Sdi Group (LSE:SDI) — AGM and Investor Q&A

0:03 Good morning, ladies and gentlemen, and welcome to the SDI GROUP PLC AGM and Investor Q and A. Throughout this session, investors will be on listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Simply type in your text in the box beneath and press send. The company may not be in a position to answer every question it receives during the presentation itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via our Investor Meet company dashboard. I'd also like to remind you that this presentation is being recorded. Before we begin, I would like to submit the following poll. I'd now like to hand over to Ken Ford, Chairman of SDI GROUP. Good morning, Ken. Good morning. Good morning, ladies and gentlemen.

0:57 Welcome to the AGM of the SDI GROUP PLC, and the kickoff time is 11:00. A quorum of members is present, and I therefore declare the meeting open. Under the exceptional circumstances of the COVID nineteen pandemic, we are rather reluctantly holding the AGM as a closed meeting, although all the directors are here in person. However, in order to allow shareholders and other potential shareholders a chance to put questions and indeed to voice opinions, The formal AGM will be followed by q and a session, and those present are able, as described, to submit questions under ask a question function on their screens. All resolutions will be voted by means of a poll using the proxy votes received prior to the meeting rather than a show of hands so that the votes of all shareholders are counted in accordance to the number of shares held, and all votes tendered are taken into account.

1:54 Polls will be taken immediately as the resolutions are proposed. I'm joined here today in Cambridge by Mike Creedon, the chief executive John Abel, the chief financial officer Isabelle Napper, nonexecutive director, and David Tilson, also a nonexecutive together. And together, we will form the necessary quorum for the AGM. You should have all received the annual report and accounts with the notice convened of this annual general meeting. If there are no objections, I will take the notice as read. As there are no objections, the notice is taken as read. I will now proceed to the formal part of the meeting. We have 10 resolutions to be put to members, eight of which are ordinary resolutions and two of special resolutions.

2:45 I propose that the report of the directors and the audited accounts of the independent audited report for the year ended 04/30/2020 be received and approved by members. I put the resolution to the meeting by way of a poll to be held immediately. The result of that poll is 100% of votes in fear favor, zero against, and I declare the resolution carried by the necessary majority. Secondly, I propose that the auditors, Grant Thornton, be reappointed to act until the conclusion of the next annual general meeting of the company and that the directors be authorized to determine their remuneration for the coming year. I put the resolution to the meeting by way of a poll to be held immediately.

3:38 The result of the poll is 99.9% in favor, naught point 1% against, and I declare the resolution carried by the necessary majority. Thirdly, before the next resolution concerns me, I would like to ask somebody else to propose it. Would you do that, Mike? Yes. Yes. I'll propose the resolution. And the result of the poll is I can tell you the result of the poll is a 100% in favor, zero against, and I'm delighted to declare the resolution carried by the necessary majority. I propose, fourthly, that my creedon be reappointed as the director of the company, and I put the resolution to the meeting by way of a poll to be held immediately.

4:33 The result of that poll is a 100% of votes in favor, zero votes against, and I declare the resolution carried by the necessary majority. Fifth item, I propose that Isabelle Napa be reappointed as the director of the company. I put the resolution to the meeting by way of a poll to be held immediately. The result of that poll is 94% in favor, 6% against, and I declare the resolution carried by the necessary majority. Sixth item, I propose that David Tilston be reappointed as the director of the company, and I put that resolution to the meeting by way of a poll to be held immediately. The result of that poll is 94% of votes in favor, 6% against, and I declare the resolution carried by the necessary majority.

5:30 Seventh item, I propose that Jonathan Abel be reappointed as director a director of of the the company. I put the resolution to the meeting by way of a poll to be held immediately. The result of that poll is a 100% of votes in favor, zero against, and declare I declare the resolution carried by the necessary majority. The eighth item is a proposed resolution number eight to authorize the directors to allot shares in the company in the notice of an ordinary resolution. I put the resolution to the meeting by way of a poll to be held immediately. The result of that poll is a 100% in favor, zero against, and I declare the resolution carried by the necessary majority. The ninth item, I propose to disapply statutory preemption rights in respect of, one, rights issues and, two, in respect of shares issued having an aggregate nominal value of up to 48,700 in the notice of a special resolution.

