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

Good afternoon, and welcome to the SDI Group Plc Final Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself. However, the company will review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to put the following poll. I'd now like to hand you over to Michael Creedon, CEO. Good afternoon to you, sir.

I just want to do a quick intro really. I've been here some years now, probably 10 or 11 years, and we're in a different situation this year to other years. So in the last 8 years, we've had a rapid growth within the group through organic growth and M&A. The exponential growth was due to sales from COVID, and this has now come to an end. We're now on a level playing field with other science and technology companies. This year, we had a few stumbling blocks on the road, which Ami and I will explain during the course of our presentation. But our business model still remains strong for organic growth and growth for M&A. So if we turn over to Page 4. Okay. I'll just do a quick intro on this. So Ami has been with the company for about 12 months now, just over 12 months, and we've also appointed 2 additional directors. Ami has only been here for sort of 12 months, I thought I'll throw this over to Ami to introduce himself, but also extend that to the 2 nonexecutive directors, Andrew Hosty, and Louise Early, a new onboard for us. Over to you then, Ami.

Thanks, Mike. Right, about me. I introduced myself at the half year. But for those of you who weren't on that call, I'll introduce myself again. As Mike said, I joined almost exactly 1 year ago in August 2022, and I spent a large part of my career at Ultra Electronics, which was a FTSE 250 aerospace and defense company. It was a decentralized manufacturing group with a small head office. And I was part of the team which embarked on a buy-and-bill strategy in the early 2000s. I'm not the only new director there, as Mike said, we welcomed Andrew Husky to the Board in August of 2022 as well. He's a Nonexecutive Director on multiple boards, as you can see from his profile. He was the Chief Operating Officer of Morgan Advanced Materials, a FTSE 250 decentralized manufacturing group, with a small head office. And he was on their Board, the Plc Board, from 2010 to 2016, and he's an engineer by background. We also welcome Louise Early to the Board in February of this year. She's an executive with the Halma subsidiary of NavTech Radar and also sits on the Board of SENSIT Technologies, which is another Halma subsidiary. She's a marketing and commercial executive, and she started her career in engineering. Back to you, Mike.

Then next page, Page 5. Group overview. So the strength of our business model hasn't really changed over the years. It's due to -- knew to have covered autonomous business unit, but the one for those synergies is actually coming through and we'll see this through the presentation, early stages. And as we acquire additional complementary businesses where you have to enhance the collaboration between the businesses. The second point is we -- all acquired businesses must and says it must be profitable and cash generative. We don't rely on a single sector of regional trading. That's why we actually did very well during the 2.5-year period of COVID. And we acquired businesses and invest in growth. And I'll give you some examples of that as we go through the presentation. And you've seen on the diagram on the right, many times over the years that it's got larger with the additional acquisitions we've got. But also in the road shows we've had in the last few days, a lot of people have actually said to us about the sector split. It's very difficult for them to get an analysis of that. So Ami, do you want to expand on that? Because you were talking to these investors about this split going forward, it will be a question on it anyway.

Yes. I mean, historically, we've been segmented as Digital Imaging and Sensors & Controls. And it's not inconceivable that we'll reconsider that sort of segment split going forward. We haven't actually confirmed that internally yet, but it's likely that we will segment the Sensors & Controls division into lab products and industrial products. So watch this space. It's likely to happen in FY '24 because most recent acquisitions have all gone into the Sensors & Controls division. So just warning you all that this is likely to happen at some point in the near future.

Just the last point before we go onto the next slide. Throughout this presentation, we'll mention collaboration and synergies, which are new to the group, as already mentioned. As a starter, we've seen a collaboration in, as Ami has just meant in the lab group, which consists of Safelab, LTE Scientific, Monmouth Scientific, Synoptics and Applied Thermal Control, but I'll give you further details as we sort of get through this presentation. So we'll go on to the next page, which is a new slide for us, really. Sorry, gone the wrong way. A new slide, it's U.K. and World presence. So it just shows where all our sites are around the U.K. and the world. So we currently have 16 sites in the U.K. and 4 overseas; in Lisbon, Dresden, Frederic near Washington D.C. and in Shanghai. So just sort of discuss very quickly the 2 new ones, which are Dresden and Shanghai, the new additions to the group and that was via Fraser Anti-Static Techniques. The Dresden one was purely because we -- when we came out of Europe, they needed a German subsidiary so that we could invoice of the German customers. So this was set up, and it's really such a sort of box number, all the admin, et cetera, is actually carried out in the U.K. and it works very well, and our customers and we're very happy with that. Of interest to me really is the subsidiary in China. It was a distributor there now for a number of years. They want a piece of the action so they sent this subsidiary, [ George Fan ], the General Manager, he owns 60% of that business. We own 70% of that business. I suppose to be going over there this week to do a presentation because of the delays in the accounts of that sort of can't. And what he would like to do is for me to present all the other 13 subsidiaries and their products because he thinks he would be able to sell some of the products, if not, help us find distributors in China. We do sell into China, but it will be an interesting exercise to see whether he can actually broaden the depth of our sales going forward. So I'll hand over to Ami now and then he can go through the numbers with you.

