Sdi Group (LSE:SDI) — Interim Results

0:01 Good afternoon, and welcome to the SDI GROUP PLC interim results investor presentation. Throughout the recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time just by using the q and a tab that's situated in the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll.

0:27 I'd now like to hand you over to Steven Brown, CEO. Good afternoon to you, sir. Thank you, Alexandra. I'd like to welcome you all on behalf of myself and group CFO, Hamish Sharma. Alongside a review of FY 2025, today, we'll be covering operations during the period and providing outlook for the remainder of the year on how we intend to deliver sustainable growth for all our stakeholders. In terms of agenda for today, I will provide an overview of the group and the general pronged strategy to drive growth. I will then hand over to Ami, who will cover the financial results. Ami will then pass back to me for the operational review before I wrap up the summary and run through the outlook for the future.

1:14 We will, of course, leave plenty of time for q and a at the end of the presentation, so please submit your questions as we progress. Additional detail on the group strategy, along with the additional companies in our portfolio, can be found in the appendices at the end of the presentation. Turning to Slide five. And for those of you who are less familiar with the SDI and what we do, I'd like to briefly explain our business model. The key takeaway from this slide is the group is a sustainable and robust platform for a clear strategy to drive to drive growth. We can simply define the strategy in two parts, organic growth and inorganic growth.

2:02 Organic growth will be driven by our ability to sustain and build revenues across our strong portfolio of existing businesses. Inorganic growth is our ability to identify and execute accretive acquisitions that enhance the portfolio, but also offer synergies and cross selling opportunities for existing portfolio of businesses, giving us a double bump of growth opportunities. We have a clear plan for both halves of the strategy. And whilst I don't intend to run through every box in this slide, you can see that our focus supports our dual pronged growth strategy. For example, our diverse portfolio drives organic growth, ensuring that we're well positioned in multiple high growth sectors and geographies with a balanced portfolio ensuring we're able to offset challenges in certain markets and strong performances in others.

2:56 We have a very strong track record in delivering acquisitions and supporting them once part of our portfolio. In the first half, we've completed a very exciting piece of M and A that I'll tell you more about later in the presentation.

3:13 Here, we wanted to reiterate the portfolio segmentation we outlined at the full year and the rationale for the structure. We now have distinct grouping across the portfolio, lab equipment, industrial and scientific sensors, and industrial and scientific products. We understand the markets we're targeting exceptionally well across these three groups. We see the growth potential in each of these target markets and the grouping on the portfolio companies enables us to better identify synergies and cross selling opportunities in clear specialist areas. This slide depicts our physical presence and illustrates that along with although we are UK based, SDI has an international presence, which enables us to access high growth international markets and sell across the world.

4:08 We estimate that we export approximately 70% of our products internationally, with 40% from direct sales and a full of 30% of UK distributor sales, which ultimately shipped overseas. In the appendices, you will see analysis of our international revenue streams. This slide also provides further granularity in the high growth sectors in which we operate. They are global in nature and demonstrate how diversified the end markets for the businesses are. So moving on to an overview of the financial results, I'll hand over to Ami to take you through the financials for the period. Thank you, Ami. Thanks, Stephen. I'm pleased to report that we've had an excellent first half cash performance with GBP 4,700,000 of cash generated by operations, and this compares to GBP 3,300,000 in the equivalent period last year.

5:03 Looking at revenues, we were down 4% year on year, of which 5.7% was an organic decline, and this arrived from a slow start to the financial year. This organic decline was largely driven by the life sciences and bioscience markets, which I'll say a little bit more about later. We saw improved trading from September onwards, and that has continued into the second half. I'm pleased to report that we've had a strong order intake period, and this is significantly up on a like for like basis compared to the second half of FY twenty twenty four. Within this, the Sensors and Products segments are performing particularly strongly. The lower sales translated into lower operating profit of GBP 3,900,000, and that fed through to the other KPIs that you can see on the screen.

5:56 I'll provide further details on these in the next couple of slides.

