Sdi Group (LSE:SDI) — Interim Results

0:01 Good afternoon, ladies and gentlemen, and welcome to the SDI GROUP PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please 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 of the questions today and publish responses where it is appropriate to do so. Before we

0:33 begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Michael Creedon. Good afternoon, sir. Oh, hi there. So we'll we'll just go through the interim results. So if we start on the agenda, Amit. So I think everybody can read the agenda there. We'll be going through the group summary. Amit will sort of do a junior intro himself as the new CFO. I would just go through some sort of general narrative where we're at or happened what's happened over the last six months. Amit will go through the numbers, and then we'll look at operations outlook and then to go just to conclusion. I think one of the interesting things that within this pack, I think you can get your hands on it after presentation, is is if you need further research, just go through to the appendices because it's actually quite interesting. We've actually got 14 business units now. And to get get some some background information on those, go to the appendices and also go to the relevant website websites of the subsidiaries.

1:33 So if you wanna go through, mean, to the next one, and I'll leave it to you. Yeah. Thank you, Mike. Good afternoon, everyone. As an intro, my name is Ami Sharma.

1:42 I joined the board back in August as the new CFO, as Mike said. I'm not the only new director, though. We welcomed Andrew Hosty to the board back in August 2. Andrew is an experienced NED on multiple boards, you can see from his profile. He was formerly chief operating officer of Morgan Advanced Materials, a FTSE two fifty decentralized manufacturing group. And he was on their board from 2010 to 2016. What about me? Well, just to give you a bit of a flavor of my background, I was formerly the, the group CFO at Ultra Electronics, where I spent also a large part of my career. Ultra was a FTSE two fifty, aerospace and defense company. It's a decentralized manufacturing group with a small head office.

2:31 And I was part of the team which embarked on a buy and build strategy in the late nineties and early two thousands.

2:37 A question I get asked quite recently, anyway, is, you know, why am I here? Why why SDI? Well, before I joined, I saw what many of you see, a strong track record of success, a team with a good eye for acquisitions, and a strong collection of successful businesses. And having been here four months and having traveled around virtually the entire estate, I'm pleased to say that my initial thoughts have been correct. I've seen a collection of well run impressive businesses who understand their customers, have a good portfolio of products, and importantly, are capable of growth. That's about that's all about me. Back to you, Mike. Okay. Let's start off with a presentation about the businesses. I think who've been on these presentations have seen this diagram many times. It's got larger.

3:28 In this sort of calendar year, we've acquired four businesses. And we started off in 2014 with Opus Instruments. That was the very first. And now today, we've acquired 17 businesses through equity raise on three occasions and then it's through our own cash and debt. As I've said to you before, four businesses that we acquired this year, two were in this financial year, and we'll discuss those later on in the presentation. So one of the is the strength of this business model. You've seen the wording on the right hand side before, but just to repeat myself, we've got all these businesses that are run autonomously as as separate business units, but what we're actually seeing now the group is getting bigger is synergies within the group as we as we acquire additional complementary businesses.

4:16 Again, we'll discuss it further as we go through the pack. All acquired businesses have to be profitable and cash generative, as you well know. We don't rely on a single sector or region. That's why we've actually sort of been quite successful through the COVID period because we have a range of businesses which were selling within the COVID epidemic, and some find it tough, but we were very successful as a group. What I'd actually like to do is is just to repeat what I said right at the start, and that is please refer to the appendices on the where it's indexed group brands, and then you can actually see the sort of sectors and regions and the type of products we actually sell within the 14 business units.

5:03 So what we do with these businesses is when we acquire them, limited sort of cost as an exercise, very minimum. But what we try to do is to invest in organic growth in these businesses. So if we go on to the next slide, Amy, this is a new one for us, UK and world presence.

5:26 What we've actually got here is we're highlighting the 14 business units and where they're located. 14 business units or businesses. They're based in The UK, and then what we've actually got is additional satellite offices. We've got one in Frederick, which is just outside Washington in The US, one in Lisbon in Portugal, the recent acquisition of Fraser Anti Static Techniques. We've acquired a business in Dresden and one in Shanghai. One thing I'd like to sort of highlight in this is most of our sort of business operations is is carried out in The UK. So that's 13 of the 14 businesses. But in recent years, what we've actually done is moved the majority of the operations of attic cameras across to Lisbon. And so what we've actually got in Lisbon now is 34, 35 people over in Lisbon, and I think it's 11 people within Borbrook, is near Norwich.

6:20 So what we operate in Norwich now is just the r and d center, sales and marketing, and then the rest of the operation, including finance, is is within Lisbon. Now, yeah, my role is sort of twofold, really. It's one is in operation, and the other one is to is to delve into m and a. Over a a six week period, I've tried to visit all the business units within The UK. So I'm actually seeing them probably six, seven times a year. And then with the overseas offices, I'll try to visit them every three to six months. But it all depends on what time is taken with m and a. Obviously said to you this year, we've accomplished sort of four sort of acquisitions within the calendar calendar year, so it's actually been quite busy for me on that aspect. But like I said, I do like to visit the unit as often as possible.

