we introduced a Sage ERP system. This is a top-level Sage 200 system that will serve both Monmouth and Uniform Engineering. As with all systems, it does have its teething problems, but it was necessary to upgrade the system as we needed to get better information on margins within the products. And then in August, as Jon has actually mentioned, we acquired a trade name asset of Clean Tent and that serves the portable and temporary market, our cleanroom market. On the final point, within Monmouth, David suddenly has made the decision to step down as MD from the 1st of December. He will continue to run in powered up as a new Managing Director until the end of this month. And then he's handing over the reins to Alan Holcombe, who was the Managing Director of Uniform Engineering. He has only had a short spell there, but he came through these projects for us very well. And I'm sure he's going to continue to drive the business forward, just like David has been over the last 17 or 18 years. David is not going to run away into the sunset. He's going to work alongside me on a part-time basis. And we've got sort of a couple of interesting acquisitions we're both looking out together at the moment. Uniform Engineering. We acquired that for GBP 350,000, which is 3.5x PBIT plus the net asset. When we entered the building with other directors of Monmouth Scientific, David Court, he had to look at it and realized very quickly, we've got some severe health and safety issues, which we had to address. So then we had to spend a fair bit of money on capital equipment to put that right as we're a public company and we couldn't take any shortcuts. That's been a positive step for the employees. They're all motivated in what we're trying to do with this business. And what we've actually got with the business there is very good. The 4 of our current subsidiaries, we use third-party fabricators. But the problem we've got with Uniform Engineering, it's got capacity problems. It's only 6,500 square feet. I think it's got about 15 to 17 employees. We really need to have a look at the business case and whether we should invest in a larger facility. There's a very nice large facility, probably 1 mile, 1.5 miles down the road. And so that takes us up to 11,000 square feet. And then what we'd have to do is to upgrade the plant and equipment so we can accommodate all our internal subsidiaries. But also Alan Holcombe has done a very good job since he's been there in that short period of time in gaining new customers and also bringing back old customers. Another area still close to my heart is training schemes within the group. We've introduced training scheme for glass blowing in Sentek because there aren't any training schemes or apprenticeship schemes around the U.K. So we decided to do it ourselves. I think we could actually introduce a similar type of training scheme in Uniform Engineering whereby we can train fabricators and welders. All of these skills are dying with the aging workforce. Therefore, I think it would be very good to introduce these types of schemes. And that would be very, very beneficial for the company and SDI Group and its subsidiaries. Jon, I would like to speak to the page that we call operations. Within here, I just wanted to highlight some of the operational challenges we've had within the group. Jon and I have been out on the road all week. This is our last meeting. And the #1 question or one of the main questions is supply issues. Yes, we do have supply issues just like everybody else in the world. But we've got a very good management team within the group at the subsidiary level, and they are able to secure supplies of key components. Ones that come to mind are the semiconductors, fans and other electrical components. Also what we've actually done as well is we've invested in stock in the short term, you have to see that on the balance sheet, to assist in the delivery of product in a timely manner. The next point is staff turnover. It always has been low within the group. The biggest problem we've got or challenges we've got, like everybody else, is trying to find staff at all levels. Currently, we've got few vacancies within the group, but we're nearly fully staffed. As I already mentioned within the slide pack, we try to invest in businesses for growth. And I've got a reasonable list of examples. I think what we discussed we might actually do is put some case studies of these in the annual report and also the year-end presentation, because all I did is go through a few bullet points. So if we look at Atik Cameras, we've invested in premises and people as we noted at the start. The second one is Monmouth Scientific. We invested in premises, which we're going to move into in the next 3 or 4 months. IT, we've already mentioned, and also plant and equipment. We invested in a new CNC machine within the facility. Uniform Engineering, plants and equipment for health and safety. And then we recently ordered a new press brake machine, which is a metal bender machine, which is required and we should be able to get additional capacity at that facility without a new unit. The one close to my heart at the moment is Graticules Optics. It's having a great year trading-wise. But what we've actually done is completely gutted a 1960s building, and we're replacing the equipment as we rolled out the program. Some of the equipment will be supplied on Monmouth, which I think is 2 cleanrooms and some laminar flow cabinets. The cost of this is about GBP 330,000, and this is Phase 1. If the return comes through on Phase 1, which I'm sure it will, looking at the trading at the moment. And they've done a great job trading through this sort of a mess river. And we have an opportunity to expand the building on the side by another, I think, 1/3 of the size with landowner agreement with that and we'll put that over in probably 18 months or 2 years. And the last one is Synoptics. Synoptics have had a great couple of years. They really have, managed by Clare Hough and Kate George. We've reduced the headcount in there. We've got a very lean and mean R&D team in there. We outsourced an R&D project with AutoCOL. It's an automatic colony counter focused on the pharmaceutical sector, adding costs of about GBP 200,000. So you can actually see in these 5 examples that we've invested in staff, premises, plant and equipment, R&D over the years to assist the company in driving organic growth. And you can actually see it through the numbers. Another point is, it is good to see that trade fairs and exhibitions are back in place again after 2 years. We recently had a number of subsidiaries attending and exhibiting at lab innovations and advanced engineering at the NEC. It was very well received. We've got 2 big exhibitions for the group next year both based in Germany. One is ACHEMA which is in March based in Frankfurt. And that followed in June with Analytica in Munich whereby there'll be most of our subsidiaries attending for exhibition in those exhibitions. The last point we have there, which has, I suppose, been out of date now with Boris' speech the other day. We did include a point about travel improving. But based on the new variant, this most likely will not hold true and travel restrictions may be imposed in the short term. And then if we sort of just close up with a summary and the outlook, which really hasn't sort of changed. It still continues. So at the half year, you can actually see from the results Jon has been through, we've had a strong half year, record interim revenues and profits. And sadly, there weren't any acquisitions in that period of time. You can actually see the high levels of organic growth coming through. All our businesses have been profitable and cash generative throughout this period. And as we've already said and I keep repeating, we continue to invest in our businesses, which in turn has delivered strong growth over the previous financial years. Outlook. This is a bit amusing because there's no change to the annual report. And that is the Board remains confident that it will meet its increased market expectation. We continue to invest in our company to drive growth. And we continue to seek further acquisitions. And I'm hoping we'll be able to close at least 1 within this financial year.