Thank you, Mike. So the first slide. This slide illustrates the global nature of SDI today and gives you a snapshot of our current scale. Revenues at GBP 67 million, GBP 68 million in FY '23 and about half our business is international now by destination. We have over 500 employees and as Mike has just said, the 20 locations. So moving on to the results. This slide shows the highlights for the financial year. You'll have seen this earlier in the week, so I won't spend too long on this particular slide. Strong revenue growth of 36%, driven by acquisitions and the significant Atik cameras contract for cameras that go into PCR machines has come to an end in FY '23. And the organic growth that you can see on this slide excludes this. All of the adjusted measures, including adjusted operating profit, shows some growth, and we generated cash of around GBP 11 million over the year. We booked a noncash impairment of GBP 3.4 million net of deferred tax against Monmouth Uniform goodwill and intangibles. This is one accounting entry that has impacted all of our reported results, and I'll talk about this later on. The underlying tax rate has risen this year due to deferred tax adjustments from the prior year. This slide shows some extracts from the income statement. The headlines from this slide are total sales growth was GBP 17.9 million, of which GBP 17.5 million came from acquisitions. The next slide will be a revenue bridge, which will illustrate the impact of the end of the Atik PCR contracts on our organic growth. Gross margins included a mix effect with our acquisitions having slightly lower gross margins on materials in our existing businesses. Excluding this, gross margin increased on a like-for-like basis. We managed to pass on most of our cost increases to our customers. Adjusted operating profit grew by 6% to GBP 12.8 million and due to higher interest rates and increased debt levels over the second half of the year, adjusted PBT increased by just under 1% to GBP 11.8 million. The impact of the GBP 3.5 million noncash impairment charge on our reported results is visible here. As a result of this, reported PBT and reported our profit after tax show reductions. The impairment is not deductible for tax purposes. So the fully diluted EPS is particularly impacted. Adjusted diluted EPS grew by just under 4% to 9.02p, with the FY '23 effective tax rate increasing to 20.7%, largely due to the deferred tax. As a side note, it's worth mentioning that the group's FY '23 return on average capital employed using adjusted operating profit and after adjusting for the impairment is 27.6%. We do now have about GBP 5 million worth of properties, which impact upon this percentage. This slide shows show the revenues have moved compared to the equivalent period last year. As I mentioned already, acquisitions contributed GBP 17.5 million in revenues. GBP 11.2 million of this came from FY '23 acquisitions, and GBP 6.3 million from FY '22 acquisitions up until the anniversary of acquisition date. The impact of the one-off Atik business for cameras that go into PCR machines as shown here. As we've said for some time, Atik's COVID-related business would come into an end, and it has this financial year with the last delivery in February. Revenues for this business reduced from GBP 10.9 million last year to GBP 8.5 million this financial year, a reduction of GBP 2.4 million. You can see this on the right-hand side. Excluding this, organic growth was GBP 2.8 million, 7.2% in absolute terms and 6.4% on a constant currency basis. I'll now spend a few minutes talking about more Monmouth. Monmouth was acquired in December 2020 for GBP 6.1 million net of cash during the pandemic. At that time, it sold a large volume of biological safety cabinets, which drove it's preacquisition profits. This sales mix has reverted to a more normal mix, which requires more labor effort for an increased number of installations. Furthermore, Monmouth has moved into a new purpose-built facility in April '22 and the cost of which were higher than anticipated at the time of acquisition. We are annually required to do an accounting exercise, checking the value of goodwill and intangibles is still supported by future cash flows. In the higher interest rate environment, our weighted average cost of capital has increased, and the forecast for Monmouth and Uniform become more operated. This has resulted in an impairment of GBP 3.5 million but it does not impact upon the cash flow of the group. It's important to note that Monmouth has remained profitable since acquisition and it's forecast to remain profitable in future years. It's also worth noting that if we had accounted for leases under the old way, i.e., before IFRS 16, the impairment would have been about GBP 1 million lower. Business has a new management team, and we are hopeful that Monmouth's performance will improve to the levels that determined the original goodwill valuation. This slide shows the performance of our Digital Imaging segment. The Digital Imaging segment comprises 3 businesses, Atik Cameras, Synoptics and Graticules Optics. All our other businesses are in the Sensors segment. And I talked earlier about the Atik PCR cameras revenues reducing by GBP 2.4 million. If you exclude this, the Digital Imaging segment grew by 16.4%. If you include the PCR revenue movements, organically, the segment declined by 3%. Encouragingly, Atik Cameras grew by 37% organically outside of the COVID-related sales. This slide illustrates the performance of the Sensors & Controls segment. All recent acquisitions have joined the Sensors segment, and as such, GBP 17.5 million of this segment's growth have come from acquisitions. The segment grew organically by 3.8% outside of this. Looking at trading over the period, Sentek, Chell and Applied Thermal Controls all had very strong trading years. Sentek experienced strong demand for it's chemical sensors. Chell produced a smart meter calibration device for a large OEM and Applied Thermal experienced very strong demand for it's chiller products. Both LTE and FAST joined the group this year and both have been earnings enhancing to the group, and we're pleased with the progress so far. Turning to cash. Working capital increased by GBP 4 million over the year. Inventories increased by GBP 2.9 million. Of this, GBP 2.1 million was used to mitigate against component shortages. A further GBP 800,000 related to one business, Scientific Vacuum Services. We spent much of the year building a sputtering machine for an OEM customer. Customer advances reduced by GBP 3.5 million due to GBP 2.7 million worth of COVID contract-related cash flow at Atik, which unwound in the period and GBP 800,000 from a pre-acquisition advance of LTE, which also unwound. Other working capital reduced by GBP 2.5 million. Cash generated by operations was therefore GBP 10.9 million this year. Interest payments increased to GBP 1 million as a result of the higher debt levels over the second half as well as increasing interest rates. SDI moved into the large company tax installment payment scheme this year. We also paid GBP 400,000 of tax in relating to prior period acquisitions. This resulted in the cash tax increasing to GBP 2.1 million. Most of our acquisition consideration was funded from our bank facilities. You can see this more clearly on the next slide. This slide shows the working capital movements I've spoken about and the GBP 21.1 million in acquisition costs. These were funded by an additional GBP 15 million in bank borrowings and GBP 3 million of this -- of these borrowings have been repaid by the year-end. Some comments now on our financing position. The revolving credit bank facility was extended by a year to expire at the beginning of November 2025. We can extend by another year at HSBC's discretion. At the end of the period, the net debt-to-EBITDA covenant ratio was 0.9x, comfortably inside the ceiling provided by our bank facility. We have GBP 9 million of headroom plus the GBP 5 million accordion option available to us again at HSBC's discretion. The acquisition of LTE Scientific cost GBP 2.8 million net of cash required, and this acquisition cost included the property, which is worth GBP 1.7 million. Fraser Anti-Static Techniques required consideration of GBP 12.8 million net of cash required. This included FAST properties for GBP 1.8 million. A further GBP 2.4 million was paid to the Safelab System sellers to close that particular transaction. And at the end of the period, we had GBP 1 million in deferred consideration. This relates to the acquisition of SVS and will be assessed over FY '24. That's all for me. Over to you, Mike.

