Sdi Group (LSE:SDI) — Interim results for the six months ended 31 October 2020

0:02 Good afternoon, ladies and gentlemen, and welcome to the SDI Interim Results Investor Presentations. Apologies for being momentarily late. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Just simply type in the question in the box below and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company review all questions submitted today and publish responses where it is appropriate to do so. They will be made available to you via your investment company dashboard, and we will send you an e mail when they are ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll, and we'd very much welcome your response to that poll.

0:48 And I'd now like to hand over to Mike Creedon, CEO and Jon Abell, CFO of SDI GROUP. Good afternoon. Good afternoon. I'm Mike Creedon, the CEO of the SDI GROUP. As we are both shareholders and non shareholders at the meeting, I will do a short introduction about SDI. And any further information, please visit our website or email infothesdigroup dot net.

1:12 By the way, all emails come directly to me, so, hopefully, we should get a a quick response from me. SDI's name quoted group specializing in the acquisition and development of companies that design and manufacture digital imaging products and sensing and control products for use in science, technology and medical applications. It was floated in December 2008 as a vehicle to buy and build. It had its problems in the early years, but we've now turned the business around. And from February 2014, we started to acquire businesses. To date, we have acquired 12 businesses using equity, internally generated cash and debt. The game changer for us was in October 2015, when we acquired Centech for 2,000,000 four times profit before tax.

2:00 We raised £2,000,000 at 8p a share, attracting EIS and VCT funds. We are now trading at, I think, about a pound or thereabouts per share. This is pleasing result for me as I see an important function of my job is to create shareholder value. So if I just oh, I'm just trying to go ah, here we go. I just thought to go backtrack, that's it, to there, to Slide three.

2:32 We will cover the group overview, highlights, acquisitions and Monmouth Scientific COVID update, financials, a bit on the M and A and also summary and outlook. The group overview on Page five. We have used this diagram over the years to give a quick overview of the sectors and business units within the sectors. We've added another business unit with our sensors and controls being monitored scientific, and I'll discuss that when we go through the slide pack.

3:05 But any detail behind the business units within the sectors can be found in the appendices at the back of the presentation. I'd like to hand you over to John now, who will go through his slides. Thank you, Mike. Yeah. Good to good to be with you all. So this slide in front of you should be number five. It's called track record, and it's showing the record of SDI over the last six or seven years. So roughly from the period when SDI started buying other companies. And you can see on the left hand side, top left, that sales have been going up quite strongly every year. And the h one of this year is no is no different. So you can see that's very strong sales in our first half.

3:55 We'll come onto that further. On the top right, we have adjusted operated profit and also cash generated from operations. And you can see there that our first half of this fiscal year has also been very strong on both of those points, strong on profit and also extremely strong on cash generated from operations, which is nearly as high in these six months as our full year last year. So we've had, over the years, very strong financial growth. This half year, sales grew 23%, and adjusted profit before tax grew 52% on the year ago half year. As Mike said, we're very acquisitive. We've done 12 acquisitions since 2014, and that includes the recent acquisition of Monmouth Scientific in on the December 3.

4:51 Of those acquisitions, seven of them were new standalone operating units and five have been combined with existing unit. And as we've grown our revenues and our profits, we've also grown the skilled base of the group, and I think we're a stronger and and bigger and better company as well over time. Share price generally follows profit, and it has done. We have a dip during the the beginning of the pandemic this year, and it's taken a while. But now it's it's increased again and it's back up to a high point.

5:31 I'm gonna move on to financial highlights of this half year. So revenue increased by 23%. Of that 7.7% was organic growth, so growth of the revenues of our existing businesses. And about $1,800,000 was provided by the Shell Instruments acquisition of November of last year. The big story I think of this half year for us has been obviously, the the consolidation of Shell instruments. But during the COVID pandemic, most of our businesses were negatively impacted by the pandemic as was the broader economy.

6:18 But we've had two business units and lines of product lines in particular that were favorably impacted by COVID nineteen in the sense that one of them produces a product that goes into the treating of COVID and another into the testing of it. So these the sales from these have quite neatly offset the reduction in sales of the other parts of our business. We'll go into that in a bit more detail in a in a while. Because revenue overall has stayed more or less at the level we might have expected it to had the pandemic not occurred, But also because we've been able to save on a lot of costs during at least the early part of the first half of this year.

7:10 Our profits have held up very well. In fact, they've increased quite dramatically by roughly 50% depending on the particular line on the income statement you might want to take. So as an example, almost the bottom line, adjusted diluted EPS, which is my favorite profit measure, increased by 45% to 2.47p for the half year, and that's compared with 1.7p last year. In addition to profit, cash generated from operations increased by a 130% in the half year and that benefited also partly because of the increase in profit, but also because we had customer down payments for some of our shipments, especially the ones in epic camera that benefited from the COVID pandemic.