Mike, Jon, that's perfect. Thank you very much for your presentation this afternoon. [Operator Instructions] But just while the company takes a few moments to review those investor questions submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via 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 this presentation has ended, you'll be automatically redirected for the opportunity to provide your feedback in order that the company can better understand your views and expectations. Mike, Jon, I haven't given you much time at all. There were a number of questions pre-submitted ahead of today's event along with the questions submitted during the live event. And I just want to hand back to you to read out the questions and give a response where it's appropriate to do so. Thank you so much.

Yes. Thanks, Steve. So we did receive 8 questions upfront, and we're going to go through those first and then we're going to try and get through all of the questions that have been popping up in the course of this presentation. So I've taken the questions that were submitted beforehand and kind of grouped them a little bit. Some of them are answered by the presentation already we think, but we'll answer all of them now. So the first question that I'm reading out is on overall strategy and it's, where does management see SDI in 5 years' time? Do we have 5-year financial targets? And are there plans for personnel changes or additions to management or directors in the next 3 years? So I'm going to ask Mike to answer that one.

Okay. Well, we don't have 5-year planning. I don't believe in that. I think it's difficult to actually forecast the next 12 to 24 months, which we have to do anyway. But I think the business model we've actually got opens here total of 10 years works. So over the last 6 years, we've actually gone from 8p a share, 7.5p a share up to nearly 2p a share. So I don't see why we should actually change that M&A or organic structure. What we do need to point out is, yes, I'm sure we'll need to change the structure as we grow because there's only so much time I could spend in the day driving around the businesses and look at acquisitions, I'm sure we'll have to strengthen either the main Board or a team below the main Board going forward on that.

Thanks, Mike. This is kind of related. So is management sticking to the long-term 28% annual growth target being 8% to 9% organic and 20% M&A growth? And is this target achievable with the current structures? Now I don't really recognize that as being a hard and fast target. But do you want to answer that, Mike?