7:11 So then I'd like to hand you over to Ami, who will go through the financial information. Thank you, Mike. On to half one financial year twenty three results. Okay. This slide takes shows the key financial highlights for the first half year. These you will have seen from the press release already, so I won't spend too long on this particular slide. But the headlines are strong revenue growth of 28%, which translated into strong operating profit growth of 19%. Both basic earnings per share and adjusted diluted earnings per share also showed strong growth. Cash generated from operations declined by 57%.

7:57 And with all of these and on all of these, I'll talk a bit further in the forthcoming slides. Okay. This slide shows some extracts from the income statement. The headlines from this slide are total sales growth of 28%, as I said, of which 3.8% was organic. This was driven by the one off attic cameras order for cameras which go into PCR machines. £6,100,000 of the growth came from acquisitions. The acquisition of Fraser Antistatic Techniques was made at the very end of the half year period, so it's not included in these numbers. In terms of gross margins, there's a mix effect going on here with our acquisitions having slightly lower gross margins than our existing businesses.

8:46 If you exclude exclude these, gross margins held.

8:51 As I mentioned earlier, adjusted diluted and basic EPS both showed strong growth, in fact, stronger growth than our profit growth. And this was due to the comparative period tax rate being higher as a result of a one off adjustment to bring the deferred tax charge up to 25%.

9:14 This slide shows how the revenues have moved compared to the equivalent period last year. As I mentioned, acquisitions contributed £6,100,000 in revenues. And the impact of the one off ASIC order for cameras that go into PCR machines is shown here. For the first half of FY twenty three, we had revenue growth of £700,000 on this contract. So with revenues in the first half of £6,400,000. This compares to £5,700,000 in revenues over the corresponding period last year. This contract ends in the second half of this year, and we have no visibility of any further orders from this international OEM. However, it's pleasing to note that Attic has experienced strong organic growth in the first half of FY twenty three when you exclude this contract.

10:10 This slide shows the performance of our two divisions, digital imaging and sensors and control. As a reminder, the digital imaging division includes attic cameras, Synoptics, and Gratikules Optics. All of our other businesses are in the sensors division. The digital imaging growth of 10.4% was driven by Attic Cameras' PCR camera order, as I mentioned earlier. All of the acquisitions made in the last twelve months have joined the Sensors division, and all of this division's growth comes from from these. Looking at trading in this division, SENTECH and Applied Thermal Controls both had very strong trading halves. This was offset by component delays at chest at Shell and Astell's control systems and a slower post COVID first half at Monmouth Scientific.

11:05 Both LTE and Fraser, those new acquisitions in the group, Mike will cover cover these a little later on. Turning to cash. Working capital increased by £5,800,000 over the period. This is largely driven by £2,000,000 from increased in in inventories at our businesses to mitigate against component shortages and in respect of PCR camera deliveries scheduled for the second half of the financial year. A further £1,100,000 outflow came from Attic Camera's upfront payments, which unwound in the first half. And all of these contributed to cash generated from operations reducing from £4,400,000 to £1,900,000 in the half.

11:56 Over the first half, most of the acquisition consideration were funded from our bank facilities. You can see this more clearly on the next couple of slides. This slide from left to right shows the working capital movements I've spoken about. You can see the attic the cameras unwind of upfront payments, the increase in inventories here. And on the right hand side, you can see the £16,600,000 consideration for acquisitions, which was funded by 50 an additional £15,000,000 in bank borrowings. Turning to the balance sheet. The growth of assets and liabilities you can see here is driven by acquisitions.

12:42 And at the end of the period, the net debt to EBITDA ratio was one times compared to a ceiling on our facility of 2.5 times. After the period end, £5,000,000 of the £10,000,000 accordion option on our HSBC revolving credit facility was exercised after agreement with HSBC. The facility size increased from £20,000,000 to £25,000,000 on the November 30. This resulted in the headroom on our facility increasing from £1,000,000 to £6,000,000. The acquisition of LTE Scientific and Fraser Antistatic Techniques required consideration of £14,200,000, and a further £2,300,000 was paid to the SafeLab system sellers to close that particular transaction.

13:32 At the end of the period, £2,500,000 in deferred consideration is included within trade and other payables in the balance sheet. 1,500,000 of this relates to Fraser's and £1,000,000 to SVS. To conclude, as you're all aware, interest rates are increasing. And as a result, interest payable on debt will also increase. The analysts following SDI have updated the interest charges in their PBT models to reflect this. That's all from me. Back to you, Mike. Okay. Just flick on to the next page, you know me? Yep. Okay. So now you've got me right to the end.

14:18 So this is page 16. This is the first acquisition we did in this current financial year. We acquired this in August 2022. This business has been on our radar for the last five or six years. Ken Ford, my chairman, and I met Colin Perry a number of years ago in London one Christmas period. I wanted to try to buy the business. We were too small for him, and so that meeting was very short. But over the years, you can actually see we've grown, and he's taken an interest in our business, and we acquired we agreed heads of terms. I think it was a number of months ago, then sadly he died. So he went into probate, and it took us a number of months to get this over the line. It's based in a place called Greenville, which is near Oldham, Greater Manchester, and it's within 44,000 square feet facility, single story building.

