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

Good afternoon, ladies and gentlemen. Welcome to the SDI Group plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all of the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll to give that your kind attention. I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Michael Creedon. Good afternoon, sir.

Hi, there. So we'll just go through the interim results. So we'll start on the agenda, Ami. So I think everybody can read the agenda there. We'll be going through the group summary. And we will sort of do a intro himself as the new CFO I would just go through some sort of general narrative where we're at or happen what's happened over the last 6 months. And we will go through the numbers, and then we'll look at operations outlook and then to get us to a conclusion. I think one of the interesting things within this pack, I think you can get your hands on it after the presentation is if you need further research is go through the appendices because it's actually quite interesting. We've actually got 14 business units now and to get some background information on those. Go to the appendices, and also go to the relevant websites of the subsidiaries. So if you want to go through it, Ami, the next one. And I'll leave to you.

Yes. Thank you, Mike. Good afternoon, everyone. As an intro, my name is Ami Sharma. I joined the Board back in August as the new CFO, as Mike said. I'm not the only new director though. We welcomed Andrew Hosty to the Board back in August 2. Andrew has an experienced NED on multiple boards, as you can see from his profile. He's formerly Chief Operating Officer of Morgan Advanced Materials a FTSE 250 decentralized manufacturing group. And he was on their board from 2010 to 2016. Well, about me, well, just to give you a bit of a flavor of my background, I was formerly the Group CFO, Ultra Electronics, where I've spend also a large part of her career. Ultra was a FTSE 250 aerospace and defense company. It's a decentralized manufacturing group with a small head office. And I was part of the team, which embarked on a buy-and-build strategy in the late '90s and early 2000s. A question I get asked quite recently, anyway, is why am I here? Why SDI? Well, before I joined, I saw what many of you see a team had a good eye for acquisitions and a strong collection of successful businesses. And having been here 4 months and having traveled around virtually the entire estate, I'm pleased to say that my initial thoughts have been correct. I've seen a collection of well-run impressive businesses who understand their customers, have a good portfolio of products and importantly, are capable of growth. That's about -- that's all about me. Back to you, Mike.

Okay. I'll start off with a presentation about the businesses. I think people who have been on these presentations, I've seen this diagram many times. This has got a larger in this sort of calendar year, we've acquired four businesses. And we started up in 2014 with Opus Instruments. That was the very first. And now today, we've acquired 17 businesses through actually raised on three occasions and then through our own cash and debt. As I said to you before, 4 businesses we acquired this year two were in this financial year, and we'll discuss those later on in the presentation. So what is the strength of this business model. You've seen the wording on the right-hand side before, but just to repeat myself, we've got all these businesses are autonomously separate business units. But what we're actually seeing now the group is getting bigger as synergies within the group as we acquire additional complementary businesses, again, we'll discuss it further as we go through the pack. All acquired businesses have to be profitable and cash generative, as you well know. We don't rely on a single sector or region. As more we've actually sort of been quite successful through the COVID period. Because we have a range of businesses which we're selling equipment within the COVID epidemic and some find it itself, but we're very successful as a group. What I'd actually like to do is just to repeat what I said right at the start, and that is, please refer to the appendices on the -- where it's index group brands. And then you can actually see the sort of sectors and regions and the type of products we have to sell within the 14 business units. So what we do with these businesses is when we acquired them, limited sort of cost as an exercise, fairly minimal -- very minimum, but what we try to do is to invest in organic growth in these businesses. So if we go on to the next slide, Ami. This is a new one for us, U.K. and World presence. What we've actually got here is we're highlighting the 14 business units and where they're located, 14 business units or businesses, they're based in the U.K. and then what we've actually got is additional satellite offices. We've got one in Frederick, which is just outside Washington in the U.S., one in Lisbon in Portugal, the recent acquisition of Fraser Anti-Static Techniques. We've acquired a business in Dresden and one in Shanghai. One thing I'd like to sort of highlight in this is most of our sort of business operations is carried out in the U.K. So that's 13 of the 14 businesses. But in recent years, what we've actually done is we moved the majority of the operations of Atik Cameras across the Lisbon. And so what we've listed now is 34, 35 people over in Lisbon. And I think it's 11 people within Oreburgh, which is Norwich. So what we operate in Norwich now is just the R&D center, sales and marketing. And then the rest of the operation, including finance, is within Lisbon. Now my role is sort of twofold really, is one is in operation and the other one is to delve into M&A. Over a 6-week period, I've tried to visit all the business units within the U.K. So I'm actually seeing them probably 6, 7 times a year. And then with the overseas offices, I'll try to visit them every 3 to 6 months, but it all depends on what time is taken with M&A. Probably I said here this year, we've accomplished sort of four sort of acquisitions within the calendar year. So it's actually been quite busy for me on that aspect. But like I said, I do like to visit the business units as often as possible. So now I'd like to hand it over to Ami, who will go through the financial information.

