Good evening and welcome to the Judges Scientific Investor Presentation. Questions are encouraged throughout the presentation and can be submitted via the Q&A box situated on the right-hand side of your screen. We are joined today by the Judges Scientific Management Team. I would now like to hand over to Chief Executive Officer David Cicurel.
Thank you very much, Rachel. Thank you, everybody, for attending this presentation. I would just, you know, introduce my colleagues: Brad Ormsby, who's the Chief Financial Officer; Mark Lavelle, who's Chief Operating Officer; Tim Prestidge, who's Group Business Development Director; and Ian Wilcock, who's Group Commercial Director. We'll all have a part in this presentation and also in answering the questions. If that's okay with you, I'm going to start taking you through the beginning of the presentation, which is really to explain what we do and why we think it's such a good idea to do what we do. Do you mind passing the next slide? Thank you so much. Judges Scientific is a buy-and-build group, and we're buying manufacturers of scientific instruments. We think that there's three pillars of shareholder value. One is the long-term drivers.
The main long-term drivers are this: one is an explosive secular growth in university education throughout the world and even in developed countries like the U.K. The other one is a constant thirst of everybody who's doing something to do it better, optimizing what we do. We all try to optimize everything in our life. When you're making things, you can't optimize without measuring. We make a lot of these measurement instruments. Without long-term drivers, you can't have a successful buy-and-build. The second thing is you have to find deals. We have a large deal pool. When we started in this business nearly 20 years ago, we calculated that there were 2,000 companies in the U.K. alone. Of course, we're looking at deals constantly outside the U.K. A good pool to find deals.
Low capital use, which is a bit less obvious why it's important. Your typical buy-and-build is this: I'm on a multiple of 20. You're on a multiple of 10. I buy you, and I multiply my money by two immediately. What we do is different. We borrow money. Over the years, it's been, you know, between 3% and 6% per year. We buy companies on average; we pay five times EBIT, so you get 20% on your money. Therefore, you multiply your money by four. It's a fantastic model. You can't pay the bank back with EBIT. You have to pay them with cash. Converting your EBIT into cash is a very important thing. The fact we use very little working capital enables us to convert all our earnings into cash and repay the bank. This is our model.
I would say an important thing in that model is that you can do deals and deals and deals and not issue a lot of shares. I want to mention that after the first deal, we had 3.3 million shares. Today, nearly 20 years later, we have only 6.7 million shares. We have only doubled the number of shares, which has enabled to multiply shareholder money by 100. You think I'm obsessed with shareholder value? I'm completely obsessed with shareholder value because this is really our mission: to create value for shareholders. The buy-and-build strategy is based on two things: M&A, which is buying the right companies and paying the right price for them, and organic growth, which is making sure that when you own them, they're going to prosper. In the nine years from 2005- 2024, we completed 25 acquisitions.
We produced total revenue compound growth rate of 20% a year and organic revenue of 7% compound. EBIT, we produced compound growth rate of 26% and organic EBIT of 9%. This is the thing which has really fed the prosperity of the group. Because of that, we've been able to pay a dividend which goes up by at least 10%. This is our promise to shareholders. Every year, we increase the dividend by at least 10%. We've done a lot more because we've paid on average 22% compound growth rate. Over these years, we've paid back the shareholders 8.6x what they invested in the company in the first place. If you pass the next slide, I wanted to explain who we are. I won't say that again. We pass on to performance, to key messages of the year 2024.
Sadly, 2024 was not a good year. We had headwinds during the year. We bought two years ago Geotek, which is a company involved in measuring cores. A third of that business relies, and we call it the coring business, relies on conducting an expedition. Typically, we have one of these expeditions once a year. In 2024, we did not have an expedition. That was a bit of a hole. We started the year on the back foot. Subsequent to that, we realized that we also had a lot of headwinds with mixed trading and difficulty obtaining and completing orders during the year. The main thing which impacted was very weak intake from China. China has been a big market for us. We were down in the first half, two-thirds in China intake. It got better, normal in the second half of the year.
For the year as a whole, we were down a third in order intake and in sales, which is about GBP 6 million. It is a sizable amount of sales that we were missing. A lot of projects got deferred in 2024, hopefully into 2025. Some of them have been already completed. That is a consolation, but it did not save 2024. I have to say the coring revenue did not happen in 2024, but we had a contract with Japan, which started in January 2025. We started the year on the right foot. Weak performance, which means fewer orders. Cash conversion was difficult in the first half, but completely restored in the second half. We had a year where we converted more than 100% of our EBIT into cash.