15:17 So it's actually a sort of quite a big footprint right in the middle of Greenfield. Nice area just outside Oldham. That's again, I think this is the second one whereby we had to well, we acquired the property. The the family didn't really want anything to do with the business. They wanted to lock stock barrel over over the whole business including the property. So we we bought the property, and that was part of the asset purchase. This business actually special I see if you do some research. It specialises in the supply and service and manufacture of medical and laboratory equipment. It's got a massive range of products which we really need to get through and analyze.

16:02 Major ones are autoclaves, steam sterilizers, endoscope cabinets, and also laboratory ovens and also environmental chambers. We do have a sort of a significant order for environmental chambers which came through just before we acquired the business. You may have seen when, I think 83% of you are shareholders, so you do look at broker's notes, and you would have actually seen that, it's, high revenues and low profits. So we acquired it on a multiple of just, about four times PBT. That's a historical three year PBT, and we are positive with the synergies with the collaboration with Safe Labs and Monmouth that we can achieve increased profitability.

16:48 And what we've actually tried to do, I think it's in the beginning of January, we

16:51 we we've tried to put together some meetings. I think in the third week in January, myself, Monmouth, MD, Alan, and Roger from SAFE Labs are meeting face to face with John Lee, the MD of LTE, to say how can we actually increase our group revenues while still remaining autonomous units because we do actually cross over in a number of areas. I think one of the areas of interest is all three of these actually service equipment. You know, can we actually share some servicing? Because one of the sort of problems we have in this this year

17:26 apart from component shortages is trying to recruit service engineers. It's become very difficult for us in this period of time. But I'm sure, you know, with these three guys, they're they're very sort of positive that we can actually try to increase our revenue share

17:45 in line with or in comparison to the to our competitors that we should actually achieve this hopefully within the next sort of year, two years. So you flick on to the next one, Amit. We'll look at Fraser anti static techniques. We acquired this business in October 2022. It was a bit outside of our sort of area. The business was bought to us, it was quite interesting, really, by a company called Thomas Westcott Corporate Finance. Now Thomas Westcott are a set of accountants with a with a sideline into corporate finance. They were the advisers of SAFELab when we acquired SAFELab in this calendar year. So they came to me with a very interesting business called Fraser Anti Static Techniques or call it FAST now and said, were we interested in purchasing it? This is the biggest acquisition we've actually completed.

18:43 Three year average historical profits of 1,400,000. So it's out of our sort of scale of what we've been buying in the past. It turns over sort of £78,000,000 worth of profit, and it's a very nice business. And we can actually think we can actually sort of grow that business. It's a leading manufacturer of anti static products from a number of industries, but the main area is plastics. So it's from sheet plastic to injection molding plastic. So what we're actually doing is taking the static electricity away from that machine. So if any of you worked in sort of the electronics industry

19:19 with an r and d or an r and d center, you'll actually see somebody has a mat with a wire earthing the desk away from the individual. Well, this is a sort of more sophisticated piece of equipment. The major area we're selling into is Germany, but we do sell all over the world. And where we think the growth is in that business is going to be in The US and into China. But, like I said to you, they have actually got a subsidiary in Germany. That is just for one customer. When we came out of Brexit, then, a German supply customer, couldn't actually trade with us. So what we've to do is, set up a German subsidiary, and then we move product and invoicing through that business.

20:05 We do sell into Germany and to other customers, but we don't use that vehicle. China, the distributor has been around for many years. They set up that about three years ago, and I'm sure there's an opportunity to grow that business.

20:18 As I actually mentioned about multiples, everyone's interested in what multiples we're buying our businesses. So this one was the most expensive to date. That was at 5.8 times PBT. If you look at our sort of scope on acquisitions, we try to buy between four and six, and I think in 17 acquisitions, we've actually kept to that. I I think on a couple of cases, we've been below four, but that's the sort of a figure we're looking at at the moment.

20:49 And, oh, just another point as well as I look at this presentation. Yeah. They're they're based in in Bampton in Devon, and they've got an r and d center, which is based in in Bristol. It's the old TV studio. Yeah. So it's quite sort of strange how they've actually put a factory, and it's in the middle of a a new housing estate. To get planning permission to build a housing estate, they had to have some industrial premises. So at the time, a number of years ago, that the shareholders of Fast actually acquired the land and actually built

21:23 a nice sort of three units on that site, and they're still extending the housing estate at the moment. Bit of an oddball in my opinion, but it serves the purpose for us anyway. So if you tick along to the next one,

21:39 that's page 18. I'm sure you've seen this again on presentations, over the years. So what SDI tries to do is to gain organic growth and also growth from m and a. This half of the year, we achieved 3.8% organic growth. To me, it's in pleasing times, and because it's difficult times for us, especially with component and labor shortages. And, last year was 22%, which is fantastic. If look at it, 16% of that was active cameras with our sort of Chinese PCR cameras going out of the door.

22:16 And this was a bumpy year as were previous years, but I think we're getting back to some normality within our business units. We do have one more shipment of cameras to a Chinese PCR manufacturer, and this will ship within this financial year. And as we've explained in the financial markets over the last two to three years, this is a one off, and we do not foresee or we haven't got any visibility on any future orders for this PCR machine. A number of our businesses are sort of back ended, so we're looking at sort of healthy sort of sales in the second half of the year, and so I think we're quite positive of the outcome that I think we should hopefully should achieve market expectations.