Thank you, Mike, on to half one financial year '23 results. Okay. This slide shows the key financial highlights for the first half year. This you will have seen from the press release already, so I won't spend too long on this particular slide. But the headlines are a strong revenue growth of 28%, which translated into strong operating profit growth of 19%. Both basic earnings per share and adjusted diluted earnings per share also showed strong growth. Cash generated from operations declined by 57%. And with all of these -- and on all of these, I'll talk a bit further in the forthcoming slides. Okay. This slide shows some extracts from the income statement. The headlines from this slide are: total sales growth of 28%, as I said, of which 3.8% was organic. This was driven by the one-off Atik Cameras order for cameras, which go into PCR machines, GBP 6.1 million of the growth came from acquisitions. The acquisition of Fraser Anti-Static Techniques was made at the very end of the half year period, so is not included in these numbers. In terms of gross margins, there's a mix effect going on here with our acquisitions having slightly lower gross margins than our existing businesses. If you exclude these, gross margins held. As I mentioned earlier, adjusted diluted and basic EPS both showed strong growth, in fact, stronger growth than our profit growth. And this is due to the comparative period tax rate being higher as a result of a one-off adjustment to bring the deferred tax charge up to 25%. This slide shows how the revenues have moved compared to the equivalent period last year. As I mentioned, acquisitions contributed GBP 6.1 million in revenues. And the impact of the one-off Atik order for cameras that go into PCR machines is shown here. For the first half of FY'23, with revenue growth of GBP 0.7 million on this contract. So with revenues in the first half were GBP 6.4 million. This compares to GBP 5.7 million in revenues over the corresponding period last year. This contract ends in the second half of this year, and we have no visibility of any further orders from this international OEM. However, it's pleasing to note that Atik has experienced strong organic growth in the first half of FY'23 when you exclude this contract. This slide shows the performance of our two divisions: Digital Imaging and Sensors & Control. As a reminder, the Digital Imaging division includes Atik Cameras, Synoptics and Graticules Optics. All of our other businesses are under Sensors division. The Digital Imaging growth of 10.4% was driven by Atik Cameras PCR camera order, as I mentioned earlier. All of the acquisitions made in the last 12 months have joined the Sensors division, and all of this division's growth comes from these. Looking at trading in this division. Sentek and Applied Thermal Controls both had very strong trading halves. This was offset by component delays at Chell and Astles Control Systems and a slower post-COVID first half at Monmouth Scientific. Both LTE and Fraser, those new acquisitions in the group. Mike will cover these a little later on. Turning to cash. Working capital increased by GBP 5.8 million over the period. This is largely driven by GBP 2 million from increased inventories at our businesses to mitigate against component shortages and in respect to PCR camera deliveries scheduled for the second half of the financial year. A further GBP 1.1 million outflow came from Atik Cameras upfront payments, which unwound in the first half. And all of these contributed to cash generated from operations reducing from GBP 4.4 million to GBP 1.9 million in the half. Over the first half, most of the acquisition consideration were funded from our bank facilities. You can see this more clearly on the next couple of slides. This slide from left to right shows the working capital movements I've spoken at. You can see the Atik Cameras unwind of upfront payments the increase in inventories here. And on the right-hand side, you can see the GBP 16.6 million consideration for acquisitions, which was funded by an additional GBP 15 million in bank borrowings. Turning to the balance sheet. The growth of assets and abilities you can see here is driven by acquisitions. And at the end of the period, the net debt-to-EBITDA ratio was 1x compared to a ceiling on our facility of 2.5x. After the period end, GBP 5 million of the GBP 10 million accordion option on our HSBC revolving credit facility, was exercised after agreement with HSBC. The facility size increased from GBP 20 million to GBP 25 million on the 30th of November. This resulted in the headroom on our facility, increasing from GBP 1 million to GBP 6 million. The acquisition of LTE Scientific and Fraser Anti-Static Techniques required consideration of GBP 14.2 million and a further GBP 2.3 million was paid to the Safelab System sellers to close that particular transaction. At the end of the period, GBP 2.5 million in deferred consideration is included within trade and other payables in the balance sheet. GBP 1.5 million of this relates to Fraser's and GBP 1 million to SVS. To conclude, as you're all aware, interest rates are increasing. And as a result, interest payable on debt will also increase. The analysts following SDI have updated the interest charges in their PBT models to reflect this. That's all from me. Back to you, Mike.