Got it. Cool. So it's me now so I want to take you through the last pages of the presentation. So if you look at LTE, we discussed this. I think it was at the interim stage. It's a pretty similar slide, but I thought I would be -- have an opportunity to give you an update of where we're at and what LTE is doing. So it was acquired, as it said on the account in August 2022. It's a manufacturer of autoclave sterilizers, environmental rooms, endoscope storage cabinets and laboratory ovens. This year, the main sort of source of revenue and profitability from this business has been the environmental rooms. It's been a lucrative source of sales revenue for us. We acquired this business with a 3-year average PBT of about GBP 300,000 a year. And since acquisition, we reported annualized PBT of GBP 600,000. So it's been a fantastic acquisition for us. I think there were some question marks about it in the early days but to me, it's a very good business in a way it's profits and revenue, but I'll explain some more as we go through the presentation. And we're pleased with the managing team as they are focused on growing the business. So we've actually got it's John Lees as the MD and Zoe Turner, she's the Production Director, she is a newbie on the block. Also, I'd like to sort of highlight [indiscernible] sort of collaboration and synergies around the group as people recommended there. And that is a sort of John Lees is the MD of LTE Scientific and [indiscernible]. So these are new guys on the block, and they're aiming at driving growth by collaborating with the companies in the group. And these include, as I mentioned before, Monmouth Scientific, Synoptics and Applied Thermal Control. And I keep on saying, this is a new territory for the group. But as we -- because we always actually stated right at the start, what we look for, and that's autonomous business units or federated structure, [indiscernible] thing, but we still want that in place but what we can think we can do is actually to gain additional revenues through total lab solution packages. So I think it's an interesting exercise -- so where we've got our first face-to-face meeting with the group on the 2nd October, which is pretty exciting, I think. The next area really is the acquisition -- when we acquired the acquisition, we had 44,000 square feet of freehold property. You can see on the diagram on the bottom right-hand corner. It was middle of the housing estate in Greenfield, which is on the outskirt to the [ Peak ] District, very pushy area. We're the only industrial unit within the town. The area with our size is the Tescos and the Coastal Road. That's about it. So myself and the management team about 3 weeks ago, I think it was all there about, that was John and Zoe. We discussed the future for LTE and it's facilities. This building is pretty tight and it's expensive to run. It costs about GBP 200,000 in electricity bills. So -- and when you compare it against the other 13 businesses, all 15 sites, it's bloody expensive. So what we're actually doing is we're currently reviewing whether we actually move from a smaller unit. So we're probably looking at 25,000 to 30,000 square feet building because there is a lot of old engineering units or plant machinery written down. We don't really use anymore and it will provide a better and probably more efficient working conditions. This is early stages at discussion. And what will we do with the building? Well, we bought it with a valuation of GBP 1.6 million. It's still there or thereabouts. And what we could probably do is Andrew hosted and he did mention about change of use. So we're actually looking at change of use and also planning, so it could be sold for housing. This is, like I said, in the early stages of the group, and that's -- for us, that we'll be extracting cash from these sort of assets. And then we invest it in projects which will give a higher return than the yield on the property. As an interesting sort of fact outside of time line is when we actually looking to acquire LTE, so was another body and all they wanted was a building. They weren't too concerned about the business, which is the building, and to do the same as we're actually intending to do with the building. So if we go on to the next slide, then we have a look. Sorry, there we go. Cool. So same thing with this one, Fraser. We discussed this at the interim stages same on slide, but again, let's give you a little bit of an update whether we're at with it for 7 or 8 months on. Anyway, we acquired that in October 2022. This is the most expensive deal we've had and you can actually see how big the debt is. Well, that is mainly due to this business here. It's a leading manufacturer of antistatic products, and it's -- with a variety of businesses, as it's listed here, but just to highlight sort of 3, the main use for this business are plastics, packaging and printing and that produces a lot of static electricity. So we actually got an antistatic product, which is bolted onto the machinery to drive away the antistatic. It operates again in the freehold site in the middle of Bampton in Devon, and it's got subsidiaries in Dresden, Shanghai. This is a sort of a strange concept when the housing estate was built. Housing estate was built and what they actually wanted to do was to bring in some industrial units into the middle of the site. I don't know why but prior to us the core of the business, Bob Fraser, actually bought all the industrial units. So I think in an early presentation, you actually saw the buildings. I think it was -- I want to get the starter units, but that didn't happen and we've got the whole site. As with LTE Scientific, I'm not in favor acquiring properties. As it's a lot of far level return that we should be able to get on our investment, looking at investing in our current and future businesses. But we don't want it to be a deal breaker. So this is an action of Ami and I have got that we need to review going forward. Next page is operations and synergy on this page. So what we've got here is -- oh no, I want you to back track to tell you the truth. I just bought something out, I wanted to mention as well. And that was -- it's in there about sort of James Cater. Yes, Sadly, Bruce [ Clovia ], the MD, decided to retire for personal reasons a few months ago, which is all really sad, he was really a great guy. I really got on well with it. But he did provide us with adequate notice, I think it was about 6 months notice just to find a replacement. So we found James Cater. His background is completely different to Bruce's. James is on the sales and marketing front and this differs to Bruce. It was really involved in production, general management, that sort of thing. So there's a gap between the 2 [ ralphs ] but there was no worries there because they've actually got really skilled resources within that to support James on a day-to-day basis. So really, it's somebody who's going to not able to look at it more on the strategic role going forward. So we actually did plan a tank to all the institutions was when we're recruiting James, we decided that the best -- the best way forward for this new person was James to recruit in, not for us. And then you can actually bringing his own sort of person in this role. And as I mentioned earlier, I'm still keen that the businesses take advantage of our sales and marketing resource in China and use Fraser showing that as available to sell their products. And now let's get on to the operations. Sorry about that. I just missed it. Operations. So what we've actually got there is I'd like to give you sort of a few examples but some of the interesting projects we've actually got or undertaken in the group. It's 2 really, so not too broad on that. So Scientific Vacuum Services, that's a niche company, and designs and manufactures high-end [indiscernible] definition equipment. What the hell is that? Well, what it is, is deposits in a thin film of material on a substrate. Within this case, as Ami already mentioned, it's a razor blade. So this machine will coat 416,000 razor blades in about 20 minutes. Cost to the customer GBP 1.8 million plus a sprayer part pack, which is about GBP 200,000. SVS or scientific vacuum services, I sold a number of these machines over the years, the first one, I think, starts at 90,000 and then it went to about 250,000 razorblades in about 20 to 30 minutes. So this is one hell of a beast. And the machinery has been factory except it's tested. So there's no worries on that score. And the customer is absolutely overwhelmed with machinery. We were due to ship it some months ago. But what has actually happened with the customer is that they're pleased with the machinery that they're bringing their R&D department from America over to see it, from the U.K., and also hopefully, for the next customer, this was going to Mexico, by the way. And so it's delayed for a couple of months while they actually bring their -- the party of the customer overhead. Why? Because what it has to do is a fair old site machine is going to be stripped down and then shipped to Mexico, which is going to take a couple of months. So I'd rather see it work in our environment. And by the way, as already mentioned, there is another one totally due and there's an interest from the customer to actually replace some of the low sort of turnover ones at 90,000 and 200,000 units to be coated in the near future. The one to mention is Applied Thermal Control. That I felt sound for Robert, the MD there. It was a really hard time for them selling chillers. 