Yes, I do. We've always actually said that we'd like organic growth at a high single-digit figure. We'll be chasing it in the first 6 months. I don't see why that still can't be achieved. What do you think, Jon? Do you think that's a fair comment? I think you said that openly?

Yes, I think we are exposed to sectors that do offer higher than average growth. So we should certainly be targeting that kind of range, yes.

Yes. And the acquisition side of that, where the 20% comes from? But like I said, we've actually got a strong pipeline. A few years ago, we did 4 acquisitions. We did 2 last year. I'm sure we're going to do 1 or 2 before the close of this year. So if we can still continue that with high, good growth acquisitions, then we might achieve the 20%. But I've never thought about that sort of figure when we acquire businesses. I just want to make sure that the acquisitions tick our acquisition criteria, which is, again, in the appendices here, and then we can actually invest in those businesses and grow them.

Yes. Thanks. So then more on acquisitions. Have you looked outside of the U.K. for examples of companies having been consistently successful at pursuing large amounts of small but extremely value-accretive M&A deals? And then a couple of examples were given.

Yes, I have. I've never looked at the Swedish one. I've looked at Constellation Software. I'm sure we're getting all the questions about that. That was founded in 1995 by private equity individual. It IPO'ed in 2006. In 2004, it wasn't roughly the same size as us before it floated. And it's in about 500 acquisitions in 26 years, which is about an average of 2, which is roughly about the same as us. But it's a bigger, bigger business. It's got a market cap of GBP 3 billion. It turns over at GBP 4 billion. It's got 16,000 employees. I think the biggest difference for that is it's software company. So what they can do is buy software and even integrate it. We are buying manufacturing businesses. We've integrated a number of these businesses through the years, Quantum Scientific Imaging and Opus Instruments into Atik Cameras, Fistreem into Synoptics, and then we merged Thermal Exchange and Applied Thermal Control together. So we can do that, but a lot of our businesses are stand-alone businesses. So I think there are some differences in that profile. But we've got some catching up to do, really.

Sorry. I was going to say, we're not ready yet to decentralize M&A. I think we still consider that as being a key headquarters function. And at some stage, we will, I think, when we're big enough, pass it down, but not for the moment.

Right. So we've got some catching up to do. They've been acquiring businesses for 26 years. We've been doing it for 6. But I think we've got some very good acquisitions. We've acquired very good businesses in the last sort of 6 years. And you can actually see it's reflected in the share price. We are still creating shareholder value, which is one of our goal.

The next one is management has not been able to make relevant acquisitions in the last 11 months. What are the reasons for this? And what will management do to further develop the M&A structures in order to build a strong M&A pipeline in the medium and long term?

I'd know somebody has picked it out at the worst case, 11 months. It could be 12 months. But I'd rather look at it on the annual results, because that's where it's reported. So we did 2 acquisitions in the last financial year. And I'm sure we're going to hopefully, depending on sort of timing, acquire 1 or 2 acquisitions this financial year. So we have a strong pipeline, and it's just timing. If you have a look at the acquisitions, we tried to acquire a couple of companies this year. We were let down. Not everything falls over the line or comes into our basket. Other people come along and take it out of our hands. So I hope that answers your question.

Another M&A question. When you buy a business, how do you make sure it has a sustainable competitive advantage over its rivals?

We buy niche businesses. If you could have a good example, when we acquired Sentek Sensors, it had got 2 big OEM projects. So as soon as we get latched into a customer, it's very difficult for them to actually go elsewhere. And from that, we actually look in to see whether their businesses or the customers businesses can grow, and it has proven it. Also what we actually do is when we acquire businesses, a lot of our business we've got probably at least a 15-year trading history. So we can look back in time and see the business growing and also you have to have belief in the management as well. You talk to the management. You talk to the sales teams. And if they're enthusiastic about sort of selling products, and we can see from history, then we have to well believe them. Jon and I have only people in the head office apart from the financial control, we have to give them the authority to say, yes, grow that business and we will support you through the investment we made on this. And I think that we've actually seen improvement in all these businesses, especially this year as well. We've actually seen a lot of our businesses trading at book for the first 6 months of the year, so it's proven it.

