Sdi Group (LSE:SDI) — Final Results Investor Presentation

0:01 Good afternoon, and welcome to the SDI GROUP PLC final results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab situated at the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during 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 submit the following poll, and I'd now like to hand you over to Michael Creedon, CEO. Good afternoon to you, sir.

0:31 Hi. Good afternoon. I just wanna do a quick intro, really. I've been here some years now, probably ten or eleven years, and we're in a a different situation this year to other years. So in the last eight years, we've had a a rapid growth within the group through organic growth and m and a. The exponential growth was due to sales from COVID, and this has now come to an end. And we're now in a in a on a level playing field with other science and technology companies. This This year, year, we had a few stumbling blocks on the road, which Amin and I will explain during the course of our presentation. But our business model still remains strong, for organic growth and, and growth for for M and A. So if we turn over to page four. Okay. I'll just do a quick intro on this. So, Amy's been with the company for about twelve months now, just over twelve months, and we've also appointed additional directors. As I Amy's only been here for sort of twelve months. I thought I'd throw this over to Amy to introduce himself, but also extend that to the two nonexec directors, Andrew Hosty and Louise Early, a new onboard for us.

1:42 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 one year ago in August 2022, and I spent a large part of my career at Ultra Electronics, which was a FTSE two fifty aerospace and defense company. It was a decentralized manufacturing group with a smaller head office, and I was part of the team which embarked on a buy and build strategy in the early two thousands. I'm not the only new director, though, as Mike said. We welcomed Andrew Hoskey to the board in August 2022 as well. He's a nonexecutive director on multiple boards, as you can see from his profile.

2:26 He was the chief operating officer of Morgan Advanced Materials, the c two fifty 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 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 a career in engineering. Back to you, mate. The next page, page five, group overview. The strength of our our business model hasn't really changed over the years. It's due to using having autonomous business units, but the wonderful word synergies is actually coming through, and we'll see this through the presentation early stages.

3:21 And and as we acquire additional complementary businesses, we hope to enhance the

3:28 the collaboration between the businesses. The second point is we all all acquired businesses must insist 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 two two and a half 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 in the roadshows 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, Amit, do you want us to expand on that? Because you were talking to these, investors about this split going forward. Were you questioning it anyway?

4:19 Yeah. I mean, historically, we've been segmented as digital imaging and sensors and control, and it's not inconceivable that we'll reconsider that sort of segment split going forward. Then We haven't actually confirmed that internally yet, but we it's likely that we will

4:36 segment the sensors and control division into lab products and industrial products. So what's just basically it's likely to happen in FY twenty four because most recent acquisitions have all gone into the Sensors and Control division. So just for warning you all that this is likely to happen at some point in the near future. Okay. Just the last point before we go to the next slide. Throughout this presentation, we'll mention collaboration and synergies, which are new to the group, as I already mentioned. As a starter, we've seen a collaboration in, as Anne has just mentioned, the lab group, which consists of SAIFLAB, LTE Scientific, Monmouth Scientific, Synoptics, and Applied Thermal Control. But I'll give you further details as we sort of skip through this presentation. So if we go on to the next page, which is a new slide for us, really. Oh, sorry. I've gone the wrong way.

5:22 Sorry. It's a new slide. It's UK and world presence. It just shows where all our sites are around The UK and and the world. So we currently have 16 sites in The UK and four overseas, in Lisbon, Dresden, Frederick, that's near Washington DC, and in Shanghai. Let's just sort of discuss very quickly the two new ones, which are Dresden and Shanghai. They're new additions to the group, and that was via Fraser anti static techniques. The Dresden one was purely because we came when we came out of Europe, they needed a a a German subsidiary, so they could, invoice their German, subs, customers.

6:07 So this was set up, and it's really such a sort of PO box number. All the admin, etcetera, is is actually carried out in The UK, and it worked very well, and our customers are very happy with that.

6:18 The the of interest to me, really, is this subsidiary in China. It was a a distributor that they're known for a number of years. They wanted a piece of the action. So they sent this subsidiary up. George Fenn, the general manager. He owns 60% of that business. We own 70% of that business. I was supposed to be going over there this week to do a presentation because of the delays in the accounts that sort of work hand. 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'll be an interesting exercise to see whether he can actually broaden the depth of our sales going forward. So if I hand over to Ami now, then he can go through the numbers with you.

7:07 Thank 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, you know, $6,768,000,000 in FY '23. About half our business is international now by destination. We have over 500 employees and, as Mike has just said, 20 locations. So moving on to the results. This slide shows the highlights for the financial year. You'd have seen these 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 attic 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.

8:06 All of the adjusted measures, adjusted operating profit, showed some growth. And we generated cash of around 11,000,000 over the year. We booked a noncash impairment of 3,400,000 net of deferred tax against Monmouth uniform goodwill and intangibles. This is one accounting entry that's 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.