2 industries that are in there in life sciences and engineering, as we all know, everything is shut down. But he's come out of it very strong and last year, he had record sales and profits, and this year was going really strong. One of the reason is because the U.S. is onboarding, i.e., it's bringing all the semiconductor manufacturing back into the U.S. from Asia. And these semiconductor plants, I think is Intel, they require cooling, and that's what we're doing. We're providing the chillers for the semiconductor plants. The next sort of category on this schedule is investments. What are we doing with our subs. Well, some examples of that is we've just bought a CNC machine for Atik Libon and that was short-term product development times. I think we've actually got one down for Chell as well in the near future. As it's a lot more cost efficient and time saving actually in your own CNC or your own machining in-house, then actually send in outside. We've discussed on a number of occasions over the year is the refurbishment of Graticules in Tunbridge old 1960s building. We've completely gutted the interior, and it's a really up-to-date modern chemical action facility. 2/3 of the products I've mentioned before, it's Graticules. So what we got there I think it's 5 Laminar Flow cabinets and a cleanroom. So it's all coming to an end in the next sort of couple of months. And there's -- and the good thing about it is they actually were right the way through the refurbishment is not exercise. It's a bit of hard work, but it's all coming to an end. Last one there is laser etch matching. I probably think it's quite boring about it. It's quite interesting. And that is the first one we bought was [indiscernible] Industries, then we did Graticules Optics and that was followed by Scientific Vacuum Systems. Let's give some examples of their use. So within [ PP ], it's precision engraving on glass. So within the flow meters, we're actually putting the ventilator to COVID. We're engraving on the side. It's like a test tube and that was used to be undertaken manually. So we've taken other way. And now it's all done through automation. Another example, which is very exciting is Scientific Vacuum Systems. So they've got a very expensive machine there. And what we're actually doing there is in engraving partner names on each component. And we had to do that for this machine we've just discussed, this butchering deposition machine rate. And they're very sophisticated machines. Also, what you can actually do with these machines is engrave a QR code, barcode as well. So when you take a part of, you can scan it and automate e-mail to us or to your supplier and then they can actually easily determine what the part is and then ship out part. So it's a good lead technology. Back on to the word of the day, synergies. I'm very enthusiastic about this. And what action are we seeing within this sort of slow. About October last year, we decided to put together a group marketing meeting. Marketing these days has changed fundamentally when offers to do this business. It was hard copy bound catalogs. These days, it's used in social media, which my daughter is involved in, so as using Twitter, LinkedIn there, et cetera. Different way of actually -- marketing completely different. What you're trying to do is to drag people to your website. So what we decided to do, first of all, we had a Zoom call last October. And then this year, a couple of months ago, we organized a meeting, face-to-face meeting in [indiscernible] Safelab. It went down very well. Talking at about 9 of the marketing people, all you kids there. I think it's most nervous that have been on a meeting, but it went very well. So what we're discussing is ChatGPT, as you've heard on the news, people are using that these days. We're using YouTube videos as well. I think one of the good ones these days for us is Atik cameras. All these are done in-house. So we don't use professional people to do it. And that's how YouTube works. I don't know what other exercises we've much got. I think they're the main ones. Yes, also as well, what we'll be discussing is especially with the land group, there's a big exhibition called [indiscernible] Munich to say, should we actually combine all the business units into one stand. There are many stands, it's just like when you go to the [indiscernible] specialist areas. But when I went last year, you got people like [ Anatech ], they're all under one roof. So it may be worthwhile looking at that going forward. The other area is a group tenders. This is what I've been harping about right way through the presentation. So what we have, as you can actually see, is an opportunity to tender for on Canary Wharf. There's a science lab just like [indiscernible] on the road from where I am today, being put up on Canary Wharf. I didn't realize this week, HSBC and a lot of the financial institutions are moving out Canary Wharf so they need to replace it with something. So I look at planning mission, I think, was in place a couple of weeks ago. And what actually happened, we've actually found out through Roger Guess of Safelab, who the building contractor is, which is [indiscernible] procurement director. I suppose it's who you know in this world. So what we actually did was put together this fly. You can actually see on this page with all the business units on that. He had a meeting, so he was chairing it, and we'll see where it goes. I think it's a couple of years why but it's something we can actually focus on. Now we've actually got 14 business units, 17 acquisitions. It's an area where, hopefully, we can actually also gain additional revenue streams. [indiscernible]. The last point is we've been running this for sort of 3 or 4 years now, is group strategy sessions. [indiscernible] you know Cambridge too. So we usually hire that out for 2 days. And what we're actually doing is just like Ami and either do this investor presentation to you chaps, these guys will do a presentation to all the subsidiary directors and senior managers, Marcelle, Ami, and the non-exec directors and then there's Q&A from the floor. It worked very well. We stopped it during COVID. It started again last year, and then we're going to go introduce it again. I think it's in November this year. It works very well. And like we said, the synergies work in some instances, but it's good when people get in a bar, have a drink and talk about business. A lot of founds have got a lot of knowledge about business and rolling businesses. So it's worthwhile people actually sitting down and listen to these guys. And then we flick on to the next page. What we got here? Yes. Growth drivers. You've seen this on many occasions on these presentations, so I won't spend too long on it. This remains unchanged. Organic growth, it's still going there -- we'll still getting the organic growth. We still expect organic growth to be well it's actually said here, organic growth to be 5% to 10%. I was like it to be in the high single digits. That's my aim. M&A no change really. We're still doing an average, probably 2 or 3 business of the year. The last one was Fraser in October, so we did 2 that year. I'm sure we'll do 2 or 3 in this financial year. And we acquired 17 businesses since February 2014. We've merged in a number of these businesses, and we've actually got 14 operating units. And we've got a very strong pipeline, and we've got a number of strong opportunities that I hope we will be able to crystallize in the short term for the group. And I'm afraid it is the last page of this presentation, summary and outlook. Just to sort of repeat what I said earlier on. It's been a challenging year in comparison to previous years. And I'm disappointed us enable like you said this for many years, probably this is a finance director, but now as the CEO, my personal goal was to deliver shareholder value, and it's difficult for me. So I'm actually quite disappointed this year. We still continue to sort of grow organically and through M&A. Trading for the first couple of months have been pretty good for us. We've got a strong pipeline of acquisitions that I feel pretty optimistic sort of going forward. I'm afraid that's it from me.