Thanks, Mike. Then a couple of questions not really on M&A, so maybe I'll take these. What percentage of group revenue is repeat orders every year? So it's a good question. It's kind of slightly different. We often get questions about recurring revenue, and there's no obvious precise definition of that. But if I include our real recurring revenue of service and calibration and also our OEM businesses where we're selling to customers that are building our products into their bigger machines, and clearly, they're going to come back every year. Then it's about 35% to 40% of our revenues, I'm here excluding a kind of bulge for Atik Cameras this year, about 35-or-so percent. And the rest of our business, we have to kind of conquer sale by sale. So that's the majority of our business, we have to do that. But of course, we have distributors who are bringing in customers all the time. So I'm not saying it's easy, but we're managing it. The next question is how sensitive are you to the economy? In other words, if there was a recession, meaning U.K. GDP was down by, say, 10%, how much would you expect your revenues to be down by? So that's very difficult. We're just coming out of a recession and our sales went up. So the answer is it depends. I think we are clearly sensitive to the economy, if our customers are. And I don't know if the answer is more than 10% or less than 10%, because it does depend. But hopefully, we're in sectors of the economy that are growing substantially and sometimes can grow through recessions, and we've certainly demonstrated that over the last period. Final question that was presubmitted relating to supply chain issues. We're seeing issues all around the globe. To what extent our SDI subsidiary is affected and are some affected more than others?

Let me answer that.

And then if it leads to sustained inflation, to what extent do you think our subsidiaries might transfer those costs to customers? So I think we've certainly talked about the supply chain issues, which our businesses are coping very well with. It's been challenging to some extent, but we have professionals there whose job is to source the components for their business. So it's not that we have an overarching structure to cope with this. This is right down in the business. They know their products, they know their suppliers and they have been getting the job done. So we're very proud of them. And as you've seen, our sales have gone up. So despite supply chain challenges, we've been managing to get the products we need and to supply our customers. Regarding inflation, I think up to now we've certainly increased our prices to cover cost increases. Inflation to date has been kind of focused in certain areas. But what we're seeing is that we will get cost inflation more or less across the board, especially in labor and in products that depend on labor from our suppliers. So we know we're going to have to price for that. And we believe that in general, we can price for that because the whole world and our customers know that not only we, but any competing suppliers are subject to inflation. And so we think we're in a strong position to transfer that to customers and we're going to have to do that. That kind of concludes the questions that were presubmitted. So now we're just going to go down the questions that we haven't really had sight of. So we're going to throw most of them over to Mike. So I've got a question here from Gilbert. COVID clearly isn't going away and recently seems to be worsening. So do you think you may get further exceptional COVID orders for Atik Cameras in 2022?

You've been answering that so you take it.

Yes. So I had that question before. I think the answer is we don't know. So we've got some indication. Our communication with this customer isn't very easy. It's located in the Far East. Language is an issue. And most of our conversations to date have been kind of technical ones rather than supply chain or sales ones. So we've got imperfect information there. I think we have recently received some kind of indication that they are selling through PCR machines to which our camera fit in. So we're quite optimistic that they don't have a big overhang of our products on their premises. Whether the Chinese market, in particular, has absorbed all the PCR machines that it needs, and now it's a matter of just using those on future ways of the pandemic, we really don't know. So we are hopeful that this customer, which started out for us prepandemic as being largely a kind of R&D customer that was buying samples and selling a small number of machines, it's become a big customer and, in fact, it's become a big manufacturer. And we hope that it will be a continuous source of sales into the future, maybe not at pandemic levels. But the fact is, we don't know, so haven't built it to any great extent into our financial plans. But it's an upside if it comes. Next question, Sergio. Are your sales expanding relative to your industry and your rivals? Again, I've been answering that kind of question. So I think the answer is undoubtedly, yes. Having said that, I think there's a kind of OEM part of our business in which nobody is really redesigning their products or designing new cameras or new modules into their products. So over the last 18 months, that's probably not been a big element of kind of displacing rivals from existing products. I just don't think that's been happening significantly. But where we're selling an instrument in which customers could buy ours or they could buy someone else's, so they're getting it off the shelf or through this distribution, I think there's no doubt that we are gaining market share. And about 16% growth over 2 years is demonstration of that, I would say. Next question from Michael. Outside of the organic growth, M&A is key and you certainly have an eye for it. What does the pipeline look like? I think, Mike, you've said that. Do you want to add anything?