6:03 Turning to the income statement. The acquisition of Peak Sensors in November 2023 contributed £1,200,000 of additional revenues. The comparative period included £750,000 worth of sales from Uniform Engineering, which we disposed off in February 2024 and from the Synoptics US sales office, which we are closed, and which we'll talk a bit more about later on. After excluding all of these, the organic revenue decline was 5.7%. Gross profit increased by 3.8% to 65.4%. This is on materials only. Pricing continues to be a key focus for the group, and the improvement in the first half demonstrates the success of our operational efforts.

6:54 On a like for like basis, our wages costs increased in line with inflation. Interest charges were flat on last year. We had lower debt levels compared to last year, but a higher interest rate through the first half of this financial year meant that the interest charges were flat.

7:13 Our tax rate has gone up slightly, reflecting the change in the R and D credit scheme. The tax rate on adjusted PBT has increased to 22.8 compared to 19.2% in the equivalent period last year.

7:30 I wanted to provide you with a bit more detail on the financial performance of the three segments of the business, which Steve had outlined earlier in the presentation. The land equipment segment was a segment that saw the biggest slowdown over the first half of our financial year with an organic decline of approximately 12%. Pleasingly, we've seen improved revenues from the segments in September, indicating a positive recent trend. This lower start to the financial year resulted in a decline in the segment's operating profit, which reduced to approximately £800,000. The Sensors segment grew by nearly 11%. This segment benefited from the acquisition of Peak Sensors in November 2023. On an organic basis, this segment saw a decline in revenues of 4.5%.

8:21 Within this segment, certain businesses had strong performances, notably MPB. As we expected, Astor's Control Systems saw lower product sales in the period, following a very strong performance over the preceding three years. This was expected and is the primary driver for the organic decline in this segment. Our best performing segment was Industrial and Scientific Products, with organic revenue growth of 0.3% and an increase in operating profit to GBP 2,300,000. Within this segment, Fraser saw its geographic market start to recover, and Gratikils had a very strong first half. In addition, Attic saw strong order intake and profit growth following our proactive restructuring of this business, which improved profitability.

9:09 Scientific vacuum systems had tougher comparatives, where we shift to sputtering machine with significant revenues and profits recognized in the first half of FY twenty twenty four. As such, the stronger comparatives meant growth in this segment was slower than it otherwise would have been. However, overall, this has been a very successful first half for the product segment.

9:34 Turning to cash. Over the period, we saw a flat working capital, which is a positive outcome. Trade debt has reduced by GBP 2,100,000 over the period, and all businesses within the portfolio focused on cash collection and debt of days reduced to forty four days compared to GBP 46 at the end of the last financial year. This was offset by a GBP 1,700,000 reduction in creditors and a marginal increase in inventories, all of which netted down to a flat working capital position. Free cash flow was GBP 2,200,000, which is a significant improvement on the GBP 400,000 last year.

10:20 This slide shows graphically the movements in net debt. You can see the flat underlying movement in working capital on the left hand side. And on the right hand side, you can see the acquisition of Inspect Vision, which is presented as a net outflow of GBP 5,600,000.

10:38 This is GBP 6,400,000 cash outflow offset by GBP $7.50 k of loan repayments. In terms of net debt, we borrowed an additional GBP 5,700,000 just prior to the end of the financial period in relation to the acquisition of Inspect Vision.

11:02 As expected, it increased our net debt to EBITDA covenant to circa 1.4 times at the period end, which is within the Board's preferred range in terms of leverage. We still have headroom of GBP 6,700,000 of unused facility and have a further GBP 5,000,000 accordion option.

11:24 Over the first six months, we paid down a net £2,000,000 of debt using cash generated over the period. And we will continue to focus on cash generation to pay down debt in the second half. Overall, our net debt, excluding leases, has increased to GBP 17,100,000 at the end of the half. When you include the deferred consideration of circa GBP 500,000 for Inspect Vision, that leaves the net debt in total at GBP 17,600,000.