Our order book was maintained throughout the year, but our adjusted EPS is down 24%. On the other hand, we had a very good year for deals. We had the second best year in terms of the number of deals because we did three acquisitions in 2024. Our previous record was four. In terms of the value of these deals, it was also the second because the best year we spent GBP 80 million, and this year, GBP 20.5 million. We have increased and extended our banking facilities, but we will talk about this. This is a very good thing for future deals. We have strengthened the executive team with the recruitment of Ian in September last year. Welcome, Ian. We have increased the dividend 10%, which we do when we have a bad year. Now I am going to pass on to Brad for the performance.
Thank you, David. Let's move straight on to the highlights. I mean, you know, in summary, this year has been a pretty disappointing year for trading, but we've still managed to execute against that long-standing buy-and-build strategy this year. Looking at the results, total revenues were down 2% at GBP 133.6 million. It's a combination of an 8% decline in organic revenue, partially offset by the contributions from our 2023 and 2024 acquisitions. The decline in organic revenue was as a result of a weakness in order intake, which we saw towards the end of 2023 and throughout the first half of 2024. In the second half, order intake recovered somewhat, and we finished the year with organic order intake up 7% by the end of the year. However, this also included the signing of a coring contract, which was not in our comparatives.
Without that, organic order intake would have only been up by 2%, which is well below our normal growth expectations. This, as David's touched on already, was substantially affected by China. The effect had lessened from the half year through to the end of the year. The lower volumes impacted our profitability. An adjusted operating profit was GBP 27.9 million, down from GBP 34.8 million, a drop of 20%. We gained good leverage from our high fixed cost base when we have good revenue growth, but it works against us when revenues decline. The adjusted basic earnings per share was GBP 2.834 , a 24% drop, also affected by higher interest. Moving from P&L to cash generation, we generated GBP 34 million in cash from operations with a cash conversion of 122%. For the group, we had a proud track record of converting profit into cash.
We have got ourselves back to where we should be this year, although we acknowledge that our working capital still remains a bit higher than we would like it to be. I will talk a bit more about this later. The good cash conversion and cash generation serves to enable us to continue to provide shareholders with the progressive dividend policy, increasing every year by at least 10%. We have increased our proposed dividend to GBP 0.748 per share, compared with GBP 0.68 per share last year, an increase of 10%, which, if approved at the AGM, will provide a full year dividend of GBP 1.045 per share.
The good cash generation has also enabled us to invest GBP 5 million in capital expenditure, be able to pay interest more than GBP 3.5 million, pay our corporate taxes of close to GBP 6 million, return GBP 6.5 million to shareholders in the form of dividends, and also acquired three businesses during the period: Lucio, Rockwash, and TIR Coatings in the second half, which David will talk more about later. Those three added close to GBP 20 million to our adjusted net debt. With that cash that we've generated meant that net debt only increased a bit shy of GBP 7 million- GBP 51.7 million by the end of the year. Leverage at 31 December was 1.7x affected by our weaker profitability, still with significant headroom in our covenants and a strong balance sheet position. We were able also to amend and extend our facilities during the year.
I'll come back to that a little bit later. Looking into 2025 and our outlook, we start 2025 following a difficult year in 2024 with a strong order book, with momentum having returned to order intake and with a coring contract in progress in H1. Whilst the global geopolitical and economic environment remains uncertain and unpredictable, the group is well positioned to continue its acquisitive strategy and return to growth. Moving on to the next slide, I will not dwell on here too long. It is another performance slide. I just want to touch on a couple of things. One, the effective rate of tax on our adjusted earnings is slightly down this year to 21%.
This is a consequence of the last quarter increase in the U.K.'s headline rate of corporation tax to 25%, more than offset by some one-off recognitions of some brought forward tax losses and also the group's first foray into the U.K.'s Patent Box scheme by a couple of our companies. Those two items both reducing our effective tax rate by around 1% each. Lastly, we do have adjusting items that take us to the statutory result. The largest of these is the GBP 9 million non-cash amortization of the intangible assets we're required to recognize when we acquire businesses. Moving on to the next slide, onto order intake. As I always say, the bellwether for our trading performance. To talk you through that, importantly, we just talk about the graph on the right-hand side.
The slides have three lines on it: a red line, a black line, and a green line. To explain those lines, the red line is our internal sales budget. We set this once a year as part of our annual budgeting process. That's our target. The black line is our trailing 12 months of orders, and the green line is the last four months of orders annualized. What are we looking for? We're looking for the black line to at least be touching the red line by the end of the year, such that we would have had sufficient orders with which to satisfy our sales budget. The green line ideally to be hovering around the red line such that we'll be at optimal capacity. What actually happened?