23:04 M and A. This is sort of the heart of our business, and we still continue to focus on acquiring cash generative profitable businesses. I said to you right the way through the presentation we've acquired four businesses this calendar year, two in this year, but we don't set a target number, but I think on average, we're doing about two a year. We have done since February 2014. Our pipeline still remains strong. We've got a good track record with friendly acquirers. I don't see why this should change or continue or shouldn't continue.

23:36 Our criteria remain unchanged, and that is really we're looking at sort of scientific technical businesses with a manufacturing bias, which means, you know, you can actually control the gross margin. As well, as I said before, as you well know, we want cash generative profitable businesses with a strong management team

23:58 and also strong exporters within these sectors. Sometimes that's actually quite difficult to actually put across, in presentations because, a number of our businesses actually are are OEM, businesses. So we actually integrate our products into, other pieces of equipment. And that is usually in The UK, and then it's shipped overseas, so it's very difficult to see where it is, it's being placed. The only time we can actually do it is if we actually deal direct on consumer parts. And, also, we actually buy businesses at a at a fair price.

24:33 If we flick on to the next page, this is a diagram sort of John put together, in the last couple of years. So a nice diagram, on page 19. If you look at it buying, it's 35% compound annual growth over a six year six year period. On the build side, our return on capital has increased from 12% to 34% over the last six years. So there's some big numbers coming through over these years, and this is due to our strategy of investing in revenue and margin growth within these businesses. I I will expand on it over the next couple of slides. And as I stated, 17 businesses have acquired in in, what's it, sort of eight years? Nearly eight yeah. No. It's nearly nine years now.

25:19 And at six, what we've actually done is combine them into existing business units, and then we've got 11 stand alone units. And then if we move on to page 20, this is where I want to expand on what we actually do in the way of investment in our businesses. So what we do is invest in those businesses. I think sort of three sort of good examples of that is Gratiakios. I think we've mentioned it in the the annual results side. What we're doing is refurbishing or getting an old nineteen sixties building. That should be completed by within the next couple of months. So what we've actually done is put a new a clean room facility,

25:59 laminate flow cabinets, painted, decorated the building. It was like a rabbit warren, so it's more open. And the next phase, if we can actually or Amy as the new CFO can look at whether it's a viable proposition is to expand the building, and that is build, on the side of it because currently, we've got that unit, and then we've got a small service office just down the road. But it'd be nice to put everybody under one roof, but we have to look at, whether we're gonna get a good return on on our investment in the next in the foreseeable future.

26:32 The second point is what we actually do, as you well know, is r and d. A good example of that is with Synoptix. I don't know you've actually looked at some analysis on them. They've got a very smart machine called Autocoll, which is an automated colony counter. Really, it's for the pharma industry. And what we've actually done or Kate and Claire with that business is reduce the headcount, and we've outsourced r and d in a number of occasions. And this is one of the projects we've outsourced, this Colony Counter. This is the version two. What's actually happened in, especially through the COVID period, not to bore you at all, is the Colony Counter can count. I think it's up to a sort of 90

27:11 plates and it will stay. The current petri dish are 90 millimeters wide. There's a new one out of 55 millimeters which was developed during the COVID period. It's got a tighter lid on it. We tried to put an adapter in the new machine, but it should have cost more than the old machine. So, what we've actually done is developed a new machine. We've run this over the pharma companies, and they're very happy, to take this on board that they will actually need two, under the machine.

27:40 Another area so, again, back to synergy. Another area this is very recently over the last couple of weeks, and, really, it's all due credit to sort of Roger Guest, the MD of SAFE Lab. What we've actually looked at is the marketing talent. Recruited a number of specialized market marketers or marketing people in digital marketing. These are young kids, and what we need to do is to see if these marketing people can actually help some of our smaller subsidiaries. So we had a group marketing meeting recently just on Zoom or Teams or whatever it was to see what we need to do to expand our knowledge and collaboration within the digital marketing across the group. So there there was two or three people who stood out within the group who could actually help people like NPV industries who sort of are behind well, not behind the ties, but they do need some help with these new tool tools and techniques within digital marketing.

28:42 So hopefully, with the resources we've got in place, we'll be able to help these guys drive new customers through to our website. As we've seen in the press recently, supply chain issues have continued to cause problems for us. There is one part was highlighted, I think, last week when I was at LTE, a fifty two week lead time on that part from The US, but we've managed to actually reduce that lead time by buying it in The US instead of our UK distributor. And, hopefully, that's alleviated the pressure on, on production. But we're not alone, with these challenges. If you've seen our recent r and s press announcements, everybody's got their problems trying to fulfill orders because of of consumer of consumer

29:32 of parts, of shortage in parts. And another area I'm sure will come under q and a is inflation. You know, what we try to do is to, with our price increases, is try to pass on to our customers where possible. The easiest time is with new business because you actually incorporate it into new growth. But we do our best. Our margins are still achieved, as you've actually seen from the presentation, which Amy did earlier on, with our gross margins. So I think, yeah, we're we're in a good a good place. And if you have a look at

30:02 our businesses, a lot of the business is still run by the founders or there is succession planning in place, and these guys know how to run their businesses and achieve good margins. So we don't actually need to use these sort of stick approach to try to increase the prices. Another area which is quite pleasing is trade shows are back. We've got two big trade shows for a number of our businesses. One is Ikema in Germany, and the other one is Analytica again in Germany. And, these are pretty busy shows, and it's good to get back to have face to face meetings with our customers, in the in the marketplace.