[Operator Instructions] As you can see, we received a number of questions throughout today's presentation, and we also received a number of presubmitted questions. And Ami, at this point, if I could just hand over to share the Q&A, that would be great, and then I'll pick up for you at the end.

Great. Okay. First question. Do SDI management look for high-growth opportunities amongst the existing SDI Group constituent companies? Is it not the case that there's a possibility that there is a better growth opportunity for the group amongst existing group than elsewhere? In other words, do organic growth is compete with acquisition opportunities for the free cash flow available to the group? The answer is -- Mike you're on mute. So the answer is that no, there's no competition here. We look at every opportunity on it on an individual merits. There's no competition in that way between acquisitions and existing group. And if there are opportunities to invest in existing companies, we will do that. And we have done to generate organic growth. So we look at each opportunity on an individual basis.

Yes, just a -- yes, yes, good point. There's sort of 2 areas where they have an opportunity to share for investment. That is one of the budget in stage and then what is the strategy stage. So we'll look at short term and medium term. And we've never sort of turn it away because they're the ones that are running those businesses and they know more about it than Ami and I. So it's never happened.

And that answers to the next question is always how do the SDI management a portion of reinvestment in existing group companies, as Mike said, it's through the budgeting process. We work through each investment proposal. Were you surprised at the market reaction when you announced at the end of the one-off pandemic-related orders given you had advised that there were one-offs? Mike?

Really true, I was all shocked on this aspect. Yes. I know in May, we actually said about the trading update. But this time around, I was very shocked, to tell you the truth. And also, we just -- Ami and I had a really busy time in the city and it wasn't negative. I actually understood what was actually going on with us. At the end of the day, we're still generating plenty of cash. It's just that through accounting standards, we have to take this write-down. But at the end of the day, we're still generating cash. The model hasn't changed. It's still buy and build. We invest for organic growth. So to me, it's been a good, strong business.

What are monthly metrics you look at for all subsidiaries? Well, I look at sales versus budget, wages versus budget, overheads versus budget. We look at that today, creditor days, stock-based level of stock, gross margins. So there's a multitude of things that Mike and I look at every month for each company in the group. Anything you got nothing to add there, Mike?

No, you said the list.

