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

Good afternoon, and welcome to the SDI Group plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Stephen Brown, CEO. Good afternoon to you, sir.

Thank you, Alexandra. I'd like to welcome you all on behalf of myself and Group CFO, Ami Sharma. Alongside the review of HY '25, today, we'll be covering operations during the period and providing an outlook for the remainder of the year and how we intend to deliver sustainable growth for all our stakeholders. In terms of agenda for today, I will provide an overview of the group and the dual-pronged strategy to drive growth. I will then hand over to Ami, who will cover the financial results. Ami will then pass back to me for the operational review before I wrap up its summary and run through the outlook for the future. We will, of course, leave plenty of time for Q&A at the end of the presentation. So please submit your questions as we progress. Additional detail on the group strategy, along with the additional companies in our portfolio can be found in the appendices at the end of the presentation. Turning to Slide 5. And for those of you who are less familiar with the SDI and what we do, I'd like to briefly explain our business model. The key takeaway from this slide is the group is a sustainable and robust platform for a clear strategy to drive growth. We can simply define the strategy in 2 parts: organic growth and inorganic growth. Organic growth will be driven by our ability to sustain and build revenues across our strong portfolio of existing businesses. Inorganic growth is our ability to identify and execute accretive acquisitions that enhance our portfolio, but also offer synergies and cross-selling opportunities for existing portfolio of businesses, giving us a double bump of growth opportunities. We have a clear plan for both halves of the strategy. And whilst I don't intend to run through every box on this slide, you can see that our focus supports our dual-pronged growth strategy. For example, our diverse portfolio drives our organic growth, ensuring that we're well positioned in multiple high-growth sectors and geographies with a balanced portfolio, ensuring we're able to offset challenges in certain markets and strong performances in others. We have a very strong track record in delivering acquisitions and supporting them once part of our portfolio. In the first half, we've completed a very exciting piece of M&A that I will tell you more about later in the presentation. Here, we wanted to reiterate the portfolio segmentation we outlined at the full year and the rationale for the structure. We now have distinct grouping across the portfolio, lab equipment, industrial and scientific centers and industrial and scientific products. We understand the markets we're targeting exceptionally well across these 3 groups. We see the growth potential in each of these target markets and the grouping of the portfolio companies enables us to better identify synergies and cross-selling opportunities in clear specialist areas. This slide depicts our physical presence and illustrates that although we are U.K.-based, SDI has an international presence, which enables us to access high-growth international markets and sell across the world. We estimate that we export approximately 70% of our products internationally with 40% from direct sales and a further 30% of U.K. distributor sales was ultimately shipped overseas. In the appendices, you will see an analysis of our international revenue streams. This slide also provides further granularity in the high-growth sectors in which we operate. They are global in nature and demonstrate how diversified the end markets for the businesses are. So moving on to an overview of the financial results. I'll hand over to Ami to take you through the financials for the period. Thank you, Ami.