8:40 This slide shows some extracts from the income statement. The headlines from this slide are total sales growth was 17,900,000, of which 17,500,000 came from acquisitions. The next slide will be a revenue bridge, which will illustrate the impact of the end of the Attic PCR contracts on our organic growth. Gross margins include a mix effect with our acquisitions having slightly lower gross margins on materials than our existing businesses. Excluding this, gross margins 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 six percent to $12,800,000 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 £11,800,000 The impact of the £3,500,000 noncash impairment charge on our reported results is visible here.

9:39 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 9.02, with the f FY '23 effective tax rate increasing to 20.7%, largely due to the deferred tax.

10:08 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 £5,000,000 worth of properties which impact upon this percentage.

10:29 This slide shows how the revenues have moved compared to the equivalent period last year. As I mentioned already, acquisitions contributed £17,500,000 in revenues. 11,200,000 of this came from FY 2023 acquisitions and £6,300,000 from FY 2022 acquisitions up until the anniversary of acquisition date. The impact of the one off attic business for cameras that go into PCR machines is shown here. As we've said for some time, Attic's COVID related business would come to an end, and it has this financial year with the last delivery in February. Revenues for this business reduced from £10,900,000 last year to £8,500,000 this financial year, a reduction of 2,400,000. You can see this on the right hand side.

11:17 Excluding this, organic growth was £2,800,000, 7.2% in absolute terms and 6.4% on a constant currency basis. I'll now spend a few minutes talking about Monmouth. Monmouth was acquired in December 2020 for £6,100,000 net of cash during the pandemic. At the time, it sold a large volume of biological safety cabinets, which drew drew which drove its pre acquisition 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, the costs of which were higher than anticipated at the time of acquisition.

12:06 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 have become more prudent. This has resulted in an impairment of 3,500,000, 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 is 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 a million pounds lower. Business has a new management team, and we are hopeful that Monmouth's performance will improve to the levels that determine the original goodwill valuation.

12:56 This slide shows the performance of our digital imaging segment. The digital imaging segment comprises three businesses, Attic Cameras, Synoptics, and Gratikhils Optics. All our other businesses are in the sensors segment. As I talked earlier about the Attic PCR cameras revenues reducing by £2,400,000, 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, as the cameras grew by 37% organically outside of the COVID related sales. This slide illustrates the performance of the Sensors and Control segment.

13:43 All recent acquisitions have joined the Sensors segment. And as such, pounds 17,500,000 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, SendTech, Shell, and Applied Thermal Controls all had very strong trading years. SendTech experienced strong demand for its chemical sensors. Shell produced a smart meter calibration device for a large OEM, and applied thermal experienced very strong demand for its 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.

14:31 Working capital increased by £4,000,000 over the year. Inventories increased by £2,900,000. Of this, 2,100,000 was used to mitigate against component shortages. A further 800,000 related to one business, Scientific Vacuum Services, who spent much of the year building a sputtering machine for an OEM customer. Customer advances reduced by £3,500,000 due to £2,700,000 worth of COVID contract related cash flow at ADI GROUP which unwound in the period, and 800,000 from a pre acquisition advance of LTE, which also unwound. Other working capital reduced by 2,500,000. Cash generated by operations was therefore £10,900,000 this year.

15:18 Interest payments increased to £1,000,000 as a result of the higher debt levels over the second half as well as the increasing interest rates. SDI moved into the large company tax installment payment scheme this year. We also paid 400,000 of tax in relating to prior period acquisitions. This resulted in the cash tax increasing to £2,100,000 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 £21,100,000 in acquisition costs. These were funded by an additional £15,000,000 in bank borrowings and £3,000,000 of this of these borrowings have been repaid by the year end.

16:11 Some comments now on our financing position. The revolving credit bank facility was extended by a year expire at the beginning of November twenty twenty five. We can extend by another year at HSBC's discretion. At the end of the period, the net debt to EBITDA covenant ratio was 0.9 times, comfortably inside the ceiling provided by our bank facility. We have £9,000,000 of headroom, plus a £5,000,000 accordion option available to us, again, at HSBC's discretion. The acquisition of LTE Scientific cost £2,800,000, net of cash acquired, and this acquisition cost included the property, which is worth £1,700,000.

16:55 Fraser Antistatic Techniques required consideration of £12,800,000, net of cash acquired. This included fast properties for £1,800,000. A further £2,400,000 was paid to the SafeLab system sellers to close that particular transaction. And at the end of the period, we had £1,000,000 in deferred consideration. This relates to the acquisition of SVS and will be assessed over f y twenty four. That's all for me. Over to you, Mike.