Yes. As you get bigger, is it becoming more difficult to find acquisitions that can be provide the returns that you've achieved in the past?

Not at the moment. I think the problem I've got at the moment is delays, as I actually said [indiscernible]. I think it's October was the last time we did a deal. I'm sure we should have done one, in my view, probably May time, but it's just drags out. You do the DD, you shake hands and then you hand it out to lawyers and what happens? It sits there in a box somewhere. So I'm still confident we're going to do sort of a few this year and we've got the cash there to do it. So I can't see any reason why we shouldn't. The multiples haven't changed at all. We're still looking at between 4 and 6 there on a goodwill. So I can't see any reason why not. Over to you, Ami.

Okay. As you no longer expect any more orders from the PCR OEM customer, how do you expect earnings and free cash flow to trend over the next several years? I know you've said that you aim for single-digit organic revenue growth. I'll answer this one. Yes, I'll answer this one. So yes, we do still consider single-digit organic growth. Earnings will continue to grow as a result. Clearly, interest rates are higher. So as long as we have debt and those interest charges will be a factor. And tax rate is increasing to 25% for everybody. So that is a factor for everyone. But earnings, we should increase free cash flow, the sort of working capital unwind that you saw this year will not happen again. It's not likely to. So cash flow -- free cash flow will improve over the next '24 and beyond. So yes, we do expect it to trend upwards. Will you consider share buybacks anytime soon? The answer is probably not the best use of our cash currently, I think, is to buy companies acquisitions and generate greater shareholder return. But buybacks clearly, we do consider them. But at this point, we have no plans to do so. When you look at large industrial conglomerates like [ Antech ] and Danaher that run a decentralized model while also implementing a system of operational excellence, do you envision SDI following that sort of playbook? That's a tricky one. I mean, part of the reason I'm here is help us grow really -- and obviously, I've been in larger companies, decentralized companies and some of the Board have as well alongside Mike. We all sort of see the growth path and we'll expand our headcount and all that sort of stuff in line with -- but it's that we at the right time for the organization. So we will develop our organizational structure as we go along, as we get bigger. Mike, anything to add there?

No. I just got a point on that. [indiscernible] support Ami on that. If you look at -- I think the classic model is Hammer. Like us in the 1980s and as they grew, are people doing 3 jobs for 1, then they have to increase the headcount in the structure. So I'm just concerned that you actually increased destructive before the revenue is coming stream, but we're not doing that anyway. So yes, I agree on the answer for Ami on that.

Ami, please help us understand better your thinking behind the company's acquisitions over the last 2 to 3 years. Some of them don't look cheap optically, i.e., high enterprise value EBIT multiples. I guess that's because you expect earnings to improve significantly near term. However, the Monmouth case makes one question the quality of these acquisitions. Rightfully, if you could share your thoughts on your acquisition criteria going forward.

Okay. Two parts to that. So first of all, the acquisitions I think what you need to do is either do for the Board, it is actually separate the cash -- total cash consideration. So what we're doing is, first of all, we split it into 2 or 3. So first of all, part 1 is goodwill, what we're paying for goodwill and that's usually a multiple of profits, profit before tax. We take a 3-year historical average. Sometimes it could be an earn-out, but it's also a very sure earn-out and multiply that by the multiple. It's 4x, 5x, or 6x, the highest we've ever paid was at Fraser at 5.8x. And if you go down further down, it was 5.5x, 5.6x safer, lowest was up 4x. So that's what we're paying. Then on top of that, we paid for net assets. We never paid for the cash. We hand the cash back for that but the problem is that in recent acquisitions, the net assets have been very high because we're buying property. And that's why it skews it somewhat. So in some instances, we don't -- you don't have to see that in the broker's note, but I'm actually said to the brokers. And this is what the people were discussing this week at the investor presentation. So it's two-fold for us. It's the amount of net assets and the goodwill. So it skews it. If you actually look at it, it's a total sum. We got Monmouth -- what have we got from Monmouth?

Quality of these acquisitions, if -- it just makes one question that?

Yes. I think Monmouth and people said what you thoughts on Monmouth. Well, we bought a 3-year historical. So it was making 500 for a couple of years and then it had a really bumpy year with COVID, made GBP 1.6 million, 3 average was [indiscernible], which was fair, but the stubble block was the properties. There are 6 or 7 properties constructed around Bridgewater. It already got planning -- they've already got planning for this property. And I think it just got out of hand on the fit out for it. Did we get it wrong with that? I think we got it wrong. We might probably got it wrong on a multiple of 5x. It could have been 4x to 4.5x. So the numbers aren't that big. But we -- we don't look at a crystal ball to say what's going to happen after COVID because at the end of the day, they were shipping 15,000 -- 10 to 15 biosafety cabinets out to hospitals, trust, et cetera. I need 1 or 2 service engineers commission. That model has changed now, which should be 2 or 3 and the variation of other products. So your overhead base goes up. So your service engineers -- you need more service engineers. One of the biggest problems we've got to go is finding service engineers. So we've actually got service departments in a lot of the businesses. One of the questions asked is, do we share those. A good example is LTE, scientific safe lab. And I just mentioned Monmouth, I've all got big engineering teams with them. Do we share it? I don't know. It's something we're talking about at the moment. So this is all part of this sort of collaboration we're talking about, so it's hot off the press roller.

Can you confirm whether you are seeing any changes in valuation expectations from vendors in the current market environment? Are they still -- are you still aiming to get 4x 6?

Yes. No, no change.