8:10 So net debt at the end of the six month period was 300,000, and that compares with 4,000,000 at the beginning of the period. Move on to the next slide and give a bit more detail. So we divide our group into two reporting segments, digital imaging and sensors and controls. In digital imaging, sales increased by 23%. Now there, we've had the contract for cameras going into PCR test equipment, which has been very favorable to us. And at the same time, while our graticules business has suffered like most from the the pandemic, symbiosis within our Synoptics group has done pretty well and has launched its protocol product, which is without much marketing is starting to sell very well.

9:15 So sales up 23%, profits up 52%, and again, that is due to both the higher sales and cost reductions across the group. Same time, this this one off contract for PCR test equipment, so the cameras going into PCR equipment, has forced us to rapidly increase production, and we have a a new site in our Lisbon factory, a new factory there that with more space. And that was able to ramp up very rapidly to increase production to meet this demand and not only to to meet it, but to do it in a more efficient way. So we've changed the the kind of way of producing, and that's been we've been able, therefore, to scale up without scaling up the same level of cost.

10:05 All of the other manufacturing sites remained open, but with lower costs during the lockdown. On the sensor control side, sales also increased by 24%. Sensor control includes the shell instruments unit. So we've had the contribution of that this year of about 1,800,000 in the half year. Apart from that, MPB industries makes flow meters and was able to supply 45,000 of these into ventilators for use by the National Health Service in in The UK. That boosted their sales. Adjusted operating profit increased by 15% to 1,600,000.

10:55 And again, in MPB, we had to massively increase capacity, and we did so with the help of other members of the consortium, including Ford Motor Company engineers who came on to our site to teach us how to do mass production. So we're very grateful for that, and it's enabled us to increase capacity, but also to do it efficiently, and that will have benefits going forward. Again, other sites remained open with lower cost.

11:27 And in that segment, we placed after the period end, we placed the newly acquired Monmouth Scientific. And Mike will talk to us about that acquisition. Okay. SDI, last week, we acquired on the December 3, Monmouth Scientific. As you've seen in the press link, it was last Wednesday, Thursday. It's a good acquisition for us. We're going to pay about $5,800,000 for the business, and that includes a 2,100,000 earn out based on its year end 03/31/2021 adjusted EBIT. The rest of the payment, we've got 2,660,000 was paid out, you've seen from the broker's note, for the initial payment for them based on historical earnings, and that was five a 5.5 times multiple.

12:24 And the balance of 1,100,000 will be paid in January for the balance sheet, for the net assets we acquire as well. So the balance of 2,100,000 will be paid at the end of their audited period, which is going to be, I suppose, April, May time. Monmouth Scientific is a manufacturer of biological safety cabinets, fume cupboards, lammy flow cabinets and clean rooms. This is a sort of a very big market currently, especially biological safety cabinets as, its strong growth within the COVID, COVID nineteen era, whereby they're using PCR machines within the biological safety cabinet. It's based in Bridgewater in Somerset. Its end markets are quite wide.

13:09 Currently, they've got laboratories, pharmaceutical companies, electronics, medical and education. This acquisition is in line with the group's strategy of acquiring businesses with complementary products. Another area which is worth pointing out is that the founder, David Pomeroy, who set the business up seventeen years ago, will still continue to lead this business. It built up over the seventeen years.

13:37 And if we move on to the next page, which is Page 10, I'm going to quickly discuss about COVID nineteen. This is quite a detailed self explanatory slide. I'm sure the slides will be available for you after this meeting. I'll just highlight a few points within COVID. All our business units have remained open throughout the period with a number of our staff, especially the sales and admin staff working from home. We furloughed about 17% of our staff, but is pleased to note that all our staff are back in full time employment. I'm afraid to say that there are a number of roles within the group that will be that have become redundant. This is no surprise as a number of companies have had to take this type of action. This pandemic has generated a high demand for products within two of our businesses.

14:25 One is MPB Industries and the other is ASIC cameras, as John's discussed and also is actually discussed in our annual report. I would like to sort of repeat what John has said. We do not expect these contracts to continue beyond the current financial year ending 04/30/2021. And that's to conclude is that we've reduced our cost base in a number of business areas through the pandemic, but what we found is we've gained efficiencies on also giving improved capacity and output through this. So I think it was a it's a it was a good exercise in looking at the cost basis. And what's pleasing across all the business units is we've got some very, very good senior managers and directors within there, and they took appropriate action themselves without any input from myself and John.

15:10 From that, I'd like to take you back to John, who will now go through the financial pages. Yes. Thanks, Mike. So I'm looking now at the income statement. I'm not going to take you through every line of this just to say that revenue is up 23%, as we've already said. Gross profit is up 21%. So there's been a slight reduction in in gross margin, and that's due to just mix of of products. And in particular, the attic cameras sold into into the PCR machines come in at slightly lower margin than the rest of our business. At the same time, they have a a very low cost base underneath that, so so costs overall profit has has benefited from that.

16:00 As you've seen, all of these various lines of profit, operating profit through to diluted EPS, they're all up roughly 45 to to 58%. So very good improvement on previous years. Onto the balance sheet. Again, I'm not gonna take you through this number by number, but if you look on the right hand side, you can see movement in cash. We started the half year or the end of last year, we had a net debt of £4,000,000, but that was made up of 5,300,000 of cash and 9,300,000 of loans. We've generated a lot of cash in the period and reduced the net debt to 300,000, paying off the revolving loan. So we ended the period with 3,400,000 of cash and our amortizing loan, which will be amortized through to 2023 of 3,800,000.