Thanks, Stephen. I'm pleased to report that we've had an excellent first half cash performance with GBP 4.7 million of cash generated by operations, and this compares to GBP 3.3 million in the equivalent period last year. Looking at revenues, we were down 4% year-on-year, of which 5.7% was an organic decline, and this arose from a slow start to the financial year. This organic decline was largely driven by the Life Sciences and Bioscience markets which I'll say a little bit more about later. We saw improved trading from September onwards, and that has continued into the second half. I'm pleased to report that we've had a strong order intake period, and this is significantly up on a like-for-like basis compared to the second half of FY '24. Within this, the Sensors and Products segments are performing particularly strongly. The lower sales translated into lower operating profit of GBP 3.9 million, and that fed through to the other KPIs that you can see on the screen. I'll provide further details on these in the next couple of slides. Turning to the income statement. The acquisition of Peak Sensors in November 2023 contributed GBP 1.2 million of additional revenues. The comparative period included GBP 750,000 worth of sales from Uniform Engineering, which we disposed of in February 2024 and from the Synoptics U.S. sales, which we have closed and which Stephen will talk a bit more about later on. After excluding all of these, the organic revenue decline was 5.7%. Our gross profit increased by 3.8% to 65.4%. This is on materials only. Pricing continues to be a key focus for the group and the improvement in the first half demonstrates the success of our operational efforts. On a like-for-like basis, our wages costs increased in line with inflation. Interest charges were flat on last year. We had lower debt levels compared to last year, but a higher interest rate through the first half of this financial year meant that the interest charges were flat. Our tax rate has gone up slightly, reflecting a change in the R&D credit scheme. The tax rate on adjusted PBT has increased to 22.8% compared to 19.2% in the equivalent period last year. I wanted to provide you with a bit more detail on the financial performance of the 3 segments of the business, which Stephen outlined earlier in the presentation. The Lab Equipment segment was the segment that saw the biggest slowdown over the first half of our financial year with an organic decline of approximately 12%. Pleasingly, we've seen improved revenues from this segment since September, indicating a positive recent trend. This lower start to the financial year resulted in a decline in the segment's operating profit, which reduced to approximately GBP 800,000. The Sensors segment grew by nearly 11%. This segment benefited from the acquisition of Peak Sensors in November 2023. On an organic basis, this segment saw a decline in revenues of 4.5%. Within this segment, certain businesses had strong performances, notably MPB. As we expected, Astles Control Systems saw lower product sales in the period following a very strong performance over the preceding 3 years. This was expected and is the primary driver for the organic decline in this segment. Our best performing segment was Industrial and Scientific Products with organic revenue growth of 0.3% and an increase in operating profit to GBP 2.3 million. Within this segment, Fraser saw its geographic market start to recover and Graticules had a very strong first half. In addition, Atik saw strong order intake and profit growth following our proactive restructuring of this business, which improved profitability. Scientific Vacuum Systems had tougher comparatives where we shipped to sputtering machine with significant revenues and profits recognized in the first half of FY '24. As such, the stronger comparatives meant growth in this segment was slower than it otherwise would have been. However, overall, this has been a very successful first half for the Products segment. Turning to cash. Over the period, we saw flat working capital, which is a positive outcome. Trade debtors reduced by GBP 2.1 million over the period and all businesses within the portfolio focused on cash collection and debtor days reduced to 44 days compared to 46 at the end of the last financial year. This was offset by a GBP 1.7 million reduction in creditors and a marginal increase in inventories, all of which netted down to a flat working capital position. Free cash flow was GBP 2.2 million, which is a significant improvement on the GBP 400,000 last year. This slide shows graphically the movements in net debt. You can see the flat underlying movement in working capital on the left-hand side. On the right-hand side, you can see the acquisition of InspecVision, which is presented as a net outflow of GBP 5.6 million. This is a GBP 6.4 million cash outflow, offset by GBP 750,000 of loan repayments. In terms of net debt, we borrowed an additional GBP 5.7 million just prior to the end of the financial period in relation to the acquisition of InspecVision. As expected, it increased our net debt-to-EBITDA covenant to circa 1.4x at the period end, which is within the Board's preferred range in terms of leverage. We still have headroom of GBP 6.7 million of unused facility, and we have a further GBP 5 million. Over the first 6 months, we paid down a net GBP 2 million of debt using cash generated over the period. And we will continue to focus on cash generation to pay down debt in the second half. Overall, our net debt, excluding leases, has increased to GBP 17.1 million at the end of the half. When you include the deferred consideration of circa GBP 0.5 million for InspecVision, that leaves net debt in total at GBP 17.6 million. And now I'd like to hand back to Stephen to take you through the operational review.

