SDI Group plc (SDI) Earnings Call Transcript & Summary

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

Good afternoon, and a warm welcome to today's final results for the year ended 30th of April 2026. I'm Stephen Brown, CEO of SDI Group, and joining me is our CFO, Ami Sharma; and Group Head of Corporate Development, James Dimitriou. Today, we'll walk you through our group summary, provide an operational overview, present the financial results for FY '26 and discuss the outlook for next year. At the end, we will answer any questions you may have. First, let me introduce you to the SDI Group. We are a buy-and-build group with, at the year-end, 18 established businesses with over 550 employees operating from 19 locations worldwide. We operate a decentralized model that fosters autonomy, independence and agility with our focus being on high-growth scientific niche markets. We have a proven strategy of combining organic growth with earnings-enhancing acquisitions, having made 21 since 2014. In FY '26, we achieved a total group revenue of circa GBP 75 million, and this came from growth from all 3 of our divisions. This is, in fact, the highest level in SDI's history. Also, with our operations being geographically diverse, we export more than 70% of our highly specialized products to international markets. Our buy-and-build model relies on a compounding cycle of growth. This cycle focuses on 2 key pillars, organic and inorganic growth. Organic growth strategies include driving operational excellence and promoting synergies to foster group culture. Our model works as cash flow generated from organic activities feeding inorganic growth where we seek to acquire complementary, profitable business in niche markets. And this all feeds back to create a compounding effect. Let me provide a bit more detail on what we delivered during the year. This financial year has been one of real momentum for the SDI Group, moving beyond simply proving our resilience to actively delivering growth. This year demonstrates the success of our unwavering focus of the strategy we've deployed previously. We delivered solid financial performance with circa 13% increase in group revenues, driven by robust demand and an 8% increase in second half organic growth. We are proud to report that we expanded our group level management team and intend to strengthen our capacity for portfolio management and supporting our growth strategy. Our growth was further driven by 2 acquisitions that perfectly aligned with our strict criteria. We are proud to welcome Severn Thermal Solutions and PRP Optoelectronics. I would now like to provide a bit more color on some of our key organic growth initiatives undertaken during the year. We focused on extracting tangible value from our group network, identifying opportunities to improve efficiencies and market access as well as potential cross-selling opportunities across the portfolio. We invested in modern ERP systems at Fraser, LTE and Peak to build a more resilient and scalable infrastructure. We've seen great cross-divisional collaboration such as Monmouth Scientific, partnering with Fraser Anti-Static to develop a market-leading product, leveraging individual products from each business. We also saw a second appearance as a collective at the Lab Innovations Expo, bringing 5 of our businesses together under a single banner to showcase an integrated product offering at the U.K.'s leading industry event. Also, to foster internal talent, we've invested strategically in our people, sponsoring 5 colleagues into Level 6 CMI senior management apprenticeships that ultimately lead to top-tier recognized qualifications. This strong initiative will continue to grow into FY '27 and beyond, and improve cross-section of levels. We do this as part of our goal of continually building a robust and sustainable business. I would now like to give an operational overview of the business at divisional level. First of all, it's worth reiterating that all 3 of our divisions delivered growth in FY '26. Our Industrial & Scientific Sensors segment delivered excellent revenue growth of 23% to GBP 21 million. To pick in a few businesses within the segment, Chell Instruments enjoyed a phenomenal year, expanding in Formula One to supply 10 of the 11 teams and securing aerospace contracts for Tempest and HALO Space. Sentek successfully secured a multimillion contract with a multinational health care clients for custom electrochemical blow gas sensors and Peak Sensors had a phenomenal year, driven by thermocoupled projects in the glass industry. As per usual, we have continued product development across the group. One example of new products launched in the period is MPB's new Long Series 1200 Flowmeter, which is designed for gas and liquid measurement, typically used in laboratory industrial as well as process control environments. The division was further bolstered by the addition of PRP Optoelectronics, more to follow on PRP. Now to our Laboratory Equipment segment, where revenues increased more than 12% to GBP 27 million. I'd like to highlight a few of the successes within the division. Safelab secured a major GBP 1.3 million government contract to supply over 100 Airone XP4 fume covers in the defense industry. Monmouth expanded its capabilities by forming an lucrative exclusive partnership for modular cleanrooms. LTE received a bulk order for flexible, bespoke drying cabinets for a major client. And Severn Thermal Solutions acquired in June 2025, proved their technological capabilities by finishing their pilot program for a new vacuum furnace alongside the UKAEA. Among new product launches in this segment was Safelab's new Airone C700 ductless recirculating fume cabinet designed for industrial labs, universities, research facilities and higher education environments. Finally, the Industrial & Scientific Products division seen solid performance across the division with revenues up 6% to GBP 27 million. Atik Cameras performed very strongly, securing a $4 million professional astronomy contract and winning a pivotal integration into a prestigious deep-space observation telescope project, the world's largest all-lens telescope. InspecVision continued to gain traction in North America, completing installations for key multinational companies across the aerospace, e-commerce and industrial manufacturing sectors and receiving the Best Award 2025 for Innovation at the leading industry conference. Fraser saw increased activity from South Korea. Scientific Vacuum Systems demonstrated strong customer stickiness, securing a GBP 2.2 million contract with a leading global consumer brand and Applied Thermal Control releasing new portfolio of products to address regulatory changes relating to phase downs and bans in F gases as well as chillers able to survive an increasingly more common temperature extremes. I would now like to hand over to James to provide some more detail on the acquisitions undertaken during the period.