Okay. I am going to flip on to the next page, Ami? Okay. So now you've got the year off the end. So this is Page 16. This is the first acquisition we did in this current financial year. We acquired this in August 2022. This business has been on our radar for the last 5 or 6 years, Ken Ford, my Chairman and I met Ken for a number of years ago in London one Christmas period, I wanted to try to buy the business. We were too small volume. And so that meeting was very short over the years. You can actually see we've grown and has taken an interest in our business. And we acquired -- we have good hazard terms. I think it was a number of months ago, been sadly it's on. So went into probate. It took us a number of months to get this over the line. It's based on a place called Greenfield, which is the near Oldham road to Manchester, and it's within 44,000 square feet facility, single-story building. So it's actually sort of quite a big footprint right in the middle of Greenfield, nice area just outside Oldham. That's, again, I think this is the second 1 where we had to what we acquired the property. The family didn't really want anything to do with the business. They want to do work -- get lot of stock of the whole business, including the property. So we bought the property, and that was part of the asset purchase. This business actually specialized, you do some research it specializes in the supply and service and manufacturer of medical and laboratory equipment. It's got a massive range product, which we really need to get through and analyze. Major ones are autoclaves, steam sterilizers, endoscope cabinets and also laboratory ovens and also environmental chambers. We do have sort of a significant order for environmental change, which came through just before we acquired the business. It may seem when I think 83% of your shareholders say you do look at brokers notes, and you would have actually seen that it's high revenues and low profit. So we acquired it on a multiple of just about 4x PBT, as at the historical 3-year PBT, and we are positive with the synergies, with the collaboration, with Safelabs and Monmouth that we can achieve increased profitability. And what we've actually tried to do, I think it's in the beginning of January, we've tried to put together some meetings. I think as I said, we in January myself, Monmouth, MD, Alan and Roger from Safelabs are meeting face to face with John Lee, the MD of LTE to say how can we actually increase our group revenues while still remaining autonomous units because we do actually cross over in a number of areas. I think one of the areas of interest is all three of these actually service equipment, and we actually share some service and good stuff and are the sort of problems we have in this year, apart from component shortages is trying to recruit service engineers. It's become very difficult for us in this period of time. But I'm sure with these three guys, they're very sort of positive that we can actually try to increase our revenue share in line with or in comparison to the -- to our competitors that we should not achieve this hopefully within the next sort of year, 2 years. So you click on to the next one, Ami, we'll look at Fraser Anti-Static Techniques. We acquired this business in October 2022. It was a bit outside of our sort of area. The business was brought to us was quite interesting really by a company called Thomas Westcott Corporate Finance. Thomas Westcott are a set of accountants with the side line into corporate finance. They were the advisers of Safelab when we acquired Safelab in this calendar year. So that came to me with a very interesting business called Fraser Anti-Static Techniques, or we call it FAST now and I said we'll be interested in purchasing it. This is the biggest acquisition we've actually completed a 3-year average historical profit of GBP 1.4 million. So it's out of our sort of scale of what we've been buying in the past. It turns over sort of GBP 7 million, GBP 8 million worth of profit. And it's a very nice business and we can actually think we can actually sort of grow that business. It's a leading manufacturer of antistatic products for a number of industries. But the main area is plastics. So it's from shape plastics or injection molding plastic. So what we're actually doing is taking the static electricity away from that machine. So if any of you worked in sort of the electronic industry with an R&D or an R&D center, you'll actually see somebody has a match with a wire earthing the desk away from the individual. While this is a sort of more sophisticated piece of equipment, the major area we're selling into is Germany, but we do sell it all over the world. And where we think the growth is in that business is going to be in the U.S. and into China. But like I said to you they have actually got a subsidiary in Germany. That is just the one customer. When we came out of Brexit, a German customer couldn't actually trade with us. So what we got done is set up a German subsidiary and now we move product and invoicing through that business. We do sell into Germany and to other customers, but so we don't use that vehicle. China, the distributor has been around for many years. This sets up back about 3 years ago, and I'm sure there's an opportunity to grow that business. As I actually mentioned about multiples, everyone's interested in what multiples we're buying our businesses. So this one was the most expensive to date, that was at 5.8x PBT. If you look at our sort of scope on acquisitions, we try to buy between 4 and 6 and I think in '17 acquisitions, we've actually kept to that in kind of a couple of cases we've been below 4, but that's the sort of figure we're looking at, at the moment. And just another point as well as I look at this presentation. Yes, they're based in Brampton, Endeavor, we've got an R&D center, which is based in Bristol. It's oldest, it's quite sort of strange out of that to put a factory and it's in the middle of a new housing state. So to get planning permission to build a housing state, they have to have some industrial premises. So at the time, number of years ago, that the shareholders of FAST actually acquired the land to build a nice sort of three units on that site and they still extending the housing states at the moment. Bit of not in my opinion, but it serves the purpose for us anyway. So if you tick along to the next one, that's Page 18. I'm sure you've seen this again on presentations over the years. So what SDI tries to do is to gain organic growth and also growth from M&A. In this half of the year, we achieved 3.8% organic growth. To me, including times and because it's a difficult time for us, especially with components and labor shortages. And last year was 22%, which is fantastic. We look at 16% of that was Atik Cameras with our sort of Chinese PCR cameras going out of the door. This was above the year as for previous years, but I think we're getting back to some normality within our business units. We do have one more shipment of cameras to a Chinese PCR manufacturer, and this will ship within this financial year. And as we've explained in the financial markets over the last 2 to 3 years. This is a one-off. And we didn't do not foresee or we haven't got know any visibility on any future orders for this PCR machine. A number of our businesses are sort of back-ended. So looking at sort of healthy sales in the second half of the year. And so I think we're quite positive of the outcome. But I think we hope you should achieve market expectations. M&A. This is sort of the heart of our business, and we still continue to focus on acquiring cash-generative, profitable businesses. I said to you right way through the presentation, we've acquired four businesses this calendar year, two in this year. But we don't set a target number, but I think on average, we're doing about two a year. We have done since February 2014. Our pipeline still remains strong. We've got a good track record. With friendly acquirers. I don't see why this should change or continue or shouldn't continue. Our criteria remain unchanged. And that is really we're looking at sort of scientific, technical businesses with a manufacturing buyers which means you can actually control the gross margin. As well, as I said before, as you well know, that we want cash-generative, profitable businesses with a strong management team and also strong exporters within these sectors. Sometimes that's actually quite difficult to actually put across in