Thank you, Ami. During the period, we've made good strides in delivering against organic and inorganic strategy. We continue to explore opportunities within the portfolio of companies to drive further synergies and unlock growth. We strive to continuously improve the performance and ultimate delivery of our portfolio of businesses. As an example, we restructured the team at Atik Cameras during the period to better reflect the market opportunity and is now performing ahead of expectations. We also refocused Synoptics sales strategy and closed its Synoptics U.S. office in the period as a direct action of this. The group's focus on the U.S. remains unchanged, but having reviewed the go-to-market strategy for Synoptics, the business' U.S. market penetration can be better achieved through different go-to-market plans. We are seeing greater collaboration across a number of businesses and have combined the senior management teams of Safelab Systems and Monmouth Scientific to improve operational efficiencies and drive economies of scale across both businesses. Within the Lab Equipment division, we have several businesses working together to optimize the routes to market and also working in partnership to secure more sizable contracts. In October 2024, for the first time ever, we had 6 businesses from our Lab Equipment division co-exhibiting at the Lab Innovations Conference. Our efforts were recognized and we're presented with the Best Marketing award, which we're incredibly proud of. I'd like to thank the teams for their collective hard work and excellent coordination delivering this feat. This award is just one example of the progress against our efforts to drive organic growth. Finally, during the period, we demonstrated delivery of our inorganic strategy, and we're proud to welcome InspecVision, an incredible metrology business into the group. InspecVision is a highly profitable business, which meets our M&A criteria and is highly synergistic in our existing Industrial and Scientific Products pillar. Turning to Slide 17. We look at InspecVision in more detail. InspecVision provides precision measurement machinery for smart manufacturing, automated inspection and reverse engineering and offers a group an entrance into the high-value metrology market and the global blue-chip customer base. Located in Northern Ireland and employing 14 people, their innovative products, distinct in technology and is well positioned within the market. They have a blue-chip customer base, which is predominantly export orientated with the largest export market being the U.S. We're also fortunate enough to maintain the leadership of the business, where Jan and Colette continue as directors and run the business in full-time capacity. And the continuation and contribution to the group is strong with 2023 numbers showing an adjusted EBIT of GBP 0.84 million. Reverting back to the double bump mentioned earlier on, InspecVision neatly fits into our criteria, not only as an attractive stand-alone acquisition, but due to its sales profile and exciting technology, it also in terms of the synergies and its other businesses within the group. We believe there are opportunities to form alliances with Fraser Anti-Static and strengthen the go-to-market proposition of both businesses. The acquisition also introduces new technological capabilities to the group, including smart manufacturing, AI, AR and machine learning, alongside strong IP, which can be leveraged. Its strong U.S. market presence and international reach is also compelling and provides a platform to deliver additional value to the group. The potential for some significant international growth is clear. InspecVision will join our Industrial and Scientific Products division and will be operated separately from existing businesses. I'm really excited by the prospects of InspecVision and about continuing our acquisitive growth strategy alongside driving our organic growth. In summary, the group has demonstrated good progress against the stated strategy in the first half. Alongside driving organic growth and identifying synergies across the portfolio, we have acquired a high-value business in InspecVision and we're hugely excited about the potential of the business going forward. I'm very proud of the team from across the portfolio for their hard work in delivering the set of results. We have strengthened our senior management team to support the delivery of both organic and inorganic growth going forward. We saw an uptick in activity as the half progressed with strong order intake, underpinning our confidence in achieving full year expectations, albeit with lower revenues, higher gross margins and operational efficiencies. Our M&A pipeline remains strong, and we will continue to keep momentum up. Additionally, we remain focused on increased collaboration and synergies within the existing businesses to drive future organic growth and strong cash generation to pay down existing net debt and affording us to deliver on our inorganic growth strategy. We have absolute clarity of the strategy, which is gaining positive momentum, and we have the right team in place, and we're well set to deliver our plans for future growth. I would like to thank you all for listening to the presentation, and I would like to open up the Q&A.

[Operator Instructions] I'd like to remind you that a recording of this presentation along with the copy of the slide and the published Q&A can be accessed by our investor dashboard. As you can see, we have received a number of questions throughout today's presentation. And Ami, if I could just hand over to you to share the Q&A, what the questions are. I'll pick up from you at the end.

Right. Okay. First question, what are the cost efficiencies you referred to in the segment?

So, we've put a lot of effort into the cost efficiencies this year. What we have really done is employed good business management throughout the portfolio of businesses, including deploying appropriate price increases and operational improvements, economies of scale where it makes sense and cost base rationalization. There has been a few head reductions in part of this rationalization. But because we're very much focused on the sustainable business going forward, these have been minimized.

Okay. Next one. Are you still confident that you can deliver full year profit expectations? I'll take that one, Stephen.

Sure.

Yes, we are confident that we can deliver full year profit expectations. Our gross profit margin, as you've seen have improved significantly. [indiscernible] that we just talked about and all the actions that we've taken over the previous periods. We've also got a strong order book as we talked about and all of this gives us confidence that we will continue to deliver. Do you have the firepower to continue to deliver M&A? I'll take that one too. Yes, we do. I mean we are cash generative as you've seen from the first half. That will continue into the second half. The net leverage, net debt to EBITDA covenant was at 1.4x, which sure in the absence of any M&A will reduce naturally as we progress through the rest of the financial year. So the combination of the current cash flow will allow us to do some more M&A. So yes, the answer is that we are able to do more accretive acquisitions, and we have a strong pipeline with multiple opportunities. Okay. Next one. Could the company reiterate the target of paying 4x to 6x EBIT for acquisitions as the latest acquisition took place at more than 7x EBIT?