Thanks, Stephen. Yes, moving on to our inorganic strategic development. In FY '26, we made 2 earnings-enhancing acquisitions, both of which in line with our key criteria. Firstly, Severn Thermal Solutions, which we acquired in June 2025 for GBP 4.8 million. They got 11 employees and are based in Dursley, Gloucestershire and have been positioned into our Lab Equipment division. Severn are expert designers and manufacturers of specialist furnace systems and environmental chambers. These systems are capable of going from almost absolute 0 to over 3,000 degrees C. Their focus is on advanced material testing and processing applications, specifically within highly technical and high-value markets such as aerospace, semiconductors and most recently in the nuclear space, as Steve mentioned earlier. They will remain autonomous as part of our decentralized model. Our second and most recent acquisition, PRP Optoelectronics was completed in February 2026 for a total consideration of GBP 9.3 million. They're based in Swindon with 33 employees, and they're sitting within our Industrial & Scientific Sensors division. PRP are specialists in the design and manufacture of custom high-performance microLED systems. And whilst they make LED components for optics, industrial printing and purification systems, their core focus is the supply of mission-critical components such as instrumentation, warning panels and switches for civil and military avionic platforms, including the Eurofighter Typhoon F-16, F-22 and the Airbus A320. PRP will also be kept autonomous as part of our structure. Since joining the group, the integration of both companies has already gone very well with the leaders of each business settling in and already exploring synergies across all divisions within the group. I shall now hand you over to Ami for our financial overview of the year.

Thank you, James. Good afternoon, everyone. Looking at the financial highlights. SDI has had a good year with the second half weighted as we expected at the interims. This was due to the timing of deliveries on some large contracts. I'll talk about this in more detail later on. This drove this particularly strong organic revenue growth over the second half of the year. We saw over 7% growth due to acquisitions. And the strategy that we have implemented over the last couple of years has driven organic revenue growth above 5% for the full year. Adjusted EBITDA improved to GBP 14.1 million and adjusted operating profit grew to GBP 11.6 million, whilst net operating margins improved from 15% to 15.5%. We saw strong growth in adjusted profit before tax and hence, adjusted diluted earnings per share. Cash generated by operations exceeded GBP 10 million once again. The acquisition of PRP was made in the last quarter of the year, and this increased net debt to GBP 24 million at the period end. Turning to the income statement. The GBP 4.7 million acquisition growth includes PRP and Severn Thermal, which were new acquisitions this year. InspecVision revenues for the first half of this financial year and Collins Walker for the first 11 months represent the balance of the acquisition growth. Organic revenue growth was therefore 5.3% on a constant currency basis for the year, 6.7% in the second half alone, again on a constant currency basis. Organic revenue growth was 7.6% in the second half if you include currency effects. Gross profit margins increased to 66%. This is on materials only. On a like-for-like basis, gross margins improved from 64.9% to 65.7%. Pricing continues to be a key focus for the group. Our cost base increased this year for a number of reasons. We saw the impact of increased employee NII, minimum wage and apprenticeship levy, which increased operating costs. SDI also invested in additional management resources to support its organic strategy. Average net debt was higher this year, but interest rates were lower. This meant that finance charges increased by GBP 200,000 compared to last year. The tax rate on adjusted PBT was unchanged at 22.7%, which meant that the adjusted diluted EPS grew at a similar level to adjusted PBT. The next 3 slides provide a bit more detail on the financial performance of the 3 segments. We start with the Sensors division. PRP added GBP 1.3 million in revenues post acquisition. Excluding PRP, organic growth was an excellent 15.4%. This was driven by strong performances at Chell, Astles and Sentek. Chell delivered most of GBP 1 million smart meter system project in Q4, and Sentek saw strong demand from its OEM customers for pH sensors and pH electrodes over the year. Astles saw growth from chemical dosing system revenues as well as spare sales. Peak had an excellent year, as Stephen mentioned, driven by demand from the glass industry. This segment increased its EBIT by 17% to GBP 5.3 million. Operating margins of 25.1% compared to 26.4% last year. The reduced margins reflect contract mix. Next, the Lab Equipment division. Better year for this segment, Severn Thermal joined the division early in the financial year and added GBP 1.8 million in revenues. Organically, segment grew by 4.8%. Safelab, Monmouth and LTE all had good years from a revenue perspective. The large government contract Stephen referred to was largely delivered in Q4. Monmouth saw growth in clean room sales and LTE's product range showed year-on-year improvement, while Synoptics continued to see a slower market. The segment increased its EBIT by 30% to GBP 3.5 million. Net operating margins improved to 13% with Severn Thermal providing a competitive mix of product. Next, the Product division. Acquisition revenue become organic 12 months from the date of acquisition. And InspecVision and Collins Walker contributed GBP 1.5 million in nonorganic revenues. The division saw largely flat revenue this financial year on an organic basis. Overall, there was a small organic decline of 0.5%. Atik had a very strong year, delivering the large professional astronomy contract Stephen referred to. Both Fraser and Graticules were largely flat revenue-wise. Scientific Vacuum Systems saw a slower period of trading as they worked on 1 large program compared with 2 in the comparative period. As Stephen mentioned, the second large contract worth GBP 2.2 million was won late in the financial year. The segment increased its EBIT by 23% to GBP 6.1 million. Net operating margins increased to 23% due to the excellent performance from Atik and improved margin and overhead management at Fraser. Turning to cash. SDI generated cash of GBP 10.2 million in FY '26, which compared to GBP 12.9 million last year. FY '25 was a very strong year for cash with the working capital at the end of that year at a very low level. For this year, working capital has increased by GBP 3 million. Of this, trade debt has increased by GBP 1.5 million with a lot of activity in the last 2 months of the period. Debtor days remained low at 44, similar to last year-end. Inventories increased by GBP 1 million. These are across most businesses with the largest increases at Atik and Monmouth. Other debtors or creditors has increased by a net GBP 1.1 million, the largest component of GBP 0.5 million relating to SVS. These final cash flows on an ongoing long-term contract with our U.K. government customer will not be received until this financial year. This slide shows graphically the movements in net debt. GBP 10.2 million in cash generated by operations is on the left-hand side of the graph and our utilization of that cash is illustrated on the right. We ended the year with GBP 24 million of debt, excluding leases, and this compares to GBP 13.8 million at the beginning of the financial year. We renegotiated our bank facility over the autumn for some improved terms. This provides GBP 25 million in committed funding for another 3 years to November 2028 with a further 2 option years available. A further GBP 15 million accordion option was available to SDI at HSBC's discretion. GBP 6 million of the GBP 15 million accordion was exercised in February to fund the acquisition of PRP, leaving GBP 9 million of the accordion available at the end of the period. There was headroom of GBP 4 million on the RCF at the year-end. Our leverage at year-end was 1.7x net debt to EBITDA, driven by the acquisition of PRP late in the financial year. By the end of June 2026, gross borrowings reduced to GBP 26 million, meaning the RCF headroom has increased to GBP 5 million. There was GBP 0.7 million in outstanding deferred consideration at the year-end relating to PRP, and this was paid in May. Now I'd like to hand back to Stephen, who will take you through the outlook.