17:33 Okay. We got it. Cool. So it's me now, so I'll just take you through the last pages of the presentation. So if we look at LTE, we discussed this. I think it was at the interim stage. It's a pretty similar slide, but I thought I'd 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 the can in August 2022.

17:56 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.

18:16 We acquired this business with a three year average PBT of about £300,000 a year. And since, acquisition, we're reporting annualized PBT of 600,000. So it's 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 it's a very good business in the way of its profits and revenue, but, I'll explain some more as we go through the presentation. And we're pleased with the management team as they are focused on growing the business. So what we've actually got is John Lee, who's the MD, and, Zoe Turner, she's the production director. She's a a newbie on the block.

18:54 Also, I'd like to sort of highlight I keep talking about this sort of collaboration and synergies around the group, but, yeah, there's people we commended here. And that is, sort of John Lees is the MD of LT Scientific and Roger Guest, MD of Sandflags. 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've mentioned before, Momba, Scientific, Synoptics,

19:18 and Applied Thermal Control. And I keep saying this is a new charity for the group, but as we've because we always actually stated right at the start, what do we look for, and that's autonomous business units or federated structure, same darn thing. But, we still want that in place, but what we we can think we can do is actually see, again, additional revenues, through TotalLab solution packages. So, I think it's an interesting exercise. So we've got our first face to face meeting with a group on the October 2, which is pretty exciting, I think. The next area, really, is the acquisition. When we acquired the acquisition, we we had a 44,000 square feet of free old property. You can see it on the diagram in the bottom right hand corner. It's right stuck in the middle of a housing estate in Greenfield, which is on the outskirts of the Peak District.

20:10 Very prushy area. We're the only industrial unit within the town. The only other woodabout size is the Tescos across the road. That's about it. So myself and the management team about three weeks ago, I think it was or thereabouts, that was John and Zoe. We discussed the future for LTE and its facilities. This building's pretty tired, and it's expensive to run. It costs about £200,000 in electricity bills, so and when you compare it against the other 13 businesses or 15 sites, it's bloody expensive. So what we're actually doing is we're currently

20:44 reviewing whether we actually moved a modern smaller unit. So we're probably looking at 25, 30,000 square feet building, because there is a lot of old engineering units, or plant and 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 in discussion. And what will we do with the building? Well, we bought it with a valuation of 1,600,000. It's still there or thereabouts. And what we could probably do is Andrew Hosty, our NED, 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'd 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, side line is when we actually were looking to acquire LT, so was another body, and all they were were wanted was a building. So they weren't too concerned about the business, it was just the building, and to do the same as we're actually intending to do with the building.

22:03 So if we go on to the next slide, let me have a look. Sorry. There we go. Cool. So so the same thing with this one, Fraser. We discussed this at the interim stages. Same old slide, but, let's give you a little bit of an update of where we're at with what was it? No. Seven or eight months on. Anyway, so we're going out in October 2022. This is the most expensive deal we've we've had, and you can actually see how big the debt is. Well, that is mainly due to this this business here. It's a leading manufacturer of antistatic products, and it's involved with a variety of businesses as it's listed here. But just to highlight sort of three, the main interests for this business are plastics, packaging, and printing, and that produces a lot of static electricity. So what you've actually got is an anti static product which is bolted onto the machinery to drive away the anti static.

22:58 It operates again in a freehold site in the middle of Bampton in Devon, and it's got subsidiaries as in Dresden and Shanghai. This is a sort of strange concept when the housing site was built. The housing site 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 sort of acquiring 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 they were trying to get little starter units, but that didn't happen. We've got the whole site. As with LTE Scientific, I'm not in favor of acquiring properties as it's a a lower far lower return that we should be able to get on investment, looking at investing in our current and future businesses.

23:48 But we don't want it to be a deal breaker, so this is an action where Amy and I have got we need to review going forward.

23:59 Next page is operations and synergy on this page. So what we've got here is oh, no. I wanted to backtrack, to tell you the truth. I've just thought of something else I wanted to mention as well. And that was it's in there about sort of James Cater. Yeah. Sadly, Bruce Clothier, the MD, he decided to retire for personal reasons a few months ago, which is is sort of really sad, really, because he he was a really great guy, and he really got on well with him.

24:28 But, he did provide us with adequate notice. I think it was about six months notice 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 difference to to Bruce, it was really involved with production, general management, that sort of thing. So there's a gap, between the two roles, but, there was no worries there because they've actually got really skilled resources within there to support James on a day to day basis. So really, it's somebody who's gonna have a look at it more of the strategic role going forward. So what we actually did plan at Hussain to all the institutions was when we were recruiting James, we decided that the best, the best way forward for this new person was for James to recruit him, not for us, and then he can actually, bring in his own, sort of, person for this role.