17:07 That leaves us then with £5,000,000 of unused bank facility and 3,400,000 of cash, so plenty of firepower available for acquisition, bearing in mind also that our businesses remain cash generating. So in December, we used 2,400,000 of that cash for the first payment for Monmouth, and we expect to pay a further 3,200,000 of cash over the course of January through to April or May of next year,

17:39 the balance of of that acquisition. On this next slide, there's a bridge showing more or less the same thing. We start the period with 4,000,000 of net debt, strong operating cash inflow, and also favorable movement of working capital because of the customer down payments received for cameras, and then finishing with a net debt in October of 300,000. And then on the right hand side, I've added in pro form a the total outlays for the Monmouth acquisition of 5,600,000. So our pro form a net debt post the acquisition would be 5,900,000, but of course, we're going to generate cash in the meantime.

18:32 Further slide here on cash flow, but I'm not going to go through that. Just again to say that cash flow overall has been very strong. Cash generated from operations plus 130% based on strong profits and the benefit of customer down payment.

18:54 Now slide on m and a. I think Mike will take this one. The presentations. We've discussed our acquisition criteria in some sort of depth. Also, I could like to put you through to the annual report. I think it's on Page 14. It does give a detailed page of what we expect as we go through the acquisitions. This time, I'm just going to highlight a few bullet points. And here we go. So through the pandemic, we've seen reduced levels of activity, but mainly due to lockdowns where we whereby we've been able to have face to face meetings and also site visits. But, thankfully, we did manage to continue our m and a strategy with the acquisition of Monmouth Scientific in this period. There was a question which I'm gonna answer, which is about valuations.

19:39 Valuations have always been based on historical earnings, usually three an average of a three year average and a multiple of between four and six. But I think we're seeing more deals using earnouts within the evaluation. I'd I'm comfortable with short term, earnouts. You know, massive months probably going up to a year, but no longer. The reason for that is that it's difficult to actually ring fence the profitability,

20:05 using our strategy of investing for growth. So what we don't want to do is to buy a business, invest in that business, and after two or three years, we're still rewarding the sellers for our hard work on the investment. And the last bullet point, I'm sure you're aware in the press, is a short in the short term, it will be interesting to see the impact of the proposed changes in capital gains tax, which are being discussed by Richard Sunak in parliament, as this may impact future acquisitions. Because what he's trying to do or he's thinking of doing is align capital gains tax with income tax. It's it will have no impact on us, but it will have on our sellers, going forward. Then I think that's it. And then let's just go through to the summary and outlook. Half year, as John rightly said, we've had a a fantastic six months with record revenues, profits, and cash flows.

20:56 Sales haven't really had a a negative impact, regarding code the COVID academic. And, we've had two businesses which, have actually suffered, and that was applied thermal control and Shell Instruments. But the good thing about our businesses, all businesses, units, have been profitable and cash generative throughout this period, and my job is actually to support these units when times are hard. And a, final point on our half year, which wasn't. It was just after half year on the December 3. We continued our buy and build strategy and acquired Monmouth. Outlook going forward, the board is still confident to meet the expectations in the market, and we're looking for normalization in the following year in 2021, '22, which mean, hopefully, our recovery of all our businesses, which have been negatively impacted. We're actually seeing signs of a turnaround with, within our,

21:52 our businesses now. And, the last point is that we continue to further look for further acquisitions, which fit our criteria. So when we grow the business, what we're looking for is both organic growth and, through m and a. So I think that's it. Thank you. That's brilliant. Thank you very much indeed to Mike and to John. Ladies and gentlemen, please do continue to submit your questions using the q and a tab situated on the right hand corner of your screen. So just while we give the company a few moments to review the questions that have been submitted today, I'd 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 Meet company dashboard. I'd also like to remind you that your feedback is important to the company. And immediately after this presentation, as usual, you'll be redirected for the opportunity to provide your feedback in order the company can understand your views and expectations. We'd very much encourage you to do so. It is very useful for the company to receive that.

22:47 Mike, John, obviously, investors had the ability to pre submit questions. We received a few. Perhaps

22:53 what I'd like to do is start off with those ahead of perhaps asking you to look at the questions that have come in. But the first question that we received was with regards to areas of your business has been benefited from COVID or one off contracts won, which were mentioned in your interims. How is SDI trying to maximize these going forward, I. E, investments in those areas or prepare for potential further contracts in the future or third wave?

23:20 Yes. I'll answer that. It's Mike. As John's rightly pointed out, we had two big contracts which made the press, which is MPP ventilators and, PCR machines with Attic. Going forward, we can actually see that Monmouth is actually selling its biological safety cameras, cabinets, for helping, with PCR. But across all our range of business units, we actually don't know what the end goal is. We sell to labs, pharma companies, medical, and other and other biz and other sectors.