11:56 And now, I'd like to hand back to Stephen to take you through the operational review. Thank you, Ami. During the period, we made great strides in delivering against organic and inorganic strategy. We continue to explore opportunities within the portfolio of companies to drive further synergies and unlock growth. We strive to continuously improve the performance and ultimate delivery of our portfolio businesses. As an example, we restructured the team at ATA Cameras during the period to better reflect the market opportunity and is now performing ahead of expectations.

12:33 We also refocused Synoptics' sales strategy and closed its Synoptics US office in the period as a direct action of this. The group's focus on The US remains unchanged, but having reviewed the go to market strategy for Synoptics, the business's US market penetration can better achieved through different go to market plans.

12:56 We are seeing greater collaboration across a number of businesses and have combined the senior management teams of SafeLab Systems and Momo Scientific to improve operational efficiencies and drive economies of scale across both businesses. Within the lab equipment division, we have several businesses working together to optimize the risk to market and also working in partnership to secure more sizable contracts.

13:22 In October 2024, for the first time ever, we had six businesses from our lab equipment division coexhibiting at the lab innovations conference. Our efforts were recognized, and we presented with the best marketing award, which we're incredibly proud of. I'd like to thank the teams for their collective hard work and excellent coordination delivering this feat. This award is just one example of the progress against our efforts to drive organic growth. Finally, during the period, we demonstrated delivery of our inorganic strategy, and we're proud to welcome Inspect Vision, an incredible metrology business into the group. InspectVision is a highly profitable business, which meets our m and a criteria and is highly synergistic in our existing industrial and scientific products pillar.

14:13 Turning to Slide 17, we look at InspectVision in more detail. InspectVision provides precision measurement machinery for smart manufacturing, automated inspection and reverse engineering and offers a group an entrance into high value metrology market and the global blue chip customer base. Located in Northern Ireland and employing 14 people, their innovative products is steep in technology and is well positioned within the market. They have a blue chip customer base, which is predominantly export orientated with the largest export market being The US. We're also fortunate enough to maintain the leadership of the business where Jan and Colette continue as directors and run the business in full time capacity.

14:59 And the continuation and contribution to the group is strong with 2023 numbers showing an adjusted EBIT of 9,840,000.

15:13 Reverting back to the double bump mentioned earlier on, and speculation neatly fits into our criteria, not only as an attractive stand alone acquisition, but due to a sales profile and exciting technology, it also in terms of the synergies and its other businesses within the group. We believe there are opportunities to form alliances with Fraser Anti Static and strengthen the go to market proposition of both businesses.

15:40 The acquisition also introduces new technological capabilities to the group, including smart manufacturing, AI, AR, and machine learning alongside strong IP, which can be leveraged. Its strong US market presence and international reach is also compelling and provides a platform to deliver additional value to the group. The potential for some significant international growth is clear. Inspect Vision will join our industrial and scientific products division and will be operated separately from existing businesses. I'm really excited by the prospects of of Inspect Vision and about continuing our acquisitive growth strategy alongside driving our organic growth.

16:28 In summary, the group has demonstrated good progress against the stated strategy in the first half. Alongside driving organic growth and identifying synergies across portfolio, we have acquired a high value business in that spec vision, and we're hugely excited about the potential of the business going forward. I'm very proud of the team from across the portfolio for their hard work in delivering these set of results. We have strengthened our senior management team to support the delivery of both organic and inorganic growth going forward. We saw an uptick in activity as the half progressed with strong order intake, underpinning our confidence in achieving full year expectations, albeit with lower revenues, higher gross margins and operational efficiencies.

17:18 Our M and A pipeline remains strong, and we will continue to keep momentum up. Additionally, we remain focused on increased collaboration and synergies within the existing businesses to drive future organic growth and strong cash cash generation to pay to an existing net debt and affording us to deliver on our inorganic growth strategy. We have absolute clarity over the strategy, which is gaining positive momentum. And we have the right team in place, and we're we're well set to deliver our plans for future growth. I would like to thank you all for listening for to the presentation. I would like to open up to q

17:58 and a. Steve and Amy, thank you very much for your presentation. What I'll do at this point is just bring your cameras back up. Ladies and gentlemen, please do continue to submit your questions. You can do so just by using the Q and A tab that's situated on the top right hand corner of your screen. But just while the company take a few moments to read the questions that have been submitted today, I'd like to remind you the recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, have received a number of questions throughout today's presentation. And, Amy, if I could just hand over to you to share the q and a or any questions out, I'll pick up from you at the end.