Okay. Next one. In the past, you've said that the target is to have mid high single-digit organic growth, '23 was lower even excluding one-off from Atik cameras, what are your current view on the organic growth going forward? But actually, it is -- if you exclude the Atik cameras revenues and the organic growth of 6.4%, which is within the sort of range that we talked about. So I think -- so we're quite happy that the year was actually within our line of what we expect. I'm not sure quite what you meant by this one. So this is a question about impairment and they're asking about headroom on the -- are there any other headroom issues on other companies. But if you -- can I guide you to Note 8 of the press release and that talks about headroom on other companies, it is there in the press release. You don't have to wait to the annual report to have a look at that. Next one is interesting one. Operating expenses, excluding impairment, are up an eye-watering 51% year-on-year versus '22, so a much larger increase in revenues up 36%. Yes, it is, but it includes acquisitions. So that's the bit about '22, from FY '22 and FY '23. That's all in there. You've got an annualized 12 months of '22 against the shorter stub period in the prior period and you got a half year or whatever for the acquisitions. But yes, they have gone up, no question, lots of reasons. Trade shows have restarted, traveling has restarted, audit fees are up. Salary inflation is there. We haven't been able to avoid it. We have put increases up on it for our payroll for our lower paid employees. So clearly, we were not mean to the sort of inflation out there. But yes, it has increased. And so no, your point is well made. Anything to add to that, Mike?

No, none at all.

Okay. Bank debt at GBP 16 million at the year-end. In the absence of further acquisitions, how fast do you expect that bank debt to be repaid? Circa 2, 2.5 years, is probably depending on how quick we can get the cash in circa 2 years, I would say. Is it possible to explain the impairment of GBP 3.5 million in relation to the profitability of those companies? I think you have done -- we made -- the cost of the -- the property cost was certainly about GBP 300,000 to GBP 400,000 higher than we anticipated, and that's -- but you bought out for multiple -- what was that, Mike?

5x.

It was 5x. So it's about a few hundred thousand of the profitability of those 2 companies, but it's still pretty profit. These are still profitable companies. Monmouth, their CGU is profitable. Will the increased interest rates influence your decision to fund acquisitions to your debt? In other words, is there a scenario where expected to pay off debt in the current environment?

Good question.

It's a good question. Clearly, the accretion on acquisitions is less with the higher interest rates. There's no doubt about that and you have a higher tax rate as well. But we don't buy businesses for 1 to 2 years. You buy them for 3 to 5 years beyond, and our model is to increase profitability of these companies. So I don't think we see any change but yes, there is a scenario where it's better to pay off debt. I'm not sure we're there yet. I don't think we are. And do you have anything to add, Mike?

No, not at all. That's what you've been saying that way through the sort of couple of years, last few days to most investors.

Is the new management team at Monmouth hired from within the company or from outside the SDI Group?

Great area on that one. For the Managing Director, Julian Mussett, he is ex, but would already include -- recruit him as a sales director on a short-term and big role. He's now a consultant. It didn't -- decided they didn't want to stay on for that long. He said around helping us, is a nice guy. And then Kim Locke, she is the Finance Director, but what she also does is operations. So what we've actually got within Monmouth now is a similar sort of management structure to all the other 13 subs as well. So you've got 1 or 2 directors and the senior managers before had an MD and 3 directors -- 3 very expensive directors. But we've actually sort of formed that back now and it seems to be working. And what we're actually trying to do with Julian, as it's new, is a game is a collaboration. So we've had a couple of subs, and these going down there really to look at fabrication at Uniform and they stopped it at Monmouth. And what they've actually found is they've got a fantastic sort of portfolio of products, which is ideal for overseas -- for the overseas market. But they've got quite a limited distributor base, but the likes of LTE, Applied Thermal Control and also Synoptics got a massive distributor base. So we're trying to sort of making sure he taps into that base. There's no point in invent in the world when it's already there. So that's what we're trying to do with it. So I want out a bit on lay on this, but I thought I'd cover it. That's okay.

How would you calculate the total addressable market for SDI? That's actually an impossible question at a group level because of our business model. We have 14 companies, most of whom are in different markets, different segments, other than lab products. Outside the lab products, you've got what each business has its own total addressable market, which is completely different independent of each other. So it's not a question with our business model that we can actually answer. How much of the revenues are recurring and nonrecurring in each division?

I'll work this out when you were talking.

Very good.

Cool, yes? I have more [indiscernible] and it's roughly what we thought about 20%, but I'll just highlight some areas. So virtually all the businesses actually self spares. But the service side, the book of the service I've already mentioned is LTE, Safelab, Monmouth, [indiscernible]. It usually 50% of their revenue was a service. I think it's gone back that way now with [indiscernible], they sell a bunch of spares I've just mentioned with the razor machine and Applied Thermal Control. So they're the ones who offer spares, which is about GBP 6 million. And then you [indiscernible] businesses, which is solely recurring revenue streams, which is Sentek, Sensors and Graticule and that is about GBP 7.5 million. So in sale about GBP 13.5 million looking 20%, 21% off the top of the [indiscernible] don't think. Thank you, Ami.

Very good. The next question is -- the question is the net debt and we referred to a GBP 13.3 million and the balance sheet shows a figure of GBP 22.7 million. Difference is lease liabilities. We don't classify lease liabilities as debt. In the same way, most banks don't include lease -- IFRS 16 lease liabilities within their debt calculation. So the bank -- our banks will look at net debt without lease liabilities. That's the difference. How do you reduce the risk from acquisitions failing? That's a very good question.

Don't look at me.

Due diligence really.