6:31 And I put the resolution to the meeting by way of a poll to be held immediately. Result of that poll is 99.9% in favor, naught point 1% against, and I declare the resolution carried by the necessary majority. The tenth item, I propose the the resolution to disapply statutory preemption rights in respect of the shares issued with an aggregate nominal value of up to 48,700 in connection with an acquisition of capital or capital investment in the notice as a special resolution. I put the resolution to the meeting by way of a poll to be held immediately. The result of that poll is 99.9 in favor, north point 1% against, and I declare the resolution carried by the necessary majority.

7:24 That completes the formal business of the meeting. Thank you very much indeed, Ken. Ladies and gentlemen, we're shortly gonna move moving into the q and a session. And in order just to ensure that you can see the functionality to submit your questions, on the top of the screen towards the right hand side, you will see q and a. If you select the q and a tab, and then at the bottom, you'll see the ability to type in your text and then press send. That will then send your question directly through to the presenting team. Just while the company take a few minutes to review the questions that have been submitted today, I'd also like to remind you that a recording of this presentation, along with a copy of your slides and the published Q and A will be accessible via your Investor Meet company dashboard.

8:12 Also post the conclusion of this AGM, investors will be offered the opportunity to provide feedback for the company. We would be very much appreciative if you could then fill in the feedback and give the company your views and expectations. I think that probably addresses it from my point of view. Ken, if I may hand back to you, sir, for the q and a. Thank you. Yes. Before before hello. I've closed the formal business meeting. I just like to mention that at 07:30 this morning, the group

8:45 did make a statement, and that statement says that the group's made a very good start to the financial the new financial year. Despite the ongoing economic headwinds, the board is comfortable with current trading and in delivering financials in line with market expectations for the year. So that really wraps wraps up the meeting from my point of view, and we'll we'll move on to q and a. In the the first question is, in the final results, you stated that other companies within the group faced some uncertainty and a downturn in orders, all our manufacturing facilities remain in operation. Could you update us on the current position I'm going to hand over to Mike Creedon, the the CEO?

9:34 Okay. So it's a very straightforward sort of answer to that. All our business units are as per the question. So more importantly, all our business units are EBITDA level profitable, and also the none of our business units are on cash burn. So there's been no change really right way through. Thank you, Mike. The second question I've got on the screen is, in the light of a second wave of COVID nineteen, what contingency plans do you have in terms of those businesses that have already suffered a downturn? Michael. Good question based on Boris' statement from last night. We've learned a lot from the April shutdown. All our businesses are still fully operational.

10:20 What we've actually started to do is only through ringing around subsidiaries today is with the new rules that we will have staff on a rotor. So we will have a bubble effect within each subsidiary, but people still want to come to work. They don't want to work permanently from home. So we'll do sort of two or three days on, two or three days off with the staff.

10:39 But more importantly, production will remain as right the way through the shutdown. They will still be fully operational. Thanks, Mike. Third question is, I guess, are you are seeing an increasing pipeline of exciting opportunities. I presume they mean acquisition opportunities. Can you update us in terms of the competitive landscape around new opportunities? I think I can kick off by saying that we have we have no signed deals at the moment, but because of because of COVID, slightly less restrictions, board is exploring a number of acquisitions as stated in the annual report. So I don't know if there's anything you want to add, Mike. No. It was just to just to reinforce that, that Ken and I are actually having meetings now, face to face meetings, which we couldn't do for a a number of months.