30:42 And as I mentioned as well, about the acquisition of LTE, are now able to increase our synergistic opportunities internally with our business units. And I'm sure that we'll be able to sort of expand on that across the group over the year.

31:02 If we go on to page 21, so what we've actually got on here oops. My hard copy pages. These are our priorities for the latter part of the year. Still, we're gonna continue to manage our supply chains. We've got some very good buyers and some very good engineers. If we do get problems, we're actually reengineering some of our products. Labor is still a big problem for us as well as inflation. If you look at Astor's, it's a very small business. It only employs sort of 12 people. Yeah. We've got a shortage of four people there, two admin and two engineers. So we're we're in a very difficult market at the moment. The second point is, as I've mentioned right the way through this, is synergies across our businesses, which we're trying to achieve, and I I think we will be successful in that. Obviously, the early stages is gonna be the LTE, Monmouth and Safe Labs, and then we'll expand it across the board. What we did do this year for the second year, it was stopped in COVID, and that is to have a strategy day or a couple of days. That's whereby

32:04 all 14 businesses presented their ideas of what a five year plan looked like and what we need to do to invest in these businesses, and it went down very well. So how the format was was very similar to what Amy and I are doing today. It's put a a presentation forward, and that's what they did. It wasn't just purely to the main board. It's to every sort of senior manager, director of the subsidiary. So we had about 40 people attending that, and it was worthwhile. And what we'll actually do is follow that those strategies up over the coming year. Next point is buy. Very little to say on that. There's no change from previous years. Still seek high quality cash generative businesses. We have a strong pipeline, and I'm sure we'll continue what we have been doing since February 2014.

32:57 And then just a summary, again, it's just repeating what we've said in previous years. Yeah. We still aim to deliver our full year profits in line with market expectations. We still invest in our businesses for growth, as I've already mentioned, and we'll continue looking for complementary acquisitions. And also what we're actually doing as well is looking for another non exec director. Now these days, ESG, with governance, you know, it's it's very strict, so we need to make sure that we have the, the right, governance going forward for SDI as we continue to grow. And that, my friends, is the end. Okay. Michael, I mean, if I may just jump back in there and thank you very much indeed for your presentation this afternoon.

33:44 Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that situates on the right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Michael, Amy, we obviously received a number of pre submitted questions ahead of today's event. And as you can see in the Q and A tab there, we've also received a number of questions during your presentation this afternoon itself. So thank you everyone on the call for taking the time to submit their questions. And Michael, Amy, if I could just hand back to you to respond to those questions where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Okay. So one question for you, Mike, which is when we take the revenue and profits coming from COVID and we strip them out from the core business, Can the core business still manage double digit growth in the coming quarters?

34:42 Thank you, and great work. Okay. I can't see why not. Well, not double digit. We've never actually said double is that double digit growth? Yeah. Well, that's the question is double digit, but No. We we we've never actually said that. What our our target is is high single digit growth. You know, we've we've had a great sort of two to three year ride with the COVID products, but I I don't think it's gonna be double digit growth. You know, we we never actually said that on the outset. So it's always gonna be my target has always been high single digit growth. You know, if you look at some other businesses, you know, they're in line with us, but not double digit growth on organic. Maybe with I'm sure it will be with acquisitions, but if you just strip out the acquisitions, it's high single digit is my target.

35:33 Okay. You've acquired a lot of freehold property with your recent acquisitions. Are you intending to sell and lease back? I'd like to see you carrying on shopping for new businesses as they go and sell without necessarily maxing out on the accordion. I'll answer that one. Yeah. But we have we've acquired three three holes. In terms of there's no current intention just to do a sale and leaseback. I understand the question. Obviously, if you do do that do that, you do incur then the p and l charge, albeit it'll be directly in operating. But, yeah, it's will we will consider this in the in the next year or two as well. So not currently, but maybe in the future. Can I just expand on that, Amit, as well? Yeah. Just when we buy the properties, they we actually put a nominal rent charge through on the valuation as well.

36:23 So our so we've actually got a a true reflection of what a rented property would be when we look at the goodwill valuation. So we do build that into valuation. I just wanted to mention that to people. So we don't just buy the property and say it's our property. There has to be a rental charge in there as well Because at the end of the day, we need a guild on that, not just like anybody else. Are there any decisions made to divert any manufacturing from any divisions to move away from China to a different region? If so, where would work better? Thank you. To move away from China. Well, I've moved to China, I think is what the question means. No. I don't know. It's the nice and simple. Easy one. Are you pursuing any US deals? Yes.