If you look at the green line first, you can see it's been pretty anemic in really the second half of 2023 and throughout the first half of 2024, such that we were down 4% at the half year. Shortly after the half year, you can see a significant improvement in that line. We then go and have a look at the black line. Similar picture. It's obviously not as jagged because it's a longer-term measure. It's improving towards the end of the year. When you get to the end of the year, which is the end of the graph, there's still a significant gap between the black line and the red line, and hence why we had weaker performance this year. Intake, as David mentioned earlier, certainly affected from an early stage by a big decline in China.
Positively, though, we look forward into 2025. We have an organic order book. We start the year with over 19 weeks. Order intake year to date slightly ahead of the previous period. With a coring contract in progress as well, we expect a good start to 2025. Moving on to the next slide. Onto Profit Bridge. This slide reconciles between the 2023 and 2024 profit contribution of our businesses before central costs. They are the big green blocks on either side of the slide. Reconciling between these, you can see the effect of the weaker performance this year with a much larger organic decline than organic growth. Really improvements at some of our businesses, but more than overshadowed by some significant reductions at a few. Lastly, a small block for the effect of our more recent acquisitions.
Really not the picture that we expect to deliver every year and one which we certainly expect to reverse in 2025. Moving on to the next slide. To balance sheet and cash flows. As I mentioned earlier, I'm pleased that we've returned the group's return to its historical norms for cash conversion. We generated 122% cash conversion, although this was also enhanced by a full prepayment on our coring contract that started this year, but was paid in full before the end of the year. Without this, cash conversion, though, would still have been 105%, which is aided by a really strong performance in the second half. Just to remind you, at the half year, we were only 63%. Good performance and a good return to our norms.
It is the first tick in the box for us in terms of getting back to where we expect to be. At the same time, we still have higher working capital. Pleasing that we have gone back to 19% of working capital as a percentage of annual revenue, having been as far up and as high as 25%, but we still have some way to go to reach our target of being back at 10%. Quite openly, we have still got some work to do over the coming next couple of years to help continue to chip away at particularly an inventory where we certainly got 7 million-8 million more inventory on a like-for-like basis than we had prior to the supply chain issues. Leverage at the year-end was 1.7x .
We still have significant headroom in our covenants, plenty of borrowing capacity, and the continuing support of our banks at Lloyds, Santander, and Bank of Ireland, who supported us in amending and extending our facilities in the middle of the year. If we move on to the next slide. It is a reminder for everyone, when we acquired Geotek in 2022, we refinanced the group's facilities for GBP 100 million facility, which was due to mature in May 2026. That was a GBP 25 million term loan, a GBP 55 million revolving credit facility, RCF, and a GBP 20 million accordion. Now we extended the facilities by a couple of years, so they now mature in July 2028.
That gives us good runway and also increased them from GBP 100 million to now GBP 140 million overall facility with a GBP 90 million RCF and therefore no more term loan, which means that we do not have to repay as much as we are quite happy to, and also a larger GBP 50 million accordion. No change to our covenants. Overall, this gives us greater firepower to continue to execute our acquisitive strategy and continue to buy the businesses like TIR Coatings that we think are right for this group. We move on to the next slide. Return on total invested capital, another key measure for our group. Just to explain about this graph, ROTIC, it is quite simply a function of the multiples you pay for the businesses you acquire.
When you start on the left-hand side, our first acquisition of FTT, where we paid close to five times, we start at around 20%. Improving ROTIC thereafter requires improved financial performance and/or buying businesses at lower multiples. As you move across the graph, you can see the effect of buying businesses at higher multiples. When we acquired GDS and Scientifica in 2012 and 2013, respectively, which were then very large deals for the group, that cliff edge effect of paying a higher multiple. Move further across. As we have gotten bigger, made another six times acquisition of THT in 2020, not a big change to our ROTIC, and smaller acquisitions now make minimal difference. Of course, you move on to 2022, and you can see the effect of acquiring our largest acquisition of Geotek when we paid seven times and another cliff edge effect.
Of course, this year, ROTIC has declined as a consequence of the weaker performance. We ended the year at 16.5%, which is absolutely not where we expect it to be. We expect to return promptly to over 20%. Certainly, I'd like to see that even by the half year. We have to continue to push hard to work our way further back up to what we see as a target to aim for, for 30% ROTIC over the medium term. Not an easy target for us, but something which we should aspire to. Moving on to the next slide. The penultimate slide, just talking about diversification on those four pie charts. I'll talk through them. You can see from the left-hand side, there is no one single company in our group that we're overly reliant on as overly dominant.