11:32 And there are some interesting opportunities out there

11:35 at the moment. Nothing of well, we've actually signed a deal or anything. I'd like to move on to the next question. What are your current thoughts regarding the the payment of a dividend? Obviously, there there are mixed views on this and the board had some very interesting discussions on that, but I'll ask John to provide our formal position. Well, our position is we we have not yet decided ever to pay a dividend, but that comes up for review every time, you know, on each each occasion. I think we are we're we're kind of philosophically in favor of a dividend, but to date, we've had plenty of acquisition opportunities. And and the shareholder feedback we've had from both retail and and in and institutional investors is that they're happy for no dividend to be paid at the current time. Of course, there are some non shareholders

12:38 that might appreciate a dividend and and, you know, we bear those in mind as well. At some point, I think we will pay dividend because we're a profitable company and all of that all of our businesses are profitable. So, you know, at some point, we will pay a dividend. But for the moment, but, you know, we've not decided to do that. Mark, that wraps up the the questions on my screen. Now we've got one more coming through. If you could scroll up, please. Thank you. We've answered that question. So we're on right. Thank Thank you. You. I can read it now. Can you talk about your forward visibility and how that compares to earlier this year or perhaps the same stage as last year?

13:23 Or more generally, outside of this year, how many months is your your typical visibility? Very good question. So therefore, I'll give it to Mike. Well, we can't really say a lot because we're not allowed to forecast or discuss forecast in the marketplace. So we've actually really we've an got an announcement in the marketplace currently about where we are with the brokers forecast. If you look on the individual companies, we have visibility in a number of companies only a matter of two or three months. And then in a number of other businesses, we've got order books going out sort of six months. So it all depends on what

13:59 business unit we're looking at. So that's it. So it all depends on our business units, what we're looking at, because each one has a different visibility, short term or medium. And one of the benefits of the group is that whilst some may have a short vision, others have a long vision. And while some companies are doing very well, others might be down. But overall, we're performing well. So I'm gonna move on to the next question. I note today's statement refers to a very good start to the year, whereas last year, we said good in last year's statement. Can you give any further detail around this edition?

14:38 I don't think I can other than to say that is correct. Mhmm. Are you able to say what the market expectations are? Are you comfortable with SDI SDI's trading in line? The market expectation is set by FinCap, and I think that does show a rise in profit for the current year. And obviously, we've said today that we are trading in line with that. I don't know if you've got anything else to add to that, John. I think we can't re you know, we we carefully made that statement, and that's the statement that's out in the in the marketplace. So there's not not really anything more we can add.

15:20 Next question is, can you comment on the order book? Mike or and or John, can you tell us how the orders are looking at this moment in time? I think it's we actually discussed it when we looked at the visibility of each business unit. John will come in as well. And that is a number of of hours we have long term visibility on the the business units and and some short term. Overall, you know, we've got a solid order book in the group. And quote wise, you know, we've got a strong quotation process in place across the subsidiaries as well, which is coming through. And I yeah, and I think, you know, the very good start to this year includes very good order intake. So, yes, we're we're very comfortable with with where we are at the moment. A number of our business have has benefited from the from COVID, which has helped some of the companies.

16:11 We've got a next question, which is related is what headcount changes have been made post furlough? And, Mike, you're up to date with the figures. Yeah. I am. So we had about so we've got about 230 staff in the group. And as we said in

16:25 the annual report, I think it's about 10% were on furlough. Now we have got, I think, about four or five people on furlough. We've got got mainly within applied thermal control, and they're looking to come back in October. So the majority of people are either back. I think we've got two people part time back, but most of the units are really fully operational now. Thank you. And the good question on, can you comment on geographic differences?

16:57 Maybe The US versus The UK and Asia and so on. Are you experiencing any issues also with universities being shut? So first of all, Mike, could you tell us That's a good some of it. Yeah. It's a good question. What we're actually finding is The US market is very difficult at the moment. You know, there's a big organization called NIH. It's still not open. So we're we're finding finding it it difficult to actually sell into there. But more importantly, what we're actually finding is we're commissioning products or selling products over to overseas, and we can't commission because we can't get over there. So people want to buy the kit, and we just can't actually get get on a plane to to commission the products. So it's very difficult for us. So what we're actually trying to do is to sell or service products within Europe. And then people are very amiable to say it's a waiting game to say when we can actually get over there and service or commission the products, really.

17:50 Thank you, Mike. And now have we've mentioned for Attic that we have a US based OEM customer. And any have you got any comment on current trading there, please?