25:21 As I mentioned earlier, I'm still keen that the businesses take advantage of our sales and marketing results in China and use, Fraser China as a vehicle to sell their products. And now let's get on to, the operations. Sorry about that. Just missed it. Operations. So what we've actually got there is I'd like to give you sort of a few examples of some of the interesting project projects we've actually got or undertaken in the group. Just two really, so I'm not too bored of it. So Scientific Vacuum Services, that's a niche company, and designs and manufactures high end sputtering definition equipment. What the hell is that? Well, what it is is depositing a thin film of material on a substrate.

26:02 Within this case, as Ami has already mentioned, it's a razor blade. So this machine will coat 416,000 razor blades in about twenty minutes, costing the customer 1,800,000 plus a spare parts pack, which is about 200,000. SBS or, Scientific Vacuum Services have sold a number of these machines over the years. The first one, I think, started at 90,000, and then it went up to about $250,000 razor blades in about twenty, thirty minutes. So this is one hell of a beast. And the machinery has been factory acceptance 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, pleased with the, machinery, that they're bringing their r and d department from America over to see it from The UK and also hopefully for the next customer.

27:00 This one's going to Mexico, by the way.

27:02 And, so it's delayed for a couple of months while they actually bring their, the party of of the customer overhead. Why? Because what it has to do is a fair, old sized machine is is gonna be stripped down and then shipped to Mexico, which is gonna take a couple of months. So they'd rather see it working in our in our environment. And, by the way, as already mentioned, there is another one, hopefully due, and there's an interest from the customer to actually replace some of the low sort of turnover ones at 90 and £200,000 200,000, 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.

27:48 Two industries they're in, they're in life science and engineering. As we all know, everything's shut down. But he's come out of it very strong, and last year, he had record sales and profits. And this year, it's going really strong. One of the reasons is because The US is onboarding,

28:03 I. E, it's bringing all its semiconductor manufacturing back into The US from Asia. These semiconductor plants, I think it's Intel, they require cooling, and that's what we're doing. We're providing the chillers for the semiconductor plants.

28:18 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 ASIC Lisbon, and that will shorten product development times. I think we've actually got one down for Shell as well in the in the near distant future as it's a lot more cost efficient and time saving, actually doing your own CNC or your own machining in house than actually sending it outside. Another area we've discussed on a number of occasions over the year is the refurbishment of Grashcules in Tunbridge. Old nineteen sixties building. We've completely gutted the interior, and, it's a really up to date modern chemical action, facility.

29:06 Two thirds of the, products I've mentioned before is graticules. So what we've got there, I think it's five laminiflow cabinets and a clean room. So it's all coming to an end in the next couple of months, and there's and the good thing about it is they actually worked right the way through. The refurbish is not exercised. It's a bit of hard work, but, it's all coming to an end. Last one there is laser etching machines. You probably think it's quite boring, but I think it's quite interesting. And that is the first one we bought was for MPB Industries, then we did, Graphicals Optics, and that was followed by,

29:41 scientific vacuum systems. Let's give some examples of their use. So with MPB, it's precision engraving on glass. So with the flow meters, we're actually putting the ventilators through COVID. We're we're in engraving on the side when it's off the test tube. And that was, used to be taken undertaken manually. So we've taken that away, 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 engraving part numbers on each component,

30:17 and we had to do that for this, machine we've just discussed, this sputtering, deposition machinery. And they're very sophisticated machines. Also, what you can actually do with these machines is engrave a QR code or barcode as well. So when you take a part off, you can scan it and automatically email it to to us or to your supplier, and then they can actually easily determine what the part is and then ship out a part. So it's it's good leading technology. Back on to the the word of the day, Synagis. I'm very enthusiastic about this, and what action are we seeing within this? Just a quick slurp. About October last year, we decided to put together a group marketing meeting. Marketing these days has changed fundamentally when I first joined this business. It was hard copy bound catalogs.

31:12 These days, it's using social media, which my

31:14 daughter's involved in. So she's using Twitter, LinkedIn, etcetera. 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, Western Supermair at Rogers Place, Safefield sorry, SafeLab, and it went down very well. I think we had about nine of the marketing people, all young kids there. I think it's the most nervous I've ever been on a meeting, but it went very well. So what they were discussing is GPT, 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 attic cameras.

32:02 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 actually got. I think they're they're the main ones. Oh, yeah. Also as well, what we were discussing is especially with the lab group, there's a big exhibition, called Analytics Cups in Munich to say should we actually combine all the, all the business units into one stand. There are many stands. It's just like when you go to the NEC with specialist areas, but when I went last year, you get people like Ametek. They're all under one roof, so it may be worthwhile looking at that, going forward. The other area is, group tenders. This is what I've been harping about right the way through the presentation. So what we have, as you can actually see, is an opportunity, to tender for on Canary Wharf.