37:12 Okay. In terms of acquisitions, how is the pipeline looking? And second, with rates rising, I could imagine that we would start to see less leveraged buyouts. With that in mind, do you think you'll get less competition from PE firms during the bidding process? We've only competed with PE on one occasion, and that was with Shell. That's what we were told PE are involved. We never do. I don't think our business is too small or or they're outside their scope, but we we never see them at all. I think it's a good question, but we never see we we never compete with them. This one, I'll answer. How much leverage is management comfortable with utilizing on a debt to equity basis? I think the question is then what's our balance sheet sort of targets? We're at one times net debt to EBITDA, and I think the board is comfortable with one to 1.5 times currently in terms of the leverage.

38:07 So, clearly, our borrowing capacity to get us to 1.5 times is probably higher than we're currently using. But, yeah, one to 1.5 times is our sort of comfort level. Okay. Could you give some greater insight into customer concentration? How much do the top five customers account for with the group, and how has this changed over the last three years? Does any single customer account for a single amount of a subsidiary company sales over 25%? And how does management view this concentration? Well, we've got one customer, which we've talked about extensively in in this presentation, which is a very high percentage of the whole group, let alone any one subsidiary, the attic camera contract, and that is very high concentration.

38:52 And but we've been very open and transparent on the amounts, and that's unwinding over the current year. And we've reinvested some of that cash flows from that in buying new companies to to fill that gap. In terms of the rest of the con con customers, well, they're not that significant in the scheme of things. You're talking max probably four to 5% for one customer. I would say the top five, excluding the the really big one, you're talking barely into double digits. So we're quite well diversified with the with a view to customers if you exclude the one big contract that we've been very transparent about. So in terms of so this is an interesting one. Organic revenue growth of 3.8% looks low, especially with the current inflation situation. What's your expectation for future revenue growth in real terms?

39:44 I guess single digits is is is what we've said, Mike, isn't it? Yeah. High single digits. That's that that that has always been the target for us. But like I said, with COVID, we had sort of three good companies. We had the Chinese PCRs. We had buy safety cabinets with Monmouth. Right at the outset of COVID hit us, MPB with the vent flow meters, which went into the ventilators. You know, we're getting back to some normality now. So it it's it's difficult to actually forecast where we're gonna go because we've had such a a good ride for three years. But, yeah, the target always has been high single digit growth for us. Okay. Both Progressive and FinCap show declining post tax ROE in '23 and '24. Do you agree with that outlook? And if so, why would expect a delight decline? And I'll answer that one. I think what you're seeing is sort of we're working out the asset contract in The in this year and next year.

40:38 Tax rates are moving upwards in The UK next year, and I think there's some reflection of that. And in and that we have a higher level of debt, and you've got a full year impact in '23 and a partial year impact in '24. Hence, the sort of EPS type movements that you're seeing in the broker notes. Okay. Mark, hello, Mike. Why has the the market reacted poorly to today's results down over 9% before this presentation? What has been misunderstood in the market in your opinion? Thank you. Do you want me to answer that? No. Yeah. I'll answer it, then you can come in with some proper comments. To tell you the truth, I don't look at the financial markets at all. I don't even look at the share price. It's only what being told me today. I don't know.

41:26 I'm not interested in the financial markets. My job is to create shareholder value, and I love what I do. But to to me, the financial markets, you know, I'm not interested in it. So I I don't know. Amy may do. I don't. Well, I mean, it's possibly because of the working capital movements. Although some of the working capital movements have been quite well flagged in respect of the increase in or do the unwind of the attic down down payments. So that's been well flagged cash wise. I imagine that the inventory buildup is probably surprising, but we're not unusual when it comes to most manufacturing companies having a man having a component having component shortages and having to manage it through inventory build off build up. But it's likely to be it's not likely to go up any further, and we we should be back to normal cash in 2024 once we've worked through the unwind of the attic customer upfront payments.

42:26 Okay. Right. What else we got? Okay. So let's go to a controversial one. For a company growing as strongly as SDI, I'm a little surprised that directors don't have a larger shareholding to demonstrate confidence in future growth. Would you like to comment, please? Me? Yeah. Well, first wanna? I'll I'll first of all, I'll I'll start with this one for some for us. A few of us have just joined. So and but so I've got a small holding, and he's just starting, and we we also have options that will vest in future years. So we're quite new to the board. And, typically, NEDs don't have a huge shareholding, although some of the ones here do. Mike? Yeah. I think we'll answer that on the next question, Amit, about why I sold my stock. Yes. I think I'll do it all in one. Yeah. First of all, as I mentioned before, I'm not really interested in financial markets. I don't understand them. I think my job is, which I enjoy as MD or CEO of the group, is to create shareholder value for you guys who sits in the hit there today as shareholders.

43:33 I sold it because there was a number of our employees and ex employees who were going to sell stock. My job is to speak to you and also institutional investors. There was demand for shares, and, we agreed. I think it was about 750,000 in shares with FinCap to sell. And at the last minute, our, employees and ex employees backed out because the share price wasn't, high enough for them. So I didn't mind. I sold the stock. What have I done with it? Stuck it in the bank, give some to my kids so they can get on the housing ladder. You know? I'm not that overly concerned about the money side. You know? If I have buy shares in it, like I said, I don't understand I'm not interested in the stock market. So for me, I think I do, hopefully, a reasonable job for you guys.