I think the one is Monmouth, but we didn't know that COVID was going to end. That's the biggest one. But we've had another problem that was issue that was with Thermal Exchange, but we rectify it. So for us, in my view, on it is when we look at acquisitions is to make sure that one, as Ami rightly said, it is DD, but not over extend is what we -- if we overextend and get too bigger acquisition, then we're in the line light, at least if we actually do a nice niche ones between GBP 0.5 million and GBP 1 million profit. At least you've got some bandwidth to get out [indiscernible] but if you actually really extend yourself in. A good one we looked at was a really good acquisition. It was turning over I don't know, GBP 20 million, GBP 30 million fantastic acquisition, but the only customer base was the NHS. So Ami and I discussed this and said, no, that [indiscernible].

I mean we also introduced people improved quality of some of the people. We got a qualified accountant perhaps to be the financial controller, you get your upscale some people as well. There's various different things you can do. We do mention it in the annual report as well as a key risk. With share repurchasing, I think we've said that we're looking to do. Can you explain management M&A process, for example, criteria that need to be met the number of targets valuation at all. We haven't got long enough, I don't think, management quite your DD process.

Again, the DD process is -- I've just sent it over to one of the institutional investors interested. It's not the 50-page document, what you're actually looking at is a constitution, personnel, property, patents, legal litigation, IT, you're looking at some -- so much information within the potential acquisition. It's not that difficult. It's probably a week, 2 weeks work, and it's a good way of actually speaking to the staff and a lot of the cases, we know that the seller has already involved the staff. So it's actually working with these guys to get under the table. Number of targets currently. I think we've got 6 or 7 at the moment. We've got a couple in the U.S. Valuations, well, we've already discussed that already, we're looking between 4 and 6. The U.S., somebody actually mentioned about the U.S., is it a little bit higher. They're looking at 5 to 7. So all of the sort of ballpark, but we're not seeing anything sort of above that really.

Is GBP 9 million of headroom to the available sufficient for meaningful M&A. Yes, the answer is in the short term yet. There is some management process for dealing with low inventory. We review it quite closely on a monthly basis and quarterly basis. And we put provisions in for slow moving. We have reports from each subsidiary. Growth likely in the April, August period, we've been in line with budget for April and sort of May, June. It's kind of what we said in our report. In your federated business model, are there any costs not benefits of synergies? Interesting. No really.

Not really because everybody has been paid by their subsidiaries. So we're not driving any additional costs through there that's the float cost virtually nothing. So not really. I think the pleasing thing for me is now everybody in all those 5 companies [indiscernible] into it, they understand it, and they then to talk about it. So it's good for us. I think the major area for me is how you split the profit because all these subsidiaries are bonus related on their profits and making sure that the profits are allocated correctly if you go into a tender. So that's the only question I had from the subsidiaries.

Could you elaborate on the COVID-related profitability of the revenue recognized in '23 of GBP 8.5 million was in line with profitability within the division? Yes, it's circa gross margins of the division. Buybacks now. We talked about -- for Mike, for better recurring revenue, would you consider acquiring maintenance service or software orientated businesses, please?

Software, apprehensive brand, that's what we're not involved in. So I don't really understand that service maybe. But as I already mentioned, we have got probably GBP 5 million to GBP 6 million worth of service. And what we're trying to do is expand that internally, it's not buying. So I think the answer, if you want to yes or no is no, because it's cheaper to do it internally.

What are the drivers for the reduced forecast operating margins going forward? It's a mix effect. Clearly, that had super profits really yet, and that's operating leverage there, where you've lost the sales at the gross margin is replaced by acquisitions that have a lower net margin, and that's the driver. But we suggest that the pre-COVID margins between 15% and 20% seem a bit of a even a sensible range for this group. Would you consider hedging your interest paid rates? Yes, we would. It's always on the table. Valuation, what are the EBIT and EPS forecast next year? I would suggest you have a look at near the broker notes and there's progressive notes. How do you source ideas for your acquisition pipeline? Do you get ideas also for managers of the divisions?

Yes. So there's a number of routes to that. So we have a third party, a couple of third-party people who are on commission only. But for me, as soon as we acquire the business, we do have a presentation to the staff. And one of the questions, top of the list is who should acquire next. So we've actually been acquiring businesses through that. So a number of groups we get -- I've had some like 4 or 5 e-mails a day from different corporate people about selling businesses, not just here in Europe as well. So they come from a lot of areas because we're rightly well known as an acquirer.

Okay. I think, well, there's quite a few questions that we haven't quite managed to get to. I think we're nearly at the end of the hour. If we've got time then, what is the risk of further impairments give the Monmouth experience? That one is always -- you have to do this every 12 months, and it depends on the weighted average cost of capital in 12 months' time, how performance is during the course of the year. There's lots of variables in this, and it's a mathematical calculation, really. So I can't -- all I can guide you is to have a look at the annual report and see whether we do give some guidance where there's less headroom notate of the financials of the press release gives you some color and then annual report will be coming out within a couple of weeks.

Perfect. Michael, Ami, thank you very much for that. You addressed these questions you can from investors. And of course, the company will review all the questions submitted today and will publish such responses on the Investor Meet Company platform. But just before redirect investors for their feedback, which knows particularly important to the company, Michael, could I just ask you for a few closing comments?

Yes, just a couple of sentences. Yes, I'm pleased that we'll finding businesses collaborating together. They're not just sort of stand-alone businesses. It's a wonderful word, but I think it's coming together. I keep sitting that right way through my presentation. We'll continue to invest in companies to drive organic growth within the business that we got. And also evaluate the businesses has to become available to bring into the SDI growth. I think that's it. Thank you. Thank you for your attendance.

Mike, Ami, thank you once again for updating investors today. Can I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few months to complete, I'm sure we'll be greatly valued by the company. On behalf of the management team of SDI Group Plc, we'd like to thank you for telling today's presentation, and good afternoon to you all.

Thank you.

Thank you.