32:49 There's a science lab just like Cambridge Science Barn, just down the road from where I am today, being put up on Canary Wharf. I didn't realise it this week. HSBC said a lot of the financial institutions are moving out of Canary Wharf, so they need to replace it with something. So, they're looking at a planning commission, 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 Key Construction. He knows the 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, with all the business units on there. He had a meeting, so he was chairing it, and we'll see where it goes. I think it's a couple of years away, but it's something we can actually focus on. Now we've actually got 14 business units, 17 acquisitions.

33:37 It's an area where, hopefully, we can actually, sort of gain additional revenue streams. It's alright. My screen's just died. The last point is we've been running this for sort of three or four years now is group strategy sessions. That's in, in Quarry Mill. It's in Stoke and Quarry, if you know Cambridge at all. So we usually hire that out for two days. And what we're actually doing is just like Ami and I do in this investor presentation to you, chaps. These guys will do a presentation to all the, subsidiary directors and senior managers, myself, Ami, and, and the nonexec directors. And then there's q and a from the floor. It worked very well. We stopped it during COVID. It started again last year, and then we're gonna go introduce it again. I think it's in November this year. It works very well.

34:27 Like, we had said that synergies work in some instances, but, it's good when people get in a bar and have a drink and talk about business. You know? A lot of founders have built a lot of knowledge about business and running businesses, so it's worthwhile, you know, people actually sitting down and listen to these guys. And let me flick on to the next page. What do we got here? Oh, yeah. Growth drivers. You've seen this on many occasions on these presentations, so I won't spend too long on it. Yeah. This remains unchanged. Organic growth, yeah, it's still going there. It's still we're still getting organic growth. We still expect organic growth to be, what it's actually said here, organic growth to be 5% to 10%. Yeah. I always like it to be in the high single digits. That's my aim.

35:16 M and A, no change really. We're still doing on average probably two or three business businesses a year. The last one was, Fraser in October, so we did two that year. I'm sure we'll do two or three in, this, financial year. And, we acquired 17 businesses since February 2014. We've merged a number of these businesses, so 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. So my Outlook, just do a sort of a repeat what I said earlier on. It's been a challenging year in comparison to previous years, and I'm disappointed. Was unable I've actually said this for many years. It pretty much is a finance director, but now as the CEO, my personal goal was to deliver shareholder value, and it's it's difficult for me, so I'm actually quite disappointed for this year.

36:23 We still continue to sort of grow organically and through M and A. Trading for the first couple of months has been pretty good for us. We've got a strong pipeline of acquisitions there. I feel pretty optimistic sort of going forward. I'm afraid that's it from me. Perfect, Michael, Amy. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments for your next question submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the q and a can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation, and we also received a number of presubmitted questions. And, Amy, at this point, if I could just hand over to share the q and a, that'd be great. And then I'll pick up from at the end.

37:10 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 compete with acquisition opportunities for the free cash flow available to the group? The answer is Mike, you're on mute. And so the the answer is that, no. There's no competition here. We 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. Yeah. I just thought And just add to that. Yeah. Yeah. Yeah. Good point. Yeah. There there are sort of two two areas where where they have an opportunity to to share for investment. That is one of the budgeting stage and then one at the strategy stage. So we're looking at short term and medium term. And we've we've never sort of turned it away because they're the ones that are running those businesses, and they know more about it than Amy and I. So it never it's never happened.

38:28 And that answers the next question as well, is how do SDI management apportion reinvestment in existing group companies, as Mike says, is through the budgeting process and we 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? Too bloody true, I was. I was shocked. To tell you the truth, on this aspect. Yeah. I know in May we actually said about the trading update, but this time around, I was really shocked, to tell you the truth. And also, just I mean, I had a really busy time in the city, and it wasn't sort of negative. They actually understood what was actually going on with us.

39:13 At the end of the day, we're we're still generating plenty of cash. It's just that through accounting standards, had to take this ride down. But at the end of the day, we're 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 still a a good strong business. What are the monthly metrics you look at for all subsidiaries? Well, I I look at sales versus budget, wages versus budget, overheads versus budget. We look at debtor days, creditor days, stock day and and stock days, level of stock, gross margins. So there's multitudes of things that Mike and I look at every month for each check for each company in the group. Anything you got nothing to add there, Mark? No. You said the list. Yeah.

39:59 As you get bigger, is it becoming more difficult to find acquisitions that can be provided returns that you've you've achieved in the past? Not at the moment. I think the the problem I've actually got at the moment is delays, as I've actually said, in the city. You know, I think it's October was the last time we we did a deal. I'm sure we should have done one in my view probably May time, but it's just just drags out. You do the DD, you shake hands, and then you hand it over to lawyers. And what happens? It sits there in a box somewhere. So I'm still confident we're gonna do sort of a few this year. Amy's got the cash there to do it, so so I can't see any reason why we shouldn't. The multiples haven't changed at all. We're still looking between four and six there on goodwill, so I can't see any reason why not.