presentations because a number of our businesses actually are OEM businesses. So we actually integrate our products into other pieces of equipment. And that is usually in the U.K. and then shipped to it. So it's very difficult to see where it is being priced any time we can actually do it is if we get to deal direct on the consumer part. And also, we actually buy businesses at a fair price. As we flip on to the next page, this is a diagram sort of jump put together in the last couple of years, very nice diagram on Page 19. If you look at it by, it's 35% compound annual growth over a 6-year period. On the build side, our return on capital has increased from 12% to 34% over the last 6 years. So there are some big numbers coming through over these years. And this is due to our strategy investing in revenue and margin growth within these businesses. I will expand on it over the next couple of slides. As I stated, 17 businesses were acquired in what sort of 8 years, yes, it's nearly 9 years now. And at 6, what we've actually done is combine them into existing business units, and then we've got 11 stand-alone units. And then if we move on to Page 20. And this is where we will expand and what we have to do in the way of investment in our businesses. So what we do is invest in those businesses. I think sort of 3 sort of good examples of that is Graticules, I think we've mentioned it in the annual result side. What we're doing is refurbishing or getting an old 1960s building. That should be completed by within the next couple of months. So what we've actually done is put a new clean room facility, laminar flow cabinets, painted, decorating the building. It was like a rabbit warrant. It's more open. And the next phase, if we can actually or Ami, as the new CFO, can look at whether it's a vial proposition is to expand the building and that build on the side of it because currently we've got that unit. And then we've got a small service office just down the road, but it will be nice to let everybody under one roof, but we have to look at whether we're going to get a good return on our investment in the next -- in the foreseeable future. The second point is what we actually do, as you well know, is R&D. A good example of that is with Synoptics. I don't know what you actually looked at some analysis on. They've got a smart machine called AutoCOL, which is an automated colony counter really, it's for the farmer and strength. And what we've actually done or cut and clear with that business is reduce the headcount, and we've outsourced R&D a number of occasions. And this is one of the projects we've outsourced this colony counter. This is version 2. What's actually happened in, especially through the COVID period, not to bore you at all is the colony counter. I think it's up to a sort of 90 plates and will stay the current picture this a 90 millimeters wide. There's a new one out 55 millimeters, which was developed during the COVID period. It's got a tie to live on it. We tried to put an adapter in the new machine, which cost more than the old machine. So what we've actually done is develop a new machine. We've run this over the pharma companies and I'm very happy to tight this on board that they will actually need to under the machine. Another area -- so again, back to synergy. Another area, this is very recently over the last couple of weeks. And really, it's -- all due credit to sort of Roger Guess, the MD of Safelab. What we've actually looked at is the marketing talent. We recruited a number of specialized marketers or marketing people in digital marketing. These are young kids. And what we need to do is to see if these marketing people can actually help some of our small subsidiaries. So how to grow marketing meeting recently just on Zoom or Teams or whatever it was. I see what we need to do to expand our knowledge and collaborating within the digital marketing across group. So those 2 or 3 people who stood out within the group have been actually help people like MPV industries sort of behind -- not behind the times, but they do need some help with these new tools and techniques for the digital marketing. So hopefully, with the resources we've got in place or we have to help these guys drive new customers through to our website. As we've seen in the press recently supply chain issues have continued to cause problems for us. There is one part was highlighted, I think, to -- last week, when I was at LTE, a 52 week lead time on that part from the U.S., but we've managed to actually reduce that lead time or buying it in the U.S. and so their U.K. distributor. And hopefully, that's alleviating the pressure on production, but we're not alone with these challenges. As you've seen on recent RNS press announcements, everybody's got their problems on joint infill orders because of consumer offer consumable -- sorry, of the parts -- shortages in part. And another area, I'm sure come on to Q&A is inflation. What we try to do is with our price increase is try to pass on to our customers where possible means as time gets with new business because you actually incorporate into new growth. But we do our best. Our margins are still achieved if you've actually seen from the presentation, which Ami did earlier on our gross margins. So I think we're in a good place. And if the outlook at our businesses, a lot of the business is still run by the founders or there is succession planning in place. And these guys know how to run the businesses and achieve good margins. So we don't actually use the sort of stick approach to try to increase the prices. We've got another area, which is quite pleasing as trade shows are back. We've got two big trade shows for a number of our businesses. One is ICEMA in Germany and the other one is Analytica again in Germany. And these are pretty busy shows, and it's good to get back to our face-to-face meetings with our customers in the marketplace. And as I mentioned as well, about the acquisition of LTE, we are now able to increase our synergistic opportunities internally with our business units. And I'm sure that we'll be able to sort of expand on that across the group over the year. And if you go on to Page 21, I thought we're up to high profit base. These are our priorities for the latter part of the year. Still, we're going to continue to manage our supply chain. We've got some very good buyers and some very good engineers. If we do get problems, we're actually reengineering some of our products. Labor is still a big problem for us as well as inflation. If you look at Astles, it's a very small business, only employees of its 12 people. We've got a short set of four people there: two workers and two engineers, so we're in a very difficult market at the moment. The second point is, as I've mentioned, right across through this is synergies across our businesses, which we're trying to achieve. I think we will be successful in that. I say the early stages is going to be the LTE, Monmouth and Safelabs, and then we'll expand it across the board. What we did do this year for the second year, it was stopped in COVID and that is our strategy or a couple of days, that's whereby all 14 businesses presented their ideas of what a 5-year plan look like and what we need to do to invest in these businesses, and it went down very well. So how the format was very similar to what nare doing today. It's a presentation forward, and that's what they did. It wasn't just purely to the main board. It's to every sort of senior manager, director of the subsidiaries. So we had about 40 people attending that. And it was worthwhile. And what will actually do is follow that those strategies up over the coming year. Next point is buyer. Very little to say on that. There's no change from previous years. We still see high-quality cash-generative businesses. We have a strong pipeline, and I'm sure will continue what we have been doing since February 2014. Now just to sum up just a summary. Again, it's just repeating what we said in the previous years. We still aim to dealing with our full year profits in line with market expectations. We still invest in our businesses for growth, as I've already mentioned, and we'll continue to look at our complementary acquisitions. And also what we're actually doing is while he's looking for another non-exec director. These days, ESG with governance, it's very strict. So we need to make sure that we have the right governance going forward for SDI as we continue to grow. And that, my friends, is the end.