44:23 And to me, I'm not motivated by having lots of shares in in any business, really. I've said I don't follow the market. And I'm just being honest with you, just after being honest with the people at Mello and all the institutions where we've been going around today. Okay. Do you expect to be able to get the gross margin of your acquired companies up to your existing businesses? That's a good target. Yes, is the answer. I think we need to. Yeah. I think so. We will work to do that. Yeah. I'll answer the next one. In the next one to two quarters, do you expect inventories to go down? The answer is probably not. We will some of it will because we will ship out the cameras on the ASIC contract in the next month, so there will be some decline. But whether there will still be an increase likely in inventories by the period end.

45:13 It just may not be as high as 2,000,000, but there will be an increase at the full calendar year end. Okay. I think we might be coming to an I can't see any others. Oh, yeah. I've got one here. This is a real cool one from Patrick L. Okay. Okay. No one. He's done some real good research. Go ahead. He's he's seen a photo of a new CNC machine delivered in Attic Lisbon, which is cool. So what we're actually going to do is, yes, you're right. It is outsourced currently. But what we want to do is, first of all, is use it purely for developing new cameras.

45:58 It could be going forward that we we use it in production, but initially, it's just developed cameras. So what we're actually doing is we've got a really sort of a quite a big factory or facility just outside Lisbon in the place called Santa Area. We took the Top Floor, and it's a nice clean room environment. Downstairs is just purely storage, and what we decided to do was to buy a CNC machine and just test it because it is expensive developing new products or the casing. So what we actually do, you've gone over the CNC machine, you get a block of aluminium. What we're doing is drilling out to make a casing. So there's a lot of waste there, which is all recycled anyway. But very good spotting, Patrick Al. What is the largest acquisition you'd consider consideration wise, and how would you finance it? That's controversial, isn't it?

46:50 Yeah. All I can say about it is something we've always said before, as long as it's not a reverse. At the end of the day, I think Fraser was a big one for us. That was over £13,000,000. So our debt what's our debt? It's 19,000,000, is it? Mean Yeah. Net debt's about 15 at the minute. 15. Okay. Yeah. So, yeah, it it it really sort of took the money out of the piggy bank for us, but I think we have to look at it on a case by case basis. When we actually do due diligence, it's an eighteen month process, and we go through everything, so we have to really tick the boxes. What worries me more than anything is you see a lot of people who do M and A, buy a big deal and copy it up. The biggest one is really HP and autonomy, which is going through the courts. So we have to make sure it ticks all our boxes because the problem is if you don't make a mess of a big acquisition, then it affects you guys, the shareholders, and that's what we don't want to do.

47:42 Okay. I think this is the final one because I can't see, anything more. What is the percentage of attic sales that are actually COVID, related? And can you also talk about the nature of recurring revenue in our business? I presume that means attic and the margins that come with it. So the percentage of attic sales, which are which are actually COVID related, which the PCR contract is, which is extremely high is what I will tell you percentage wise. Can you talk about the nature of the recurring revenue in our business and the margins that come with it? Well, do want me to answer that? Yeah. Why don't you have a go at the one? Well, we have got 14 businesses, and we do everyone likes recurring revenue streams. I don't know what the figures are, but if we go through the subsidiaries at SendTech, they they make Sensors, which really is a recurring revenue stream. It's a consumable item. You look at our stores, as we've said through presentations, 50% of their revenue is service. Again, recurring revenue stream.

48:43 We have service in SafeLabs. We have service in Monmouth, and we have service in LTE. So they're they're the major areas. And also we have service as well in applied thermal control. So they're they're the main ones coming through. Let me just have a look at the diagram and see if there's any other recurring revenue streams for us. Alright. Here we go. Oh, graticules. Yeah. They make graticules and graticules, a lot of that is recurring revenue stream as well. That's it, really. So I think it's about 20% of our revenue is recurring revenue, but I worked out roughly. And that is and I actually I thought we'd include service on that.

49:29 Okay. I think there's one more actually that I would like to just wrap to wrap up with. Yeah. Are there any specific goals you you plan to reach within five years, for instance, in terms of growth efficiency ratios, business quality, and position? And then there's a final financial one, which is there's someone's found 2,860,000 labeled cost of development. Does this item express the overall r and d spending for the whole group? I'll answer that one. Do you wanna answer the first one? I'll answer that last one, which is, no. It's not the overall r and d for the whole group. It's just those that are specifically intangible assets, which have a recurring revenue stream, which we can reliably and and certainly ascertain to that spend so that the accounting rules are very specific about what you can capitalize. It isn't all of the r and d. No. And and over to you for the other question. If there's any specific goals for the next five years.

50:19 What would be me? So it's hard enough actually forecasting or looking at the next twelve months in this strange world of uncertainty. But I think Yeah. I think single digit high single digit growth, I think, is probably Yeah. It is. But I think what I I think we're gonna be I mean, I've become a clever with it. Now we've actually started to introduce this strategy days. And, also, I think one area we've gotta do is this going around the subs. You wanna expand on that, which you're setting up? Yeah. So so in terms of going around the subs, we are going to spend more time regular meetings with them to discuss strategic objectives. We're starting that at the beginning of twenty three, and these strategic objectives have come from our strategic meetings. So we're linking our regular meetings in terms of business management. So we we will do that in the next year.