No. We can just say, again, we've already got a dozen acquisitions. We had 2 of which fund away this financial year. And that's probably the reason why we didn't actually sort of close or crystallize a deal in the first half of the year. But it looks promising to the second half of the year and the following year as well. So we have got a number of opportunities we hope to close in the foreseeable future. And then you've already mentioned about funding. Jon, do you want to repeat that?

Yes. So we think funding is not a current issue for us. That's right. Next question, Sergio, again. Do you have a constant demand for your products other than cameras? Well, I'm not really sure how to interpret that question.

If we look at it, I'm going to interpret it to say, it's OEM. So then you can have a look and say Sentek Sensors, we've got 2 really big OEM contracts, sort of GBP 1 million each contracts for them, and Applied Thermal Control. We provide chillers that go into a lot of science equipment, again, sort of an OEM. Synoptics have got an OEM, but it's a branded water filtration business. So we've actually got constant demand for these products coming through from people within the OEM side. I think, I could guess what the question is.

Yes. Okay. Thank you. Another question from MGM. What is the likelihood of Atik getting more orders for PCR-related revenues? I think we've probably just answered that.

Yes.

Well, to expand a little bit, we were talking about the one customer that -- the question is, okay, can we find other customers that are making PCR machines and would like to use our cameras? Again, I don't know. So Atik Cameras has its feelers out to try and find new OEM customers, sure. Not all PCR machines by any means use cameras as their kind of sensor for determining quantities of DNA, et cetera. So we shouldn't look at the whole of the PCR machine market here. But we're certainly trying to find other customers. What is the likelihood? Very difficult to say. We're certainly working as hard as we can to try and find those potential customers.

And as I said right at the start that we've invested in Atik. We've got a very smart and knowledgeable R&D director who's taken onboard the sales, really technical sales. And then we've got a business Development Director as well trying to find these niche markets whereby they want an Atik Camera.

Yes. Moving on, question from [ Uni ]. What happened with negative cash move? Will we get back to growth in free cash flow generation? So I did explain, I think that cash flow was reduced compared to a year ago. And that's mainly because last year we were getting cash ahead of sales from our customer, particularly the customer for the cameras. And this year, we've been using that cash. So that's caused a kind of double whammy in terms of growth in free cash flow. Because last year, they were sending cash to us. And this year, we're sending cameras to them, which caused not a negative cash flow because cash flow is always positive, but negative growth in that case. We may see it again in this half year. So as I said, we still got GBP 1.8 million on our balance sheet of customer prepayments for cameras. And assuming that we run out this order and don't replace it, then that will contribute again to lower growth in free cash flow or negative growth even. So yes, I think after that, then we can expect to grow again. And so just to repeat, we had a positive contribution of down payments a year ago and a negative contribution this time around, plus some additional increases to stock. Next question again from Ng. Forecasts for 2023 are showing a significant decline in profits and earnings per share growth. How confident is the Board of making acquisitions in the next 6 to 12 months that will increase growth in these forecasts? I think, Mike, you can take it. You're confident.

I'm confident. Yes, that is my job to fill that gap. I'm sure we're going to get a certain amount of it from organic growth. But that's what I said to the city when the forecast came out that we have to find acquisitions to fill that gap. So I'm reasonably confident that we're going to do it and hit that.

Good. Next question, this is from Patrick. How is Chell performing considering some of its end markets, for example, aerospace are subdued? It's a good question.

Do you want me to answer?

Yes.

Chell, this business is really quite difficult this financial year. We've got some really good prospects within the gas sensor market. And Jamie, the Sales Director, has actually informed us probably 6 weeks ago that they're going to the right. So we're not losing orders, but they're going to the right. Aerospace is an issue worst, rightly so. But we've had a big upsurge in Formula 1. Rolls Royce used to be our biggest customer and it's Ferrari now. So what they're actually doing is budgets in Formula 1 are going to be cut for next year, so everybody is buying on the back end of that before the cut. So having a good year for that, but the rest of it actually is quite low in the way of sales. Calibration is still a great revenue stream for us. But as I must say and be honest with you, the funds in Chell is not that bad, but they are a great company, great team there, and I'm sure they'll come through. And like you know how the business model works, if somebody finds itself like Applied Thermal Control through the COVID period, there's always somebody within the group stand up and support them and take away that trading or the shortfall in trading away from them and pick it up, like Atik, Synoptics, et cetera, et cetera. I hope that answers your question.