18:31 Right. Okay. First question. What are the cost efficiencies you referred to in the second?

18:38 Steven, you want that one? Yeah. Sure. So the cost effect we've we've got a lot of effort into the cost efficiencies this year. What we have really done is employed good business management throughout the portfolio of businesses, including deploying appropriate price increases, operational improvements, economies of scale where it makes sense, and cost based rationalization. There has been a few head cut head reductions in part of part of this rationalization. But because we're very much focused on the sustainable business going forward, these have been minimized. Okay. Next one. Are you still confident that you can deliver full year profit expectations?

19:21 I'll I'll take that one, Steve. Sure. Yeah. Yeah. We are confident that we can deliver full year profit expectations. Our gross profit margin, as you've seen, have improved significantly, efficiency that we've made, that Steven just talked about, all the actions that we've taken over the previous periods. We've also got a strong order book that we've talked about, and all of this gives us confidence that we are, that we will continue to deliver. Do you have the firepower to continue to deliver M and A? I'll take that one. We do. I mean, we are cash generative as we've seen from the first half. That will continue for the second half. The net leverage net debt to EBITDA covenant was up 1.4 times, which will, in the absence of any M and A, will reduce naturally as we progress through the rest of the financial year.

20:12 So the combination of the current cash flow will allow us to do some more M and A. So yes, the answer is that we will have a we are able to do more accretive acquisitions and we have a strong pipeline with multiple opportunities. Okay. Next one. Could the company reiterate the target of paying four to six times EBIT for acquisitions as the latest acquisition took place at more than seven times EBIT? I'll jump in on that. It's actually I think the net figure is around 6,000,000 for the for inspection for about a million EBIT. So I think it's not more than. So do you wanna have a chat? Yeah. No. Absolutely. So so we've always said that we pay four to six times EBIT on based on the goodwill portion of of a of an acquisition.

21:01 The goodwill part of the of of Inspect Vision sells conflict between the four to six times. So that that remains our our focus going forward, and we we will we do not intend to go beyond that in a future acquisition. Has the order book continued to grow in half two to date? It still remains long at the end of November. I think the short answer to that one. Is only one month since the half year ended. Why quote just quote the GP on percentage of materials only? Well, that's our standard GP. We've been consist it's consistent. We've always quoted that percentage, so you've got comparability year on year. And changing that, I don't think it's beneficial just at this point in time. I understand the question, but it's what we've always done.

21:53 We've always said it's, GP has been on materials only. So okay. In the context of overseas markets, when the recent closure is not distinct, do the board consider the threat of tariffs, trade policy changes under President Electronk now presents the further potential hurdle to further growth opportunities in The US in near to medium term. Dean? I think it's something that we need to monitor very closely going forward. Is it gonna be a hurdle for us? I think it's up to us to minimize it. We have already started plans in place. For example, we're we're looking at at partnering with businesses already in The US to produce some of our products, pure for The US market to get over this and improve profitability ultimately.

22:46 So is it gonna be a problem for us longer term? I think it remains to be seen, but we are working very hard to to overcome. Over the next twelve months, what sort of operational reshaping, resizing can we expect? We're always evaluating, obviously. I mean, it's difficult to say to answer that one. Absolutely. We're not looking at much resizing or reshaping going forward. Really, as I said in the last question so the previous question, we are very much focused on building a sustainable business going forward. We want something which is scalable. I think we started resizing quite abruptly, and that would potentially damage that or put at least put at risk. So we're not looking at signaling resizing. What we're really looking looking at is is operational efficiency more than anything.