51:06 And there will also be more stuff on ESG. We'll be working on on ESG, and that'll be a high priority for us in the next five years. It's only in the next year for sure. So you'll see us talking about our impact on the environment, and so that's a high high high priority. Oh, we've got nine minutes. I've got another cat. Oh, we got another one here. And this is on the this is from Jonathan r about the ASIC Chemimos camera. So this is this is the new area for us, the Chemimos. So what we've actually got is ASIC cameras. The majority of their cameras are CCD sensor based cameras. You know, we we once we sold to the PCR manufacturers, the majority of our cameras were developed by Steve Chambers and Rudy Stripper many years ago.

51:51 So we've got a new r and d team, and what we're doing is moving over to the CMOS sensor. So just like your mobile phone or your digital camera, it has a CMOS sensor. So what we're trying to do is develop these cameras using a CMOS sensor, so it's a completely different type of technology. So we've got one developed, you've actually seen it on the website, and what this does is go into geolocation systems. So what we're doing is taking a picture, additional picture of a gel. It's to do with protein, analyzing proteins and DNA. So it started in the early days with attic cameras selling to Synoptics, their SynGene division, which is Geldocumentation Systems. And then we've actually been selling these old well, oldest cameras, the CTDs cameras to another manufacturer of Geldocs. So what we're trying to do with this Chemimos is to be sort of world leader and to try to sell it to other geldocs manufacturers.

52:55 Now the top ones are The US, which is Thermo Fisher, Viarad, Protein Science, and also Azure. So they're the major gel documentation manufacturers. And then you've got one called Veeva, which is in Europe. So that's what we're trying to do with that. So that's a new technology coming through, and this is based on a recent tweet coming through. So I think you're fully up to speed in what we're trying to do with ASIC. Okay. I think that answers one on Unite from Unite who says, can you talk about future ASIC opportunities? I think you just did. I saw ASIC was expanding greatly into other industries. How big can that be? I think that's a difficult call, really. I think it's what we're trying to do at the moment, and I'm sure that'll come through when we go through the budget and exercise, which is gonna be in the next couple of months with Panos, the the MD automatic cameras, and also through our strategy sessions.

53:52 So following on from what you just said, I think okay. Sorry. Hold on. How how frequently are we currently meeting our subsidiaries, and how much are you going to increase this to? I think we'll we go out fairly frequently. You do certainly, don't you, at the minute? Yeah. Well, I'm doing I'll visit them probably well, like I said, every six weeks, I'm out. I go around them. So I'm seeing them six, seven times a year in The UK, like I said, and then I'm quarterly with the overseas subs. So I'm always out on road. So I'm out on the road probably three or four days a week. And for me, yeah, and for me, having been here only four months, I've visited each place once, and I will increase that to we'll do it every quarter for sure. Then we've got Jonathan, the financial controller as well. He's out. Regularly visits as well. So we're regularly going out. I'm just going to formalize it a little bit more, and it'll be involve me and Mike. And I've got a question, interesting one. I'm delighted to see you're looking for a new NED.

54:46 Have you met any suitable female candidates perhaps? Because I yes. Yes is the short answer to that. And okay, I think we're if alright. If it isn't because of having a substantial stake at SDI, why are you incentivized for staying at the group to remain at the group? Who? Me? Yeah. I think Lovely. That's why. And also, we have we do have incentivization to stay. If you look at the back of the presentation, you'll see we have long term incentive plans in place for both myself and Mike. We do have options, some of which are quite valuable to Mike. So we are incentivized, and they're performance target related as well. Yeah.

55:31 But money is not an incentive for me, to tell you the truth. If you speak to Ken Ford, I'm probably an unusual beast. It doesn't bother me. I like my job and I like what I do, so I'm not that bothered about sort of these type of incentives. We've got them in place. Good. But, you know, for me personally, I haven't got a high standard limit. I don't drive around big expensive cars, so I'm not that bothered. Okay. I'll do my job. I think that's it. Yep. I think that's it. Michael, I mean, if I may just jump back in there. Thank you very much indeed for being so generous of your time there in addressing all of those questions that came in from investors this afternoon. And, of course, if there are any further questions that do come through, we'll make these available for you to review. So then add any additional response, of course, where it's appropriate to do so. Michael, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, If I could please just ask you for a few closing comments to wrap up with, that'd be great.

56:31 Okay. I think you've known me. I've been here for sort of ten years. I'm I'm pretty blunt and truthful of what to say. So hopefully, I've answered your questions. I've got nothing else to say apart from I hope you have a very nice Christmas and a prosperous New Year in these difficult times. I think it's gonna be a difficult sort of twelve, eighteen months going forward. And, hopefully, we can make some success during this period. Michael, that's great. Amy as well, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This won't take a few moments to complete, but I'm sure it'll be greatly valued by the company.

57:16 On behalf of the management team of SDI GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all. Bye.