23:51 But, really, we don't know specifically where our equipment's going to and if it's COVID related. I'm sure it has to be, but, we don't really know, I'm afraid. Okay. Thank you. Then there was a follow on question from the from the same investor. How closely do you monitor others within your businesses on their direction of future acquisitions?

24:11 We do. Just like we actually monitor our customers and our competitor competitors and and suppliers. We don't look too heavily at them. We've got, we're doing, I think, a reasonable job on, gaining organic growth and mergers and acquisitions. And it's always nice to see what other people are doing, Helmer and Judges. But we continue with our own work and try to get the best shareholder value for our investors. Thank you very much indeed, Mike. Couple of questions combined here, but what percentage of product demand is for health? What percentage of the above for COVID vaccine delivery? And thirdly, what percentage of the above is for COVID testing?

24:56 Yeah. John here. So it's if you were to define exactly where where research ends and health begins. So I I don't think we can really give a number there, but we certainly have quite substantial health related sales or medical related sales in in Synoptics and in Attic and in SendTech and in MPB and and certainly also in in the new Monmouth Scientific acquisition. So there's plenty of it is a large part. And in fact, up until recently, the stock market used to classify us as being medical related. They've now stopped that. But medical and health still is a substantial part of what we do.

25:41 Now specifically on vaccine delivery, we don't really do we're not really involved in that. Although obviously, the research into vaccines involves PCR testing and to which we contribute both in terms of cameras going into

25:58 into PCR machines and the Monmouth Scientific biological containment cabinets that that house these PCR machines. So not really on on vaccine delivery, but certainly on the testing that that vaccines have to go through. On COVID testing, more generally, well, specifically, we we do sell into PCR instruments. And so PCR instruments are used for testing.

26:29 We probably have sailed in excess of £5,000,000 in attic into PCR instruments this year. And then probably, new Monmouth unit will also sell roughly £5,000,000 worth of sales into cabinets that will contain

26:51 PCR machines, although we can't really be sure how many of those are actually housing PCR machines. So roughly speaking, I think you can say that of this year's total year's sales, but including a full year from Monmouth rather than just the half year, probably in the order of magnitude of about £10,000,000 are going into

27:15 COVID testing. Although, obviously, these machines are going to be used not just for COVID testing, but for other things afterwards as well. Thank you very, very much indeed, John. There is just one final question that reads, please, would you advise how much furlough money you received in total? And given the excellent half one results and the fact that some parts of SDI benefited greatly from COVID, have you

27:39 given consideration to returning these funds to HMG? Yes. So we did receive about £125,000 of furlough subsidy. We put about 17% of our workforce on furlough during the initial phase of the pandemic. And we have to remember that then it was a highly uncertain situation. Our alternatives aside from furlough were either to let people go or in some cases to have them do useful work, but at some risk to themselves and to the community. So we opted to take the furlough and and made an an active decision to use the furlough on offer. And we think we did this for good reason and the right the right reasons at those businesses that were really suffering. So I think we we did the right thing and and

28:33 it had the desired results. So so I think we're happy about that. We then brought them all back in the early summer. So we're no longer using furlough. That's brilliant. Thank you very much, John. Well, that takes care of the pre submitted questions. If I could ask you both very kindly to click on the Q and A tab. If you would start at the top, perhaps if you could read out the question who it's from and give a response where it's appropriate. Obviously, there's quite a considerable amount there to to go through. I think some of perhaps

29:05 the same content, so I guess some questions may be answered through others. But if I could hand back to you, Mike and John, and if you could start at the top, read the question and who it's from, and then give your response, and then I'll pick up from you afterwards. Thank you. Okay. So we start at number one. For M and A, has COVID had any effect on potential vendors' valuation expectations?

29:27 Yes. It has. What we've actually found, with a number of these companies, two or three of them have actually fallen away because, COVID has hit their profitability. So, without multiples of four to six, they're not going to get the valuation they actually expected. So what we actually do is we don't discount them. We discount them short term, but, hopefully, they're gonna come back in one to two years' time, to come back, and, we can acquire those businesses. So I think that answers the question. Okay. And this is John again. So the next question is from John H, and he's asked, what do you see as the opportunity for ATIC in the medical space post COVID?

30:09 Do you wanna take that, Mike? Yeah. Hold on. Yes. I I will do. To tell you the truth, a lot of our business a lot of Attic's business is in the life science business, and it's OEMs. Now this is a a long lead time to get, these products into the marketplace. We are looking at it. We're looking at it to see whether there's any other business selling our cameras into the PCR market. But, we've got a good sales, marketing director within ASIC cameras, and that's what he's actually pursuing. So I don't know at the moment, but I'm sure there will be opportunities. I don't think you were saying post COVID. Post COVID is not gonna go away in in the next sort of six six months. It's gonna be, I think, long term, really. Okay. And the next question is from Martin S.

30:56 Yes. Think that's from me. Yes. Given I'll just read it out, Mike, so we can all hear it. Given Monmouth is a predominantly a UK centric focused business, Could you expand on the opportunity that may exist in The US for it to expand by existing businesses within the group?