23:35 The CEO has had a good look now. What's the biggest impact he can bring to the future of the group? Will we see this unfold? Really, we have we've set a a two pronged strategy as as we've talked about pretty quite exhaustively. We we have to really keep this this momentum going on on the two pronged strategy. And for us, cash generation is absolutely key. What what what generates ultimate cash, looking at operational efficiencies, looking at profitability, looking at revenue, looking at every everything which is good for strong business management, and that will ultimately feed the inorganic. So keeping that strong focus on drive on both sides of the strategy is something which which we need to keep going with, and that's something which I will continuously drive.

24:22 How many acquisitions do you think can handle within half two or 25? How much capital will you deploy? That's the capital deployed, it's hard to say. It depends what happens. But how many can we handle? That's a good question. So at at the moment, we've got a very strong deal for pipeline. We've got probably 37 businesses in our pipeline. Too much than than than we can handle and fund, obviously. What the m and a is gonna look like in h two, I think, remains to be seen, but we're certainly not ruling out we're certainly not not not stopping where we are. When do you expect business growth to reaccelerate? Yeah. Sure. We're we're we're we're looking quite positively at h two. The order book, it puts us in it gives us a lot of confidence going forward.

25:11 We've put a lot of effort into analyzing and really understanding the strength of our order book and the order intake. If you look at our comparative from last year to this year, our order intake is is is very strong. So we're we're we're quite positive in terms of accelerating the business. We see this very, very much as as as I keep saying, a a sustainable business of it's a marathon rather than a sprint. So what we're looking to do is have that steady growth trajectory and and position the business to do that. So are we gonna see a very steep acceleration? Probably not. What we're looking for is is that sustainability. What are the gross and operating margins for Inspect Vision and what percentage of their products are exported to The US market? In terms of gross margins, it's not too dissimilar to the group.

25:57 In terms of operating margins, I think you can actually get that from the RNS where you can see the profits that they made last financial year. We talked about it in the presentation, $8.40 k on a normalized basis, $8.40 k in FY 2023 on sales of I think, 3,200,000. Yeah. And in terms of the of export of The US market, approximately 48% was in The US market, 20 and 25 EA and 25 Asia, roughly. So there there's there's a lot to go out there. Lot of lot of potential and opportunity. Okay. The previous year, expected your current portfolio to generate organic growth of between 510%. Do you think this is achievable? I think we outlined some of the range, didn't we, at the year end? Excellent. Yeah. Between 58%, I think, is what we've said.

26:44 Yes. We do believe that's achievable. And the the organic strategy is is built upon delivering that. So, really, we we just have to keep keep the faith and keep and keep the the forward trajectory going on that organic strategy to do that. What plans do you have for product development in half two? Interesting. So we've got some well, could be the developments that Kjell talked about in the back range. Absolutely. And As it can, we could continue the development of the cameras. Indeed. We're what we what we have done, we put in a discipline across the group of of almost a continuous NPI and NPD process and and quite a lot of our businesses, not all, but quite a lot of them going forward. Do we have any product? We've got some product launches coming in h two. For example, LTE have got a a new and and quite a new design going going to market in h two. And we've got a a few other new new new to market products coming online. Developing new engine chillers. There's plenty going on. There is we're always busy. It's part of what we it's part of our DNA to to continue developing new products for our manufacturing business. Very important to us. But we have increased the focus on market driven product development as well.

28:02 So what you will see is is a is a refresh driven by market. If it's not required, it's not it's not refreshed. But, really, what what we're keen to do and what's an important part of driving our growth going forward is really keeping that refresh and really being market driven. Who's responsible for m and a sourcing and funnel building? Can you talk about how the m and a outreach is done? Yeah. Absolutely. So and and the end of the end of last financial year, we spoke about increasing the the head office team. So there's we've now got a head of m and a come in. So it's it's myself and head m and a do all of the m and a. We we build together. We build the pipeline. And in terms of outreach, we, you know, we we we not be doing ourselves, but we also got a a a we've got two brokers, which which we've got on on engagements. We also use use them as well.