Thank you, Ami. Now we're looking forward to our next year. For the future, our strategy remains consistent and focused on delivering growth both organically and inorganically. We will continue to leverage our expanded management bandwidth to drive operational excellence, promote cross-selling synergies and, of course, invest in R&D. We entered the new financial year with strong momentum following our 8% H2 organic growth and our acquisition pipeline remaining robust and actively managed. With our renewed credit facility, we have significant firepower and the capacity to execute on future opportunities. And finally, we expect to deliver FY '27 performance in line with market expectations and remain confident that we will deliver sustainable, compounding and long-term value to all of our stakeholders. Thank you.

[Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed by our investor dashboard. Ami, at this point, if I may hand over to you to chair the Q&A, to read out the questions where appropriate to do so, and I'll pick up from you at the end. Thank you.

Great. Thank you. So the first question that I've got is, what do you know about this new shareholder in your register? It's built up a 13% stake what do you know of his intentions? I'll hand that one to you, Stephen.

Yes, sure. Okay. Whilst we can't control who buys our shares, of course, we're the public company, we can confirm that we do have active engagement with Mikhail and of course, along with our major other shareholders. The good news is that he really understands our business model and he's confirmed that he is supportive of the direction and strategy of the business. He has given us some really valuable feedback, and he does add quite a lot of value to the business. His background as well also brings value. So he does seem to be a very supportive shareholder.

Okay. Next one. Will you be looking for bigger companies to buy going forward? I'll give that to you, James.

So the intention long term in the foreseeable future is not to go bigger in terms of acquisition sizes. We're likely to do more quantities of the range that we've been focused on already, which is the GBP 1 million to GBP 1.5 million EBIT range. What you're likely to see in the coming years is that we will do less of the smaller sizes, which historically we've been looking at about GBP 0.5 million or so EBIT. So we suspect they will become a bit less frequent and they will be focused on bolt-ons rather than the autonomous ones, which is the GBP 1 million plus EBIT.

Okay. Now there's 2 questions on AI. First question is, what's your view on AI and its potential impact to SDI? There's a second question on the same theme, which is how much of a threat to SDI's AI, the key to industrial businesses from AI cost reduction and more output with less people. SDI is a small operating units means there is no scaling to be had versus an advantaged larger competitors. Stephen, do you want to take this one?