31:15 So one of the reasons he wanted to sell, we wanted to buy because 80% of his business is in The UK. He's got 20% scattered around the world, but nothing into The US. So we've actually got a a very nice, small, neat sales and marketing office based in Frederick in Washington, DC. We use, we've got about five staff over there, but we use manufacturers' reps. There's not just one person on a commission only. They're actually groups of people. So we've got two very strong ones, one in Boston looking after the universities and the research labs, another one who does directly with the NIH. And as soon as planes are running, then he's hoping to get over there, and we can make some sort of introduction for him into that sort of market. Okay. And next question, Mike, is from Patrick L. Mike, you stated that one in the scientific was purchased on a 5.5 times multiple.

32:09 Can you clarify which metric or time period was used as due to the pandemic, earning appear quite volatile. Yeah. Sure. So what we actually did is the initial payment of 2,660,000 was a two year historical. So that was years

32:26 1920. So that come out about 484,000 on a two year average if you want the math out of five and a half times. He's looking to do 1.5 to 1,600,000. So what would actually happen is that part of profitability will be added into the, other two years divided by three, multiplied by 5.5, and that will give the valuation of the business. And we just pay the difference between what we paid last week and what we're gonna pay in, I don't know, April, May time. And, that's how we actually, work that out. And if you look at it, it is a bumpy year, one point five, one point six million. But you have to look at the three year historic, which comes out to be about 800,000. And, by the looks of it, his order book and what he wants to do with that business, I'm sure this is a very good acquisition for us at five and a half times.

33:16 But, if he can actually do 800 to 1,000,000 every year, it's a good buy for us. And he does wanna expand it, and

33:21 we wanna help him do that. So I hope that answers your question, Patrick. Yeah. Next question is for me. I think it's from Bruce a, and he asks, is any of the strong improvement in cash flow due to one off actions that are likely to unwind in h two? And, yeah, and I and I should have mentioned this earlier, in fact. So, yes, we did benefit in the first half from customer down payments for the epic cameras deliveries into PCR machines, and that will unwind in the second half of the year. So so definitely, we shouldn't expect the same level of cash flow. And in fact, we should that should be a a net negative for us in the second half of the year. So, of course, we we do intend to to be cash generative in the second half of the year, but it won't be at the same rate as in the first half because those down payments will unwind and we'll get back at the end of the year, we expect to more normal levels of of working capital.

34:21 I hope that answers that. Next question is from Buscott P, but I think Mike's just answered that. So roughly the same question as as Patrick's earlier. So I think we can skip over that one. Julian g, on the other hand, asked, thanks for the presentation. What are your long run targets for return on capital employed, EBIT margin, and free cash flow margin? Well, that's a kind of difficult question. These have been improving over time. And I think as we go forward, we're expecting that acquisitions are accretive to in the long run to to these measures. But we we don't really put a target on it, but we're expecting the ongoing business to improve, and then we'll add in new businesses that themselves can improve and and kind of join the the long run average or even improve it because head office gets always to be a smaller percentage of the total than than in previous years.

35:25 So no hard targets, but onwards and upwards. Next question, David B. Do you believe your existing businesses have pricing power? And is this something you look for in acquisition? Do you want to answer that, Mike? Or shall I answer Yes. No. Don't mind. It's fine. We we don't actually look at pricing power at all within the businesses. We do look for organic growth. The problem is is we all our businesses are actually quite small businesses. We and we deal with big customers. So what they're actually looking for is sort of value for money, especially within the OEMs and also, also quality. And, so we're never driven. We as you can actually see with our annual reports, we do have good, very healthy gross margins. We do try to expand on on those margins.

36:16 But what we have to do is to make sure that it's a it's a juggling act between increasing prices and and demand. And so we don't want we what we don't want to do is actually to lose business through overpricing, really. K. Next question, quite complex. Alexandra, Could you please help us better understand the economics of Monmouth Scientific, structural margins, and return on capital employed? First sight, it seems less technically complex than some of your other businesses. Can you therefore get similar economics? I think this is kind of following on from that previous answer really. So is is a biological containment cabinet any less complex than some of our other products like cameras or or chemical sensors or flow meter? And I think the answer is is that if you do it properly, it is as complex and we can get similar kinds of economics.

37:23 Obviously, we're we're talking here. We're buying wood and plastic. So there's a lot of that going into one of these cabinets. But in the end, if you're making the best cabinets, then you can get pricing power for those, and the economics can be similar to to the other parts of our business. So I think we're very confident that this is a a business that can increase its profitability and, the same time, grow. Another question now from Bhaskar again. No deal Brexit impacts aside from FX. Any tariffs? What are the main risks? Mike? Do want answer that? Yeah. That's fine. Yeah. We we've looked at it. Our nonexecs, especially David Tillson raises it at a board meeting every month and rightly so.