I'll jump in on that. It's actually -- I think the net figure is around GBP 6 million for the InspecVision, for about GBP 1 million EBIT. So I think it's not more than. So we've always said that we pay 4x to 6x EBIT based on the goodwill portion of an acquisition. The goodwill part of InspecVision sells comfortably between the 4x to 6x. So that remains our focus going forward, and we will -- we do not intend to go beyond that in future acquisitions.

Has the order book continued to grow in half 2 to date? It still remains strong at the end of November. I think the short answer to that one. It's only been 1 month since the half year ended. Why [indiscernible] the GP percentage on materials only. Well, that's our standard GP. We've been -- it's consistent. We've always quoted that percentage, so you've got comparability year-on-year. And changing that, I don't think is beneficial just at this point in time. I understand the question, but it's what we've always done. We've always said it's GP has been on materials only. In the context of overseas markets and the [indiscernible] Board consider the threat of tariffs trade policy changes under [indiscernible] now presents a further potential hurdle to further growth opportunities in the U.S. in the near to medium term? I think it's something that we need to monitor very closely going forward. Is it going to be a hurdle for us? I think it's up to us to minimize it. We have already started plans in place. For example, we're looking at partnering with businesses already in the U.S. to produce number of products for the U.S. market to go over this and improve profitability ultimately. So is it going to be a problem for us longer term? I think it remains to be seen, but we are working very hard to overcome it. Over the next 12 months, what sort of operational reshaping and resizing can we expect?

We're always evaluating. I mean it's difficult to say to answer that one.

Absolutely. We're not looking at much resizing or reshaping going forward. really, as I said in the last question -- to the previous question, we are very much focused on building a sustainable business going forward. And we want something which is scalable. I think we started resizing quite abruptly, then that would potentially that or at least risk. So we're not looking at signing resizing. What we're really looking at is operational efficiency more than anything. The CEO has had a good look now. What's the biggest impact he can bring to the future of the group, we see unfold.

Really, we've set a two-pronged strategy as we've talked about quite exhaustively. We have to really keep this momentum going on of the 2-pronged strategy. For us, cash generation is absolutely key. What generates ultimate cash, looking at operational efficiencies, looking at profitability, looking at revenue, looking at everything which is good for strong business management, and that will ultimately feed the inorganic. So keeping that strong focus and drive on both sides of the strategy is something which we need to keep going with, and that's something which I will continuously drive.

How many acquisitions do you think you can handle within half 2 FY '25? How much capital will you deploy? The capital to deploy, it's hard to say. It depends what happens. But how many can we handle?

That's a good question. At the moment, we've got a very strong pipeline. We've got 37 businesses in our pipeline, too much than we can handle and fund, obviously. What the M&A is going to look like in H2, I think, remains to be seen. But we're certainly not ruling out -- we're certainly not stopping where we are.

When do you expect business growth to reaccelerate?

Yes, sure. Look, we're looking quite positively at H2. The order book gives us a lot of confidence going forward. We've put a lot of effort into analyzing and really understanding the strength of the order book and the order intake. If you look at our comparative from last year to this year, our order intake is very strong. So we're quite positive in terms of accelerating the business. We see this very much, as I keep saying, a sustainable business. So it's a marathon rather than the sprint. So really what we're looking to do is have that steady growth trajectory and position the business to do that. So are we going to see a very steep acceleration from [indiscernible] ? All we're looking for is that sustainability.

What are the gross and operating margins for InspecVision and what percentage of their products are exported to the U.S. market? In terms of gross margins, it's not too dissimilar to the group. In terms of operating margins, I think you can actually get that from the RNS where you can see the profits that we made last financial year we talked about in the presentation, GBP 840,000 on a normalized basis, GBP 840,000 in FY '23 on sales of I think it was GBP 3.2 million.

Yes. In terms of the export to the U.S. market, approximately 48% was in the U.S. market and 25% EA, 25% Asia roughly. So there's a lot to go out there, a lot of potential and opportunity.

Okay. The previous year expected the current portfolio to generate organic growth of between 5% and 10%. Do you think this is achievable?

I think we outline sort of the range at the year-end.

Between 5% and 8%, I think is what we said. Yes, we do believe that's achievable.

The organic strategy is built upon delivering that. So really, we just have to keep the forward trajectory going on that organic strategy to do that.

What plans do you have for product development in half 2? So we've got some developments that we talked about in [indiscernible] range [indiscernible].