Michael, I mean, if I may just jump back in here. [Operator Instructions]. But just while the team take a few moments to review those questions that were 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 your investment dashboard. Michael, Ami, we obviously received a number of pre-submitted questions ahead of today's event. And as you can see in the Q&A tab there, we've also received a number of questions during your presentation this afternoon itself. So thank you, everyone, on the call for taking the time to submit their questions. And Michael, Ami, if I could just hand back to you to respond to those questions where it's appropriate to do so. And then I'll pick up from you at the end.

Okay. So one question for you, Mike, which is, when we take the revenue and profits coming from COVID and we stripped them out from the core business can the core business still manage double-digit growth in the coming quarters? Thank you and great work.

Okay. I can't see why well, not double-digit. We've never actually said double -- is that double digit growth?

The question is double digit.

We've never actually said that. What our target is ply single-digit growth. We've had a great sort of 2- to 3-year ride with the COVID products, but I don't think it's going to be double-digit growth. We never -- as you said that on the outset. So it's always going to be -- my target has always been high single-digit growth. If you look at some of the businesses, they're in line with us, but not double-digit growth on organic maybe with, I'm sure, it will be with acquisitions. But if you just strip out the acquisitions, it's high single digit is my target.

Okay. You've acquired a lot of freehold property with your recent acquisitions. Are you intending to sell and lease back. I'd like to see you carrying on shopping for new businesses as they go and sell without necessarily maxing out on the accordion. I'll answer that one. But we have acquired three free holes. In terms of -- there's no current intention to do a sale and leaseback. I understand the question. Obviously, if you do that, you do incur them in the P&L charge, albeit it will be directly in operating. But yes, we will consider this in the next year or two as well. So not currently, but maybe in the future.

Yes. Can I just expand on that, Ami, as well? When we buy the properties, they -- we actually put a nominal rent charge through on the valuation as well. So we've actually got a true reflection of what a renting property would be when we look at the goodwill valuation. So we do build that into our valuation. I just wanted to make that to people. So we don't if the property and say it's our property, there has to be a rental charge in there as well because at the end of the day, we need a yield on that like anybody else.