38:14 What we've had to look at is I don't think it's gonna make that much of an impact on our group when we actually speak to all the subsidiary directors. I think the major impact for us, really, is the amount of paperwork involved. I think people are worried about shipping into Europe, but we do ship all over the world. So what we're actually doing is is using a similar sort of type of paperwork to actually ship into Europe. Regarding tariffs, I think there's only one area which is hit by tariffs, and that is the sort of antifreeze type of liquid, which you put into the chiller units, which is sort of a reasonable sort of tariff. All the rest are zero or quite low. And also back to the antifreeze, it's quite a low revenue stream for us. It's very small. So to us, I don't think it's a big impact.

39:02 Thanks. Another question from David B. Roughly, what is the revenue mix between one off capital equipment and repeat sales and services? This is really difficult because we have to look it across, you know, all nine businesses. I think it the the mix is towards capital equipment, but probably towards capital equipment or or components for other people leaving larger capital equipment. We do have plenty of repeat sales and services. So some of our businesses businesses are entirely devoted really to repeat sales and services or or disposable units that that need to be replaced. So there's plenty of that. But I think, overall, probably, it's slightly more towards capital equipment, although not necessarily the biggest part of that. But in the end, we depend on customers selling their equipment for us to be able to sell out to them.

40:00 If you wanna have a stab at roughly what the recurring revenue stream, it's about 15% of turnover. So the main area is really Arastel, Centech, and Shell and a few other small sort of recurring revenue streams across the group. But it's roughly about that sort of figure, but it does change. Good night. Gavin w asks, how far has trading returned to normal across the group businesses? Do wanna say that, John, or I will do it. Yeah. I can do that. So so very much so, I think, we've seen since the since the summer, people coming back from some of those that were able to get away. We've seen that businesses has has picked up at all across all of our units. And in some cases, it's, you know, we have units which are are quite lumpy sales, but some of them are are seeing now record record months of sales.

40:55 So I I wouldn't say we're quite back up to pre COVID levels or or in in the budget levels across the group, but we are certainly getting there and they're much higher than they were at the beginning of the period. So I think we're we're talking about, you know, less than 10% gap now between where we might have hoped to be without COVID and and where we are in most of our businesses. And the exception to that remains at the cameras, which is trading far ahead of where it would have been without COVID. Another question from David b, what's the mix between industrial and academic customers?

41:43 And here, really, academical, it's it's certainly part of what we do, but it's not a huge part. So we're we're selling much much more to industrial customers, but also to hospitals and and others that aren't really academic, although they may be public sector. So I think academic is is important to us, certainly in one or two of our units, but it's not it's not the biggest part of the business by any means. Also, I think it's a very gray area between industrial and academic. It's just not black and white, really. It's I think it's it's difficult. And we don't actually analyze it in that into that much detail either ourselves.

42:30 I have another question here from Jeremy p. I've been a shareholder for some while. The group still feels like a fragmented collection of some very small businesses with limited links between them. Does your acquisition strategy focus on reinforcing the successful businesses that you have? Mike, you can take that one. Yeah. Can you wind it back to the diagram of the businesses? Yeah. It'd be easy to explain it in that. I think we discussed this quite, I thought, quite a few occasions in the city, that one there. So what we've actually done over the years, since February 2014 is acquire 12 businesses. And, what you can actually see there is we've got nine business units. Some of the businesses we acquire actually slot nicely into other businesses. A good example is ASIC cameras.

43:20 We're selling cameras to the astronomy market and also to life science. It was selling into Synoptics as well, so it's cross selling. But what it wants to do was deal the with value chain, so we acquired QSI. And prior to that, we acquired Opus Instruments. All that's done in in house in our factories in Lisbon. Synoptics, again, we acquired a small business of Fivestream based in Loughborough, and we integrated that into SendTech into Synoptics, sorry. Going further down, we acquired Applied Thermal Control based in Colville, a chiller business for the life science. And then we had an opportunity to acquire another chiller business for the industrial sector so that the sales databases didn't cross over. And that was based in Leicester. So what we've actually done is combine those two units in a in a in a unit in the Barrow Upon Sur, and we've we've reassigned the leases of Colville and Leicester. So what we're actually doing here is actually just to expand it. First of all, we've got two different business sectors.

44:21 So we're either having the businesses as stand alone businesses or actually integrating into other businesses. But if you have a look backtrack at Helmer of what they actually did in the nineteen eighties, it's a very similar sort of type of way of m and a. So as you acquire them, you put them into the pots, and there there is cross selling between them. As I mentioned to you before, with Monmouth, we've acquired Monmouth. They're very keen on moving into The States and also, using our distributor base in Synoptics. So the sales and marketing managers, who's required, wants to be in touch with Applied Thermal Control and Synoptics because he thinks we cross over on our customer base. So I think you're being a bit harsh, really, on saying it's very fragmented. But we do come across this quite often.

45:08 I I think I would add here that if if we have an acquisition strategy whose focus was on reinforcing our existing businesses, it would be a very nice strategy, but we may end up not buying anything. So so we we have to buy what's for sale, and we make sure it does fit our criteria. So we have a group of nine businesses which have a lot in common, but we can't just focus on on building them out because we we probably have some of the the the premium businesses in their industry in The UK already, and it's hard then to find others to add on to. And also, as John has said in the financial statements, we sell over many different sectors.