Yes. Good. Thanks, Mike. Final -- not the final question. So Vivek is asking, notwithstanding the exceptional orders from Atik, how do you see the business is evolving in terms of organic growth? If you were here in 2 years' time with organic growth, excluding Atik exceptionals of 15% to 20%, would you be very pleased or disappointed? So I think we should be pleased with kind of that level of growth over 2 years, 15% to 20%. I think we can do it. It's challenging, but I think our businesses are capable of that. Is that okay?

Yes.

Sergio. Will the expansion in the Chinese market continue? Don't really know. Hard to say.

Yes, it's a difficult call. We sell the cameras into the Chinese market, but a number of other companies would sell into the Chinese market. So it will continue. It is a market for a number of our subsidiaries, but we don't know what the expansion is like over there, but we're still selling that.

Another question from Sergio. One of your KPIs for SDI Group. So I would say here, I mean, we list 1 or 2 KPIs that we don't publish generally in our annual report. We're a buy-and-build business. So the key things for us really are what we're acquiring. So acquisitions, quantity, how much capital we're deploying, but more than that, it's, are they the right acquisitions that are going to generate return on that capital. And secondly, on the build side of our business, really the driver is sales growth. So we're looking at growth in sales and opportunities for sales and orders for sales. But we're not doing that so much overall at a group level as much as down in the individual businesses, which is where sales are generated. Do you want to add to that, Mike?

No, not all. I think it's right. But for our KPIs really, for me personally, I don't look at the sectors. I just look at the individual companies and we're just performing against budget. That's what we're actually doing. We've got return on capital as a Board, very simple KPIs, and it seems to work and also cash generation, which is key to my heart.

Thank you. Yogi is asking what role will David Pomeroy have in the future for SDI in the head office, an occasional addition for the M&A team or a permanent picture?

David and I don't know. David and I have gotten really well. We've been around for about a year. Sadly, he's not going to be engaged, but he's still going to work, which is great. And I think it's soak it and see from David and myself. We don't really know what we're going to do. We've got a fair bit of work to do in the next few months. And the number of opportunities coming out are growing. So hopefully, he will work with me for the foreseeable future.

Okay. And we're on literally the last question now and we've done an hour so, so we'll finish with this one. This is from Ark. When talking about M&A, the companies you look for are only U.K. based? Or are you also looking abroad?

We will look all over the place. So we found a company in France just before COVID. We got locked down. We couldn't go to France. So it was already sold to a French company. It was easier for them to sell internally. They just wanted to move away. We're looking at a company in the U.S. at the moment. So we will look at most places. But currently, the list is all of U.K. apart from one in the U.S., which we'll look out in 2022.

Mike, Jon, thank you for addressing all the questions from investors this afternoon. And of course, ladies and gentlemen, the company will review any further questions submitted by investors today and we'll publish those answers on the Investor Meet company platform. Mike, perhaps I could ask you for a few closing comments. After which, I'll redirect to investors to give you their feedback.

Okay. Well, thanks for attending the webinar. There's over 200 people. So [indiscernible] attended?

We had short of 300 that had accepted and I've just closed the admin panel, so I'll give you a list that is of [indiscernible], but very well attended, sir, as usual.

Anyway, so thanks for attending this webinar. It's been fantastic ride since 2014, when we acquired our first company, Opus Instruments. I hope you have a happy Christmas. And I hope we can continue this growth in the new year. Any questions, you can direct them to me or Jon. my email address is [email protected]. And again, have a happy Christmas.

Mike, thank you very much for that. And Jon, thank you for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations. It's going to take a few moments, but it's greatly valued by the company. On behalf of the management team of SDI Group, I'd like to thank you for attending today's session. That now concludes today's presentation, and good afternoon to you all. Thank you.

Thank you.