Are there any decisions made to divert any manufacturing from any divisions to move away from China to a different region? If so, where would work better. Thank you. To move away from China I've moved to China, I think, is what the question means.

No.

Don't know. No, nice and simple. Easy one, are you pursuing any U.S. deals?

Yes.

Okay. In terms of acquisitions, how is the pipeline looking? And second, with rates rising I could imagine that we would start to see less leverage buyouts. With that mind, do you think you'll get less competition from PE firms doing the bidding process?

We've only completed with PE on one occasion, and that was with Chell. That's what we were told here involved. We never do -- I don't know our business is too small or other outside their scope, but we never see that -- it is a good question, but we never compete with them.

This one I will answer, how much leverage is management comfortable with utilizing on a debt-to-equity basis. I think the question is on what's our balance sheet sort of targets? We're at 1x net debt to EBITDA. And I think the Board is comfortable with 1 to 1.5x currently in terms of the leverage. So clearly, our borrowing capacity to get us to 1.5x is probably higher than we're currently using. But yes, 1 to 1.5x is our sort of comfort level. Okay. Could you give some greater insights into customer concentration? How much do the top 5 customers account for with the group? And how has this changed over the last 3 years? Does any single customer account for a single amount of a subsidiary company sales over 25%? And how does management view this concentration? But we've got one customer, which we talked about extensively in this presentation, which is a very high percentage of the whole group, let alone any one subsidiary, the Atik Camera contracts, and that is very high concentration. And -- but we've been very open and transparent on the amount and that's unwinding over the current year, and we've reinvested some of that cash flows from that in buying new companies to fill that gap. In terms of the rest of the customers, well, they're not that significant in the scheme of things. You're talking max probably 4% to 5% for 1 customer. I would say the top 5, excluding the really big one, you're talking barely into double digits. So we're quite well diversified with a view to customers, if you exclude the one big contract that we've been very transparent about. So in terms of -- so this is an interesting one. Organic revenue growth of 3.8% looks low, especially with the current inflation situation. What's your expectation for future revenue growth in real terms. I guess single digits is what we said, Mike, isn't that?

Yes. High single dug that has always been a target for us. But like I said, with COVID, we had sort of three good companies. We had the Chinese PCRs by safety covenants with Monmouth. Right at the outset, of COVID hits, NPV with the event flow meters subsequent to ventilate us. We're getting back to some normality now. So it's difficult to actually forecast where we're going to go because we've had such a good ride for 3 years, but the target always has been high single-digit growth for us.

Okay. Both Progressive and FinCap showed declining post-tax ROE in '23 and '24. Do you agree with that outlook? And if so, why did you expected to decline, and I'll answer that one. I think what you're seeing is that we're working out the Atik contract in this year and next year. Tax rates are moving upwards in the U.K. next year, and I think there's some reflection on that. And we have a higher level of debt, and you've got a full year impact in '23 and a partial year impact in '24 hence, the sort of EPS type movements that you're seeing in the broker notes. Okay. Mike, why has the market reacted poorly to today's results down over 9% before this presentation. What has been misunderstood in the market in your opinion?

Do you want me to answer that?

Yes.

Yes, I'll answer it and then you can come in with some proper comments. To take the choice, I don't look at the financial markets at all, I don't even look at the share price. So what in capital for today. I don't know. I'm not interested in the financial markets. My job is to create shareholder value, and I love what I do. But to me, the financial markets, I'm not interested in it. So I don't know. Ami, may do, I don't.

Well, I mean, it's possibly because of the working capital movements. Although some of the working capital units have been quite well flagged in respect of the increase in the unwind of the Atik down payments. So that's been well flagged cash wise. I imagine that the inventory buildup is probably surprising, but we're not unusual when it comes to most manufacturing companies having component shortages and having to manage it through inventory buildup, but it's likely to be -- it's not likely to go up any further, and we should be back to normal cash in 2024 once we've worked through the unwind of the Atik customer upfront payments. Okay. All right. What else we got? Okay. So let's go to a controversy one. For a company growing as strongly as SDI, I'm a little surprised that our directors don't have a larger shareholding to demonstrate confidence in future growth. would you like to comment, please?

Me?

Yes. Well, first of all, I'll start with this one for some -- for us. A few of us have just joined, so -- but -- so I've got a small holding and he"s just starting, and we obviously have options that will invest in future years. So we're quite new to the Board. And typically, NEDs don't have a huge shareholding, although some of the ones here do. Mike?