28:58 So it really depends on on the business and and and how we and and how what the most approach appropriate outreach is. If it's if the business is known to us, for example, if it comes from within our portfolio, we would typically do it ourselves, but if it's a if it's a cold call, it's it's often beneficial to use an external, an independent, to do that initial outreach. So it really depends on the business, but we do tailor it for for each individual target. Any fruition on cross selling opportunities? Any timelines on future acquisitions? Thank you. There is as I said in presentation, I gave a couple of examples about the cross about cross selling. There there's there's an increase in the white labeling, for example, particularly in in the lab group.

29:45 On the other two pillars within the business and the sensors and the product side, There's a lot less so, probably less so than less so in the in the sensors. It's not our intent to force a cross selling or a collaboration across the group. We only do it where it really makes sense. In the in the lab equipment pillar, it makes a lot of sense. In the sense, there's not so much in products. There are some synergies across go to market. So there these are very much ongoing, and and as I really, if it makes sense, we will do. I think in the product side, there's a lot to to go after with with geographic outreach and and combine those outreach of several businesses. In terms of timeline of future future acquisitions, I'd I'd love to tell you, but but all I can say is we we're we're keeping that momentum up. Yeah. It's difficult to predict those. It'll happen when it will happen.

30:44 Interesting one. SafeLab and Momo, they're much competitive in the same market. Now they share a management team. How will they differ and retain their own USPs? On looking at at the two businesses together, it would seem that they're actually very complementary in terms of product reach. They do operate in quite different markets. In some markets, they do compete, but but it's it's it's quite there's a ducted, non ducted side of of of fume cabinets, and we've got one business stronger in in one side and and vice versa. So really, bringing them together in terms of of of leveraging their the relevant brand strengths and the relevant parts of the market is what we're tend to do. It's what's very important to us is protect the brands of both of both businesses. And I and really, where we're going to be looking at at the cost efficiencies is very much in the back office side and not necessarily in the front office. And so really what what the market will see is is probably a more unified product line, a more competitive product line Some on on on two businesses, which can ultimately deliver not only from the service side, but also on lead times, etcetera, much better than what we're currently doing at the moment.

31:56 So so I think the the the the potentials are certainly there, but what we don't want to do is is is bring two competitors together and potentially quash one business, and that's something which we're very conscious of doing. What percentage of revenues are recurring? So we've done some work on this. Mean, between around 15 between it varies from period to period. Between 1520% is is the range of which revenues are returned. How should we model staff cost percentage going forward? That's a really good question. In terms of, you know, inflation is a good proxy, although, you know, the NI changes that have been recently announced will have a bearing on this as well. So can't give you an exact sense. We're still working this out ourselves.

32:41 But it proxy is usually in absolute terms of inflation. Should investors expect revenue growth in the near future, or is it going to take longer to see the sustainable growth you've mentioned? And what does the sustainable growth look like in terms of percentage? I think we're getting the range, haven't we, going forward between 58%. We have absolutely. Yeah. And I think that I think that that's fair. As we said in the presentation, we we we have had slow start to the the the first half. The second half has been strong, and and our outlook for for the end of the second half is is good. We can enhance the the the revenue projections, what we're saying at the moment. And in terms of growth, what what we expect to see is is going next year.

33:31 What is the market profit expectation, please? My understanding is that the, adjusted EBIT expectation is circa 10,000,000 from the analysts at the limit for, FY '25. Which is the guidance? Which is the same guidance as it was. You can see it on the press release on the front page where we put it. We we do include that, and that hasn't changed. I'm just having to look to see if there's anything else that we have a concert. I think that is it. You know? Perfect. What just thank you very much for answering those questions from investors. Of of course, the company can review all the questions submitted today, and we will publish those responses out on the investor meet company platform.

34:22 Just before redirecting investors to provide you their feedback, which is particularly important to you both, Steven, could I just ask you for a few closing comments? Yeah. All I would say is thank you very much for your time, and look forward to presenting further news in the in the near future. Steve and Amy, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations? This won't take a few moments to complete, but I'm sure we'll be greatly valued by the company. On behalf of the management team of SDI GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.