18:06 Attic is actually a star. We said it in the annual report, and it's one of the areas whereby we have actually gained sales through COVID. And it's a very strong business. We've actually invested in that business. As you've seen in the annual report, we've increased the footprint of the manufacturing process. We've increased the sales and marketing function there. And for us, you know, it's still a very, very strong business. Thank you, Mike. Just looking at the next question. Yes. The question is really I'll read out the full question.

18:52 Acquisitions, understanding the science behind the acquisition targets, competitive advantages seems crucial. Which executives have in-depth scientific knowledge, or how do you acquire the scientific knowledge to assess new targets and to understand future scientific questions?

19:12 I think it's a it's a good question. Mike? As you well know from my CV, I'm an accountant. So we we use or we through the DD process, we use historical information. So lot a lot of of our our businesses that have been around for fifteen to twenty years, but also we have to try to get behind the management of those businesses to see whether they can still actually gain organic growth. But recently, we've attracted some really smart people within the business. A good example is Peter Astor, who's an engineer engineer by training, and he's actually been working alongside us in the acquisition process. A good example is when we actually acquired Shell Instruments. He working alongside us on the technical side. And also Steve Chambers, who's the CEO of. He helps us out now. So we have got resources now to look at the technical side of acquisitions.

20:08 Yeah. And I I would like to add that I've had a a lifetime of analyzing companies in the city, and I think I've I can smell the bad ones. And, hopefully, we've been choosing the good ones with, as you say, technical help. Letty's situation, please, on pro reveal. Would it not be worthwhile aligning to a larger diagnostics health company to leverage, please? What's the pro reveal situation, please, Mike? That's That's what what we we tried from the outset, was actually to align it with something like getting But they've actually got their own sort of testing out there even though it doesn't align with the standards. And it's a difficult process as we know at the moment. COVID is around. People haven't got the money.

20:54 And for us, it's a great product. But what we've actually done, and we've said it before, is we've reduced the the resources on that product now, and and we just use one sole distributor within The UK who's actually trying to sell that product. We still sell it in small quantities, but not in the quantities where we first thought of probably three or four years ago. Thanks, Mike. And next question is a follow on from the dividend question. The full question is I would have a question, which is actually a follow on of the one asked about dividends for the future. Maybe when cash inflow will be larger than acquisition prospects, have the board considered share buybacks instead of a dividend to offset options or previous offerings? We have discussed share buybacks and dividends,

21:39 but at the moment, it's the board's view that there are a number of potential acquisitions for potential perhaps to double the size of the company at least. So we're not doing either of those at the moment, but we keep everything under review, and these matters are discussed. Anything anything to add? No? No. I think it's fine. Next question. Of the markets you serve, please, can you comment on the ones which are doing well and the ones that are struggling? It's a very difficult question because we have a huge huge number of products in a huge number of markets. But have you got any overview, Mike or John, please start with I think it's you you just look at the press, really. So the ones which we're finding difficult are aerospace. One of our biggest customers is Rolls Royce.

22:24 As you well know, they've made 9,000 people redundant, so we're finding it difficult in the short term. But Rolls Royce is still saying they're gonna come back and want some products developed. So that's the main area at the moment. Another area is on the chillers. We make chillers for the industrial sector. Industrial plants are still up, not opening up. So that's another difficult area for us. And the final area is universities. You know, they're actually opening up now, but we don't know how much research is going to be undertaken across the world at the moment within those. But, so therefore, that has an impact on a number of our other businesses. So that's the major areas really for us. They're the areas of weakness at medical and others are doing They're doing very well. Doing well.

23:05 And the next question was very similar to that on the end segments on the long terms long term stress. Probably not. No. No. No. Can you comment on the level of debt and cash in view of the drawdown of borrowings as an initial reaction to COVID? And I will ask John to update us on well, we have said that we're cash generative, but I'll hand it over to John. Yeah. So right at the beginning in March, we took steps to to increase the amount of cash we had on hand, and and we drew down on our borrowing. It It turned out pretty quickly that we remain cash generative.