Yes. I think we're going to answer that. And the next question, Ami, about why almost stopped. I'll do all in one. First of all, as I mentioned before, I'm not really interested in the financial markets. I don't understand them. I think my job is, which I enjoy as MD or CEO of the group, is to create shareholder value for you guys, which is in hit there today as shareholders. I sold it because there was a number of our employees and ex-employees we're going to sell stock. My job is to speak to you analysts or institutional investors. There was demand for shares. And we agree -- I think it was about 3/4 million in shares with FinCap sold. And at the last minute, our employees and ex-employees backed out because the share price wasn't high enough for them. So I didn't mind I sold the stock. What have we done with it? Just look it in the bank, give some to my kids, so they can go on the housing ladder. I'm not that overconcerned about the money side. If I had 5 shares in it, I don't understand -- I'm not interested in the stock market. So for me, I think I do, hopefully, do a reasonable job for you guys as and to me are not motivated by having lots of shares in any business where I've said I don't follow the market, and I'm just being honest with you, I just have to be honest with the people at Mello and all the institutions where we've been going on today.

Okay. Do you expect to be able to get the gross margin of your acquired companies up to your existing businesses?

That's a good target, yes is the answer. I think we need to.

Yes, I think so. We will work to do that. I'll answer the next one. In the next 1 to 2 quarters, do you expect inventories to go down? The answer is probably not. We will -- some of it will because we will ship out the cameras on the Atik contract in the next month. So there will be some decline, but there will still be an increase likely in inventories by the period end. It just may not be as high as GBP 2 million, but there will be an increase at the full calendar year-end. Okay. I think there might be a comment. I can't see any others. Well?

I've got one here. This is a real problem from Patrick. He had done some real good research. He has seen a photo of a new CNC machine delivered in Atik, Lisbon, which is core. So what we're actually going to do is, yes, you're right. It is outsourced currently. But what we want to do is, first of all, is usually purely for developing new cameras. It could be going forward that we use in production. But initially, it's just developed cameras. So what we've have done is we've got a really sort of a quite a big factory or facility just outside Lisbon, Portugal, Santa area. We took the top floor, and it's a nice climate and clean room environment. Downstairs is just pure storage and what we decided to do is to buy a CNC machine and just test it because it is experiencing developing new products or casing. So what we actually do as you won over the CNC machine, you get a block of aluminum. What we're doing is drilling out, make a casing. So lot of waste there, which is all recycled anyway. But a very good spot in Portugal.

What is the largest acquisition you'd consider, consideration wise? And how would you finance it? That's controversial, isn't it?

Yes, I can say about it. It's something we've always said before, as long as it's not a reverse. At the end of the day, I think Fraser was a big one for us. That was over GBP 13 million. So our debt -- what's our debt? Is it GBP 19 million, is it Ami?

Yes, net debt is about GBP 15 million.

GBP 15 million. Okay. Yes, it really sort of took the money out of piggy bank for us, but I think we have to look at it on a case by case basis. When we actually do due diligence, it's an 18-month process, and we go through everything. So we have to really keep the boxes what worries more than anything because you see a lot of people who do our M&A by big deal and copy though. The biggest one is really had to be in autonomy, which has gone through the court. So we have to make sure it ticks all our boxes because the problem is we don't make a mess of a big acquisition then affects you guys to shareholders, and that's what we don't want to do.

Okay. I think this is the final one because I can't see anything more. What is the percentage of Atik sales that are actually COVID related? And can you also talk about the nature of recurring revenue in our business? I presume that means Atik and the margins that come with it. So the percentage of Atik sales, which are actually COVID related with the PCR contract is, which is extremely high is what I will tell you, percentage-wise. Can you talk about the nature of the recurring revenue in our business and the margins that come with it?

Do you want me to answer that?

Yes, why don't you have a go?

Okay. Well, we have got 14 businesses. And we do realize recurring revenue stream. I don't know what the figures are, but if we go through the subsidiaries Sentek, they make sensors, which really is a recovery in revenue stream, it's a consumer item. If you look at Astles, as we've said through the presentation, 50% of that revenue is service again, recurred revenue stream. We have service in same labs. We have a service in Safelabs, we have a service in Monmouth and we have service in LTE. So they're the major areas. And also we have service as well in Applied Thermal Control. So they're the main ones coming through. As I look at the diagram see if there's any other recurring revenues streams for us. All right. We go -- oh Graticules. They make Graticules in Graticules a lot of that is recurring revenue stream as well. That's it really. So I think it's about 20% of our revenue is recurring revenue stream works out roughly. And that is -- and I actually could include service on that.

Okay. I think there's one more actually that I would like to wrap up with, are there any specific goals that you plan to reach within 5 years, for instance, in terms of growth efficiency ratios, business quality and position? And then as a final financial one, which is somewhat around GBP 286 million labeled cost of development. Does this item express the overall R&D spending for the whole group? On that one? Do you an answer the first one. I'll answer that last one, which is, no, it's not the overall R&D for the whole group. It's just those that are specifically intangible assets, which have a recurring revenue stream, which we can reliably and certainly ascertain to that spend. so that the accounting rules are very specific about what you can capitalize. It isn't that all of the R&D.

No.

And over to you for the other question, if there any specific goals for the next 5 years?

It's hard to actually forecast looking at the next 12 months in this strange world of uncertainty. But I think...