Indeed. And what we have done, we put in a discipline across the group of almost a continuous NPI and NPD process and quite a lot of our businesses, not all, but quite a lot of them going forward. Do we have any product? We've got some product launches coming in H2. For example, LTE got a new [indiscernible] and quite a new design going to market in H2. And we've got a few other new-to-market products coming online. Developing new range of chillers, with a plenty going on. So we're always busy. It's part of our DNA to continue developing new products for our manufacturing business is very important to us. We have increased the focus on market-driven product development as well. So what you will see is a refresh driven by market. It was not required. It's not refreshed, but really what we're keen to do and an important part of driving our growth going forward is really keeping that refresh and really being market driven.

Who is responsible for M&A sourcing and bundle building. Can you talk about how the M&A outreach is done?

Yes, absolutely. So at the end of last financial year, we spoke about increasing the head office team. So there's -- we've now got a Head of M&A come in. So it's myself and Head of M&A do all of the M&A. We build -- together, we build the pipeline. And in terms of outreach, we not only do ourselves, but we also got -- we've got 2 brokers, which we got on engagements. We also use them as well. So it really depends on the business and how we -- what the most appropriate outreach is. If the business is known to us, for example, if it comes from within our portfolio, we typically do ourselves, but it was a cold call. It's often beneficial to use an external and independent to do that initial outreach. So it really depends on the business, but we do tailor it for each individual target.

Any fruition on cross-selling opportunities? Any time lines on future acquisitions?

There is. As I said in the presentation, I gave a couple of examples. about cross-selling. And there's an increase in white labeling, for example, particularly in the lab group. On the other 2 pillars within the business and the sensors and the product side, there's a lot less so, probably less so in the sensors. It's not our intent to force a cross-selling or collaboration across the group. We only do where it really makes sense. In the Lab Equipment pillar, it makes a lot of sense. In the Sensors, not so much. In Products, there are some synergies across go-to-market. So these are very much ongoing. And as I say really if it makes sense, we will do. I think in the Product side, there's a lot to go after with geographic outreach and combine with outreach of several businesses. In terms of time line of future acquisitions, I would love to tell you, but all I can say is we're keeping that momentum on.

Yes, it's difficult to predict those. It will happen when it will happen. [indiscernible] very much competitors in the same market. [indiscernible] management team. How will they differ retain your own USPs?

On looking at the 2 businesses together, it would seem that they're actually very complementary in terms of product reach. They do operate in quite different markets. In some markets, they do compete, but it's quite -- there's a ducted and unducted side of [indiscernible] covenants. And we've got one business stronger in one side and vice versa. So really bringing them together in terms of leveraging their relevant brand strengths in the relevant parts of the market is what we tend to do. It's very important to us is protect the brands of both businesses. And really where we're going to be looking at the cost efficiencies is very much in the back office side and not necessarily in the front office. So really what the market will see is probably a more unified product line, a more competitive product line and 2 businesses which can ultimately deliver not only from the service side, but also on lead times, et cetera, much better than what we're currently doing at the moment. So I think the potential is certainly there. But what we don't want to do is bring 2 competitors together and potentially [indiscernible] business, and that's something which we're very conscious of doing.

What percentage of revenues are recurring? We've done some work on this, between around 15%. It varies from period to period between 15% and 20% is the range of which revenues are recurring. How should we model staff cost percentage going forward? That's a really good question. In terms of inflation is a good proxy, although the [ NI ] changes that have been recently announced will have a bearing on this as well. So I can't give you an exact percent. We're still working this out ourselves. But proxy is usually in absolute terms is inflation. Should investors expect revenue growth in the near future? Or is it going to take longer to see the sustainable growth you mentioned? And what does the sustainable growth look like in terms of percentage? I think we've given the range going forward between 5% and 8%...

I think that's fair. As we said in the presentation, we have had a slow start to the first half. The second half has been strong and our outlook for the end of the second half is good. And the revenue projections what we're saying at the moment. And in terms of growth, what we expect to see is going into next year.

What is the market profit expectation, please? My understanding is that the adjusted EBIT expectation is circa GBP 10 million from the analysts at the moment for FY '25, which is the guidance. Which is the same guidance as it was. You can see it on the press release on the front page where we put it, we do include that, and that hasn't changed. I'm just having to look to see if there's anything else that we haven't answered. I think that is it.

Perfect. Just thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today, and we will publish those responses out on the Investor Meet Company platform. Just before redirecting investors to provide you their feedback, which is particularly important to you both. Stephen, could I just ask you for a few closing comments?

Yes. All I would say is thank you very much for your time and look forward to presenting further news in the near future.

Stephen and Ami, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. Take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of SDI Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you.