40:50 Over to you, Amy. 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 have said that you aim for single digit organic revenue growth. And I'll answer I'll answer this one. Yeah. You got it, Ami. Yeah. I'll answer this one. So, yeah, 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, then those interest charges will be a factor. And tax rate is increasing to 25% for everybody, so that 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 will not happen again. It's not likely to.

41:36 So cash flow will free cash flow will improve over the next twenty four and beyond. So, yeah, 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 at companies, and generate greater shareholder return. But buybacks are, you know, clearly, do consider them. But at this point, we have no plans to do so. Agree on me. Yep. When you look at large industrial conglomerates like AMETEK and Danaher that run a decentralized model while also implementing a system of operational excellence, do you envision SDI is 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 to and, obviously, I've been in larger companies, decentralized companies, and some of the board have as well. Alongside Mike, we 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 something we have at the right time for the organization.

42:37 So we will develop our organizational structure as we go along, as we get bigger. Mike, do have anything to add? No. Just a couple of points on that. And I support AMI on that. If you look at I think the classic model is Halmer. Halmer were like us in the 1980s. And as they grew, people were doing three jobs for one, then they had to increase the headcount and the structure. So I'm just concerned that you actually increase the structure before the revenues come in stream, but we're not doing that anyway. So, yeah, I agree on support, Hamme, on that. Hi, Mike. Please help us understand better your thinking behind the company's acquisitions over the last two to three years. Some of them don't look cheap optically, I. E, high enterprise value EBIT multiples.

43:24 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. Rightful if you could share your thoughts on the acquisition criteria going forward. Okay. Two parts to that. So first of all, the acquisitions, I think what you need to do is that I do for the board is actually separate the cash total cash consideration. So what we're doing is, first of all, we split it into two or three. So first of all, part one goodwill, what we're paying for goodwill, and that's usually a multiple of profits, profit before tax. We take a three year historical average, sometimes it could be an earn out, but it's also a very short earn out, multiply that by the multiple. It's four, five or six. The highest we've ever paid was at Fraser at 5.8 times. And if you go down further down, it was five point five five point six times to save that.

44:21 Our lowest was at four, so that's what we're paying. Then on top of that, we pay for net assets. We never pay for the cash, we hand the cash back for that. But the problem is in recent acquisitions, the net assets have been very high because we're buying property, and that's where it skews it somewhat. So in some instances, you don't actually see that in the broker's note, but I've actually said to the brokers, and this is what the people were discussing this week at the investor presentation. So it's twofold for us. It's the amount of net assets and the goodwill. So we excuse it if you actually look at it as a total sum. And we've Monmouth. What have we got for Monmouth? Quality of these acquisitions if it it begs one question that is the Yeah. I think Monmouth people said what's your thoughts on Monmouth?

45:12 Well, bought it a three year historical, so was making 500 for a couple of years, and then it had a really bumpy year with COVID, it made 1,600,000. The three year average was 700,000,800,000, which was fair. But the Stubborn Block was a property. There are six or seven properties scattered around Bridgewater. They'd already got planning in place for this property, and I think it just got out of hand on the fit out for it. Did we get it wrong? I don't think we got it wrong. We might probably got it wrong on a multiple of five. It could have been four to four and a half, so the numbers are not that big, but we they'll be looking at crystal ball to say what's gonna happen after COVID, you know, because at the end of the day, they were shipping ten, fifteen thousand 10 to 15 bio safety cabinets out to hospitals, trusts, etcetera.

46:03 It only needs one or two service engineers commissioned. That that model's changed now. We ship in two or three and a variation of other products, so your your overhead base goes up. So your service engineers need more service engineers. One of the biggest problems we've actually got is finding service engineers. So we've actually got service departments in a lot of the businesses. One of the questions we've asked is do we share those? A good example is LTE, Scientific, SafeLab, and I just mentioned Monmouth have all got big engineering teams with Vans. 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, really. Can you confirm whether you're seeing any changes in valuation expectations from vendors in the current market environment? Are they still you still aiming to get four times six? Yep. No. No change.

46:59 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 attic cameras. What is your current view on the organic growth going forward? Well, actually, it is if you exclude the attic cameras revenues, then the organic growth was 6.4%, which is within the the sort of range that we talked about. Yeah. I'll call that. Yeah. So I I think no. So we're quite happy that the year was actually within our line of what we expect. Mhmm. So I'm not sure quite what you meant by this one. No. So this is a question about impairment, and then they're asking about headroom on the are there any other headroom issues on other companies? But if you get can I guide you to note eight of the press release? And that talks about headroom and other requisite on other companies because it is there in the press release. You don't have to wait till the annual report to have a look at that.