Yes, I think single-digit, high single-digit growth, I think, is probably.

It is. But I think what -- I think we're going to be -- I mean, we've got a lot farther with it. Now we've actually started to introduce this actually days. And also, I think one area we've got to do is going around the subs and Ami, do you expand on that, which you'll set up?

Yes. So in terms of going around the subs, we are going to spend more time on regular meetings with them to discuss strategic objectives starting that at the beginning of '23. And the strategic objectives have come from our strategic meetings. So we're linking our regular meetings in terms of business management. So we will do that in the next year. And there will also be more stuff on ESG. We'll be working on ESG, and that will be a high priority for us in the next 5 years, it's only the next year for sure. So you'll see us talking about our impact on the environment. So that's a high priority.

We've got 9 minutes. I look we got another one here. And this is on the -- from Jonathan about the Atik ChemiMOS camera. So this is a new area for us that can be lost. So what we've actually got is Atik Camera -- the majority of the cameras the CCD sensor-based cameras. We sold to the PCR manufacturers, when we take about cameras were developed by sort of Steve Chambers and Rui Tripa many years ago. So we've got a new R&D team and what we're doing is moving out to the CMOS center. So just like your mobile phone or your digital camera, it has a CMOS sensor. So what we're trying to do is develop these cameras using a single sensor. So it's a completely different type of technology. So we've got developed, you've actually seen it on the website and what this does is going into Gel Documentation Systems. So what we're doing is taking a picture -- additional picture of it. It's to do with protein, analyzing proteins and DNA. So it started in the early days with Atik Cameras selling to Synoptics. There's Syngene division, which is Gel Documentation Systems. And then we've actually been selling these old cap well, older cameras, the CCD cameras to another manufacturer of Gel Doc. So what we're trying to do with this ChemiMOS is to be sort of world leader and to try to sell it to other Gel documentation manufacturers. Now the top ones are the U.S., which is Thermo Fisher, Bio-Rad, Protein Science and also Azure. So they're the major Gel documentation manufacturers, and then you've got one called Viva, which is in Europe. So that's what we're trying to do with that. So that's a new technology coming through. And this is based on a recent suite coming through. So I think you're fully up to speed on what we're trying to do with Atik.

Okay. I think that answers one from Uni who says, can you talk about future Atik opportunities, I think you just did. I saw Atik was expanding greatly into other industries, how big can that be?

If you call really, I think the swap trying to do at the moment. And I'm sure that will come through. We won't go through the budget exercise, which is going to be in the next couple of months with -- and also the Atik Cameras and also through our structured setting.

So following on from what you just said, I think -- okay -- so hold up, how frequently are we currently meeting our subsidiaries? And how much are you going to increase this to think we will we go up fairly frequently. You do certainly don't you looking at that.

Yes, well -- obviously than probably. Well, like I said every 6 weeks, I'll go around. So I'm seeing them 6, 7 times a year in the U.K., as I said. And then on quarterly with the overseas subs. So I'm always out on the road, so I'm out on the road probably 3 or 4 days a week.

And for me, having been here only 4 months, I've visited each place once and I will increase that to -- we'll do it every quarter for sure.

Then we've got Jonathan the financial as well.

He regularly visits as well. So we're regularly going out. We're just going to formalize it a little bit more, and it will be involved me and Mike. And I've got a question interesting one. I mean delighted to see you're looking for a new NED. Have you met any suitable female candidates perhaps.

Yes.

Yes, it's answer to that. And okay, I think we're all right, if it isn't because of having a substantial stake at SDI, are you incentivized staying at the group, to remain at the group?

Who? Me?

Yes. I think...

That's all right.

And also we have -- we do have incentivization to stay. If you look at the back of the presentation, you'll see we have long-term incentive plans in place for both myself and Mike. We do have options, some of which are quite valuable to Mike. So we are incentivized and their performance target related as well.

Yes. But money is not an incentive for me to tell you the truth. As we meet Ken Ford on probably unusual base, it doesn't bother. I like my job and I like what I do. So I'm not that bothered about sort of these type of incentives. We've got the implies good. But for me personal, I haven't got a high standard of living. I don't drive any big expensive cars. So I'm not that bothered. I do my job.

I think that's it, I think that's it.

Yes.

I think, that's it.

Michael, Ami, if I may just jump back in there. Thank you very much indeed for being so generous of your time and addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available for you to review and add any additional response, of course, where it's appropriate to do so. Michael, perhaps before redirecting those on the call to provide your their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Okay. I think we have been here for sort of 10 years. I'm pretty blunt. And truthful on what to say. So I hope I've answered all your questions. I've got nothing else to say at from. I hope you have a very nice Christmas and a prosperous new year. In these difficult times, I think to be a difficult sort of 12 to 18 months going forward. And hopefully, we can make some success during this period.

Michael, that's great. Ami as well. Thank you, once again for updated 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 that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SDI Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.

Bye.