45:54 We wouldn't have the results we had if we just focused on one sector. So there are some ups and downs in the group. But overall, in the market, we produce some very good profitable figures and hopefully to grow on that by acquiring more businesses on organic growth and cross selling between the business units. Okay. Next question from David L. Were the Monmouth acquisition discussions initiated and underway before the pandemic, or did it come after it hit? After it hit. So we, Ken Ford, and I had initial meetings in Taunton, in the old in in Taunton with David Pomeroy. And from then on, we started talking, having more meetings, and then I was down there doing due diligence.

46:42 And, again, at completion, I sat with David last Wednesday night to complete the accounts, and then I'm back down there next week. So it was right the way through the pandemic, and it it was a successful acquisition, hopefully, anyway. Well, I'm sure it will be. Yes. Another question here from Leonard Kay. Is it possible to tell investors what market expectations are? Without that, this phrase is largely meaningless. And actually, I do have sympathy with that. I think you're right. The how we judge market expectations today is that there's only really one analyst who follows SDI, and that is the house analyst of of FinCap, our broker. And and we take his forecast to be in line with the market expectation because we think the market takes its lead from from his his reports.

47:36 And they are available for download. I think you have to register to get them, but but they are available. So that's what we understand today to be market expectations. But I I certainly take your point, and I think it it we could going forward say, we expect profit to be in line with market expectations, which are x. And and I think that would probably be a useful thing to do. I'm not gonna do it here and now, but I I do think we should look at that going forward. So good question. Next question is from Gerard. You've previously stated that you aim for organic growth of 8% and acquisition growth of 20%. Is this still your aim?

48:22 Mike? I I think sorry. I guess I'm on. Yes. I think it still is. I think it's very we still want to always have targets. We've always said to the city that we like organic growth in the, in the high single digit figures. Acquisition growth, yes, 20% is achievable, but we don't we're not gonna rush into buying businesses just for the sake of keeping the city happy. So we have to make sure all our acquisitions tick the right boxes and adhere to our acquisition criteria. So I think acquisition growth is a difficult call, to tell you the truth, but it's a target we like to set ourselves anyway. Thank you.

49:09 Next question from Mary E. Are you expecting any impact from a no deal Brexit? I think we've already answered that. Yes. And, Bhaskar again, m and a deal sizes, is there a max size you're comfortable with? No. I think the the problem is is we've discussed this quite on on a lot of presentations over the last few days, is our sort of niche zone is between sort of 500,000 and a million profitability. Anything greater than that, then you're actually competing, with the likes of private equity, maybe even judges, etcetera, and also the multiples grow. We're we're buying businesses between four and six times. Yeah. You're gonna get into seven, eight, nine times multiples to hire, and also you're getting into a bidding war.

50:02 We've got another one after with him as well. Take the next one, which is about much competition there is typically in an m and a deal. One or two or or maybe five plus competing competing points. He hasn't put zero in there. It's it's zero in, I think, it was 12 Valdez. It was only one bidding process we had, and that was in Shell in November of last year when there were 12 people bidding for that. There was seven private equity, and, then there was a three trade, and then we come out. And we weren't the highest bidder by the way. We complete that to completed that deal at the beginning of December of last year. Thanks. Next question, David L. Could you quantify the approximate magnitude of the contribution from the one off contracts in 2021?

50:57 Yes, I suppose we can. I think in the first half of the year, those two contracts probably generated around £3,000,000 of revenue in excess of the same revenue to the same customers for the same products of last year. So about £3,000,000 of of additional contributions. For the for the full year, I think if you wanna guess, I would say it's probably slightly less than that for the full year, but that's still to play for. Next question from Lucia Gutier. Last time, I believe you mentioned that there will be more management personnel and engineers on identifying future acquisition opportunities.

51:49 What is the current situation? And are the acquisition criteria changed, or do they remain the same? Okay. I'll answer that. Yes. The our in house management do help the acquisitions. If you, look at the one we've just completed last week, Monmouth Scientific, we've got some very competent engineers. One of those is Peter Astells, who founded Astells Control Systems. He came out and sort of ticked the boxes with with me. So, we can use in house engineers and expertise to actually look at the technical side. Because at the end of the day, myself, Ken Ford, and John are are financial people, so we do need help. And we can, drag it from from our own, senior management team. And backtracking in Shell instruments, Peter came out and had a look at that. Also, so did Steve Chambers.

52:41 Both of them are are very competent engineers and, and give a good view, of the business. So, yes, we do. And has the criteria changed? No, it still remains the same. So if you look at our annual accounts, I think it's Page 14, it gives a list, and that's the list we adhere to. Yes. Thanks, Mike. Next question from James Kay. How do you see your cost base going forward? Will some proportion of the cost savings early in the year be maintained or will it drift back towards previous levels? So I think the answer is that some some of it will be maintained. Obviously, we we don't get the code, the furlough subsidy, and people are all back to work at a 100% salary. So so most of it has has is now back to a more normal level of cost. But there are still savings from efficiency, and I don't like the word, will it drift back towards previous levels? But what we can do is is plan to put back some of those savings into specific kind of growth investment ideas.