23:51 And in fact, even at a faster rate than we had pre shutdown or lockdown. And part of the reason for that was the the the some of the areas where we were supplying into COVID related sales, we were able to get cash down payments for some of those sales. So, actually, cash has been remarkably good

24:17 for the the end of last year and and continues to be good into this year. So I think we were right to be cautious right at the beginning of the the process. We're starting now to pay back down. In fact, we have started to pay back down some of the debt, the additional debt we took out. And so cash is a very comfortable situation at the moment. The next question was on the non execs, had 94% support, and I will I will answer this question because when they very first joined the board, there was there was a difference of opinion between different nomads as to whether options can be given to nonexecs. There was a very small allocation given on there coming onto the board. There'll be no further allocations of shares, so there's no further allocations sought for the nonexecs.

25:17 So we're very comfortable with what what we did. A lot of the poll companies who advise investors are US based, so it is a matter of opinion. But the the contribution, I'm sure, from the executives will will agree with me that the contribution of the nonexecs would be absolutely fantastic, and we have a very strong board. So Yeah. Have no problem with that small allocation made on their inception on the board. The next question is what CapEx is planned for this year? We've obviously, we've got budgets, I'll hand over to John. SDI GROUP is is generally a low CapEx business. So capital ex expenditure is typically around well, less than 2% of our sales each year. And And this year will probably be low year for capital expenditure.

26:09 In the last couple of years, we've spent quite a bit of money on lease refurb lease buildings refurbishment, but that that program is is just about finished. So so this year, we're not rushing into any major capital investments, and so it's gonna be on the rather low side. There's another question on ProReveal, but it's more about has COVID affected you? I can answer that. Yeah. Not at all. Because what ProReveal does is look at dirty surgical instruments, and this is not related. Where we did have a good month month or three months was with the ventilator project with MPEB, which we actually did mention in the annual report.

26:54 But like I said, Proberville is not related to COVID at all. Next question is looking backwards, which acquisition has been the biggest outperformer versus initial expectations? I'll ask Mike to the fact is that a number of them have they've all actually performed quite well, but I'll ask Mike, are any there any particular stars you want to talk I think there's any well, the one which comes to mind is before you, Ken, and and myself joined, and that is attic cameras. Absolutely. Yeah. Yeah. That was a a very small business turning over probably 1,000,000, making a £100,000, and it's gone from strength to strength. That business, really has. That's the star, and you can actually see it, you know, for the last two or three years within the annual pool. So the star is the one that Mike and I and the other executives and non execs were not involved in.

27:47 And the next question is what percent of the SDI shares are collectively owned by the board? I think it's in the order of one to 1.5%, I think. I think you'd have to look at the annual report for precise numbers. You can find them there. But it it's not huge, but it's growing. Yeah. Yeah. So fact is we joined the board. We Mike Mike and I joined the board at a at a time. We didn't own this the stock, so we were joining the company and bought shares in our own name, which is so looking at the next question. Okay. That's I think I think that is the last the last question. I just wanted to Yes, Mark. Have you got Yeah. No. Sorry.

28:35 I was just gonna say I think you have addressed. And, And, of course, if any questions come in afterwards, we'll obviously make those available to you. I was just gonna suggest perhaps now if if you wouldn't mind, I guess, wrapping up, and then I can divert investors to provide the company with their views and expectations through the feedback. I'll just wrap up by saying this wasn't our chosen route. We actually welcome AGMs, and we enjoy talking to a number of investors that come along, and that is the best situation. But in the circumstances, thank you, Mark, for providing the platform. Thank you for the board for turning up here today despite COVID, and thank you investors for your support. Perfect. Ken, Mike, John, thank you very much for updating investors today.

29:20 I think particularly given the barriers that COVID-nineteen has presented to AGM. So thank you once again. Could I please ask investors not to close this session as you'll be automatically redirected for the opportunity to provide feedback? If you access this meeting via our website, the feedback page will appear. If you access it via the link in the email, you'll be asked just simply to log in and submit your feedback. We'd be very grateful if you could provide that to the company. So on behalf of the management team of SDI, we'd like to thank you for attending today's AGM presentation. That now concludes today's session. Good morning.