47:52 Next one is interesting one. Operating expenses excluding impairment are up an eye watering 51% year on year versus 22. It's a much larger increase and revenue is up 36%. Yeah. It it is, but it includes acquisitions. So that's the bit both '22 and from FY '22 and FY '23. That's all in there. You got an annualized twelve months of '22 against the shorter stub period in the prior period, and you got the full half a year or whatever for the acquisitions. So 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 we haven't been able to avoid it. We have put increases up on it for our payroll, for our lower paid employees. So, we're not immune to the sort of inflation, well, inflation out there.

48:40 But, yes, it has increased. And, so, no. Your point is well made. Anything to add to that, Mike? No. None at all. Okay. Back debt in the at at $916,000,000 at the year end. In the absence of further acquisitions, how fast do you expect that bank debt to be repaid? Circa two, two and a half years is probably, you know, depending on how quick we can get the cash in circa two years, I would say. Is it possible to explain the impairment of 3,500,000 in relation to the profitability of those companies? I think you have done. We we we may have done. The cost of the the the property cost was, like, about $304,100 k higher than we anticipated. And that's but you bought it a for multiple what was it, Mike? It was Four times. Four times about Five. Five times. Yeah. Five times.

49:29 So it's about a few 100,000 off the profitability of those two companies, but it's still pretty profit. These are still profitable companies. Monmouth, the CGU is profitable. Will the increased interest rates influence your decision to fund acquisitions through your debt? In other words, is there a scenario where it's better to pay off debt in the current environment? Good question. It is a good question. Clearly, the accretion on acquisitions is less with a higher interest rates. There's no no doubt about that. And then you have a higher tax rate as well. But we don't buy businesses for one to two years. You buy them for three to five years beyond, and our model is to increase profitability of these companies. So I don't think we see any change. But, yeah, it there is a scenario where it's better to pay off debt. I'm not sure we're there yet, but I don't think we are. And do you have anything to add, mate? No.

50:21 Not at all. It's perfect. That's that's what you've been saying all way through the sort of Last couple of days. Yeah. Yeah. Last few days. Yeah. Most investors. Is the new management team at Monmouth hired from within the company or from outside the SDI group? From They're outside the SDI group? Out gray area on that for for the for the managing director, Julian Musset, he's ex Merck, but would already include recruiting the sales director on a short term MD role. He's now a consultant. He decided he didn't want to stay on for that long. He's still around helping us, which 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 one or two directors and then senior managers. Before, it had an MD and three directors, three very expensive directors.

51:18 But we've actually sort of farmed that back now, and it seems to be working. And what we're actually trying to do with Julian as it's new is again, it's a collaboration. So we've had a couple of subs and MDs going down there, ready to look at fabrication at Uniform, and they've stopped in at Monmouth. And what they've actually found is they've got a fantastic portfolio of products, 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 Synoptix have got a massive distributor base. So, we're trying to sort of making sure he taps into that base because there's no point in inventing the world when it's already there. So that's what we're trying to do with it. So I went out a bit on a limb on this, but, I thought I'd covered it. That's okay.

52:05 How would you 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 of lab products, you've got you know, 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've worked this out when you were talking. Okay. Good. Very good. Cool, I've done it by division. I've done it in total already. So it's roughly what we thought about 20%, but I'll just highlight some areas. Virtually all the businesses actually sell spares, but the service side, the bulk of the service I've already mentioned is LT, Safe Lamps, Monmouth, Astell's.

52:57 It used to be 50% of their revenue was service, so I think it's going back that way now with Astell's. SBS, they sell a batch of spares I've just mentioned with a razor machine and apply thermal control. So they're the ones who offer spares, which is about 6,000,000. And then you've actually got businesses which which is solely recurring revenue streams, which is Centec, Sensors, and Gratikuls, and that is about 7,500,000. So in total, it's about 13,500,000. So you're looking at 21% off the top of my head. So it's not far adrift, I don't think. There you go, Ami. Very good. The next question is me. Me, the question is the net debt we we refer to at 13,300,000, and the balance sheet shows a figure of 22,700,000.

53:43 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 the the bank, our banks, will look at net debt without lease liabilities. That's the difference. Do you reduce the risk from acquisitions failing? That's a very good question. Bug me. On me. Due diligence. Live Yeah. If we do due diligence, we still don't know what's underneath it. I I think the classic one is is Monmouth, but we didn't know that COVID was gonna end. That's the biggest one. But we we've had another problem, and that was issue, and 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 of you, as Amit rightly said, is DD, but not overextend.