53:52 So I don't think we're gonna let it drift back to the same level as it was before, but we can reinvest some of those savings to get future growth. So, you know, I think there's a net positive out of all of this. I'm not saying we're going to end up with a lower cost base, but but hopefully, we're gonna end up with a a cost base which is more orientated towards growth than than when we went into the recession. David b is now asking, do any business units have very concentrated customer or supplier basis? I can answer that if you like. Yes. A couple of our businesses have two or three customers, which are a significant part of their business.

54:38 When we acquire those businesses, you always get a bit worried that they're gonna fall away, but they haven't. They're very dedicated, mainly because they're OEM customers. So as long as you can actually provide a good quality product at a good price, then that that will continue with us. Supply basis, no. We haven't got any supplier basis that are concentrated, and we're relying on one supplier. Julian O asked, can you give some indication of the scale of the operating and cost reductions you've realized this year? Well, in the first half of the year, we've had salary wage and salary cost reductions of the order of 13% against budget, and other fixed costs or overheads have been much higher than that. In fact, about 26% compared to budget lower for the first six months. Now the the the run rate towards the end of the period was obviously a lot less than that.

55:41 So going into the second half of the year, we're not getting that same level of of operating efficiencies or cost reduction, But we're still saving on both wages and on on other operating costs. Although, we've also got the effect of some costs which were deferred from the first half are coming to the second half. So so that's the level we had in the first half, nothing like that in the second half, but but still some level of cost reduction. Matthew g now asked, can you quantify the revenue impact in the businesses which were impacted by COVID? Well, I think we probably mentioned that. So, you know, if you want rough numbers, we've had about £3,000,000 of positive impact on two of our businesses and roughly the same, maybe slightly more of a reduction in the rest of our business in the first half.

56:43 So overall, there's a net negative on revenues, a very substantial net positive on the bottom line from the pandemic. Next question is from Emmanuel. Are there any M and A opportunities outside of The UK in the pipeline? Mike? Yes, we have. We've got one in The U. We did have one in France, but they actually sold internally because we just could get over there due diligence. So it's very difficult to do anything with these while we're actually still remaining in The UK and can't travel. So we do have a pipeline with, like I said, US companies, but there's nothing we can do at the moment. And they're aware of that as well. And then there's a a follow-up question, really.

57:32 So do most deals come from you looking for targets or from targets that are for sale? Mixture of both. So what we've actually got what we use, the tools to acquire businesses, we've got a very good m and a consultant who's on a commission only, and then we've actually, brought businesses in via our businesses whereby, let's say, we've acquired Monmouth Scientific. The first one of the first questions I have to ask them after we've acquired it is who should we acquire next? And this worked very well across the group. And another area is, we're getting some interest is through, private equity. People from private equity were not who the business is not for for them. I've built some very good relationships, and they hand it on to me as well. So there are a number of routes for for these acquisitions.

58:24 And I think this is our final question, Mike. So again, from Bhaskar, how many m and a deals have you been outbid or have you lost in this year? Well, as we've only been through a bidding process for one, Shell, and we won it, so the answer is zero on that. Lost on this year, none, really. What we actually do is we're we're very fair, acquirer. So we'll put out a valuation for that acquirer, but we're not like a lot of the big companies or US and chip away at it after due diligence. So we would walk away. Historically, I have walked away from or the book we have as a company walked away from the deals, but, not this year. John, as you quite rightly said, thank you. I'm I'm sorry to jump in, but every time you seem to answer a question, more came. So I think it's probably an appropriate time for me just to step in and on the hour. Just gone through it. Perhaps I could just ask you, to wrap up seeing as you've taken every question that's come in.

59:22 After which, I'd like to redirect investors so they can provide you some feedback. So perhaps if I can hand that back you. Mike, do you wanna wrap up? Yeah. Yeah. Yeah. I'd like to sort of say thank you for for coming along. I think it was 80% of the people here who are attending today are shareholders. Like I said, my job is to create a sort of shareholder value, and hope John and I have actually done that for you. We started out with a market cap of 3,000,000. I did have a target. Ken Ford and I had a target to get it to a 100,000,000. And just before Christmas, we did achieve that. So we need to set ourselves under the target. So hope we've done proud for you. That's perfect. Thank you very much indeed to Mike and to John.

1:00:10 Ladies and gentlemen, if I could ask you please not to close the session as you'll now be automatically redirected for the opportunity to provide feedback. If you access this presentation from our platform, the feedback page will appear. If you access this via the link sent to you by email, you'll simply be asked to log in to provide feedback. And I'd very much encourage you to do so. It's very, very useful for the company to hear from its shareholders and also from potential shareholders. So on behalf of SDI GROUP PLC, we'd like to thank you very much indeed for attending today's presentation. That concludes today's session. Good afternoon to you all and a pleasant weekend. Thank you.