54:38 Because what we if we overextend and get two bigger acquisition, then we're in the limelight. At least if we actually do a nice niche once between 500,000 and £1,000,000 profit, at least you've got some bandwidth to get it out of jail on, really. But if you actually really extend yourself, you're you're knackered. A good one we looked at was a really good acquisition. It was turning over, you know, to, I don't know, $2,030,000,000. Fantastic acquisition, but the only customer base was the NHS. So Ami and I discussed this and said, no. You know, if that fails, we're knackered. I mean, we also introduce people, improve quality of some of the people. We might get a qualified accountant perhaps to be the financial controller. You know, you get you upskill some people as well. There's there's various different things you can do. We do mention it in the annual report as well as a key as a key risk.

55:27 Share repurchasing, I think we've said that we're not we're not looking to do. Can you explain manage can you explain management m and a process, for example, criteria that need to be met, the number of targets, valuation? Oh, we've got we haven't got long enough, I don't Management quite your DD process. Okay. Well, the DD process is I've just sent it over to one of the institutional investors about interest. It's like a 50 page document. So what you're actually looking at is a constitution, personnel, property, patents, legal litigation, IT. You're looking at so many different vet so much information within within the within the potential acquisition. It's not that difficult. It's probably a week, two weeks work, and it's a good way of actually speaking to the staff. In a lot of occasions, we know that the seller has already informed the staff, so it's actually working with these guys to get under the table. Number of targets currently, I think we've got six or seven at the moment.

56:25 We've a couple in The US. Valuations, well, we've already discussed that already. You know, we're looking at between four and six. The US, somebody actually mentioned about The US, it's a little bit higher. They're looking at five to seven. So we're all we're in a really sort of ballpark. But we're not seeing anything sort of above that, really. Is 9,000,000 of headroom available sufficient sufficient for meaningful M and A? Yes. The answer is in the short to medium short term, yeah, there is. What so management's process for dealing with slow 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. What that growth like in the April, August period? Well, we've been in line with budget for April and sorry, for May, June. It's kind of what we said in our report. In your federated business model, are there any costs, not benefits, or synergies?

57:24 Interesting. No. Not at the moment. Not really. Not really. Not really. Because everybody's being paid by their subsidiaries. So we're not we're not driving any additional costs through this the flight costs virtually nothing so not really I think the pleasing thing for me is now everybody all those five companies have actually bought into it they understand it and they want 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, but that's it. Could could you elaborate on the COVID related profitability of the revenue recognized in twenty three of eight point five million? Was it in line with profitability within the division? Yeah. It's circa gross margins of the division.

58:17 Buybacks, no. We talked about for Mike, for better recurring revenue, would you consider acquiring maintenance service or software orientated businesses, please? Software, I'm a bit apprehensive about. That's what my wife's involved in, so I don't really understand it. Service, maybe, but as I've already mentioned, we have got probably 5 to £6,000,000 worth of service, and what we're trying to do is expand that internally. So it's not buying. So I think the answer, if you want a yes or no, is no because we're it's cheaper for me to do it internally. What are the drivers for the reduced forecast operating margins going forward? It's a mix effect. Clearly, the Attic OEM had super profits really at and that's that's operating leverage there where you've lost the sales at the gross margin.

59:06 It's replaced by acquisitions that have a lower net margin, and that's the driver. But we suggest that the pre pre COVID margins between 1520% seem a bit of a seem 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 Oh, the brokers down. The broker notes, and there's progressive notes. How do you source ideas for your acquisition pipeline? Do you get ideas also from managers of the divisions? Yep. 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.

59:54 But for me, as soon as you acquire the business, we do 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 routes. We get them. I've had sort of like four or five emails today 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 actually 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 are the risk of further impairments give the Monmouth experience? That one is is always you have to do this every 12 months, and it depends on the the weighted average cost of capital in twelve 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 we do give some guidance where there's less headroom.

1:00:53 Notate of the financials of the press release gives you some some color, and then annual report will be coming out within a couple of weeks. Perfect. Michael, Amy, thank you very much for that. I think you've addressed this question as you can from investors. And of course, the company will review all the questions submitted today and we'll publish such responses on the Investor Meet company platform. But just before redirecting investors, provide you with their feedback, which you know is particularly important to the company, Michael, could I just ask you for a few closing comments? Yeah. Just a couple sentences. Yeah. I'm pleased that we're finding businesses collaborating together. They're not just sort of stand alone businesses. Sydney is a wonderful word, but I think it's coming together. I'll keep sending that right through my presentation. We'll continue to invest in companies to drive organic growth within the businesses we've got, and we'll also evaluate businesses as they become available to bring into the SDI GROUP. I think that's it. Thank you. Thank you for attending.

1:01:47 Michael, Amy, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This loan will take a few moments to complete. I'm sure it 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 all. Thank you. Thank you.