Our businesses manufacture instruments for different end markets, and so are diversified by scientific application. There is no one single region or country that we are overly dependent on, given that we are exporting more than 85% of our revenue. When you look at our end market, 20%-25% is geotechnical, which is a bit lower as a result of no coring contract this year, 20%-25% in industry optimization, and around 40%-50% in the life science semiconductor. We amalgamate this because the research performed either at university or in industry, and the techniques used and the instruments used are similar across both of those sectors. We amalgamate those. Onto my last slide. This really summarizes some key financial statistics about the long-term success of our group.
Revenue, profits, and earnings per share have all grown strongly over the history of our group, although this year has clearly been a challenging year for us. We still have a long-term organic CAGR for revenue of more than 7% and EBIT of more than 9% on the same measure. For us, we see this in the short term, the medium term, and the long term as more than sustainable. Dividends have grown by at least 10% per annum throughout the history of the dividend. We are increasing the dividend to GBP 0.748 and a full year of GBP 1.045 per share, with compound growth in excess of 20% for the dividend.
Lastly, the group's continued focus on cash generation serves to enable us to insulate the group through difficult periods of trading, enables us to repay acquisition debt quickly, make space for more acquisitions, and continue to fund progressively increasing dividend returns for shareholders. On that note, I'll pass you back to David to talk through our strategy.
Thank you very much, Brad. Good strategy. We're going straight next to the next one, is Rachel. As we said before, there are two sources of growth. One is M&A, mergers and acquisitions, buying new companies. The other one is organic growth, which is much harder work. It's just trying to get these companies that we own to produce more profits. We pass on to the next, which is about acquisition. I'll talk briefly about that. What counts is to have good discipline.
We have discipline in what we buy. We want to buy strong exporters in the global niche markets. We try to find companies which are actually leading niche markets with very little competition, with solid EBIT margin. A lot of people ask me, "But how do you manage to get 25% EBIT margin?" The answer is because we try to buy companies producing 25% EBIT margin. That is a bit less difficult than people think. It is not easy to find them. They need to be generating sustainable profits and cash flow. You have to be disciplined on the price that you pay. We pay three to seven times EBIT according to size. Actually, the outliers are the three and the seven times.
Apart from that, all the companies have been bought between four and six times with an average of five times EBIT, i.e., producing 20% on our investment. We are allowed to borrow up to three times EBITDA. We paid over the years between 3%-8% interest on that. If you get 20% on your money, you can see that it's a winning formula, but it was even more winning if you have growth. The deals are long to do. We call it the incubation period. They're erratic. Sometimes you pursue deals for a long time, you don't manage to close them. We try to provide absolute financial certainty for the seller. With the exception of the first deal, every deal was financed entirely before we signed heads of agreement. We are honorable in the process, and we never renegotiate the heads.
We treat people always with respect. This has enabled us to do a lot of deals which we had lost and where we were the underbidder. When we are the underbidder, we always end up doing the deal when people misbehave. We have done a lot of deals where we were the successful underbidder. Of course, we buy these companies, reduce debt, and reinvest in further acquisitions. This year, we did three acquisitions, two small ones. One is Lucio, which is a small company in fiber optics in Switzerland that is very synergistic with a company we already own, which is called P Fiber Optics. It has a completely different cycle. It is not cyclical, and P Fiber Optics is very cyclical. It is very interesting for them to be making similar products but addressing different markets.
Rockwash, which is very synergistic with one of the three businesses of Geotek because it's about the digitalization of shippings. One of the three businesses of Geotek is the digitalization of cores. I'll talk a bit more about TIR, which is by far the largest deal we did last year. If you don't mind passing, please, Rachel, to the next one. The company we bought is called Mugsbutter, but we know it under TIR because that's the brand name which is being used. It's a company which is involved in coating. They're very expensive and sophisticated coating. A lot of things that we use in our everyday life are coated, like your phone. This is where it doesn't scratch, or your glasses, which also don't scratch and sometimes have very different properties. These are very, very sophisticated coatings.
These machines that you see on the left, it costs something like GBP 500,000-GBP 1 million. On the right, you see the hole which TIR Coatings uses to actually coat for other people. We have a service business as well as an instrument-selling business. It is about half-half. The coatings that we do are very sophisticated. It is not only the machinery which is sophisticated, but the recipe which is used for each client to have the most successful coating. It is used in very sensitive industries like medical, defense, Formula 1, and also mints, which everybody likes to think that commemorative mints were going to make coins which are all exactly the same. The company is making the odd GBP 2 million a year, and we paid six times the six-time multiple. Now we are going to talk about organic growth.
Can I ask you, Tim, to deal with this one? Rachel, move to the next one and the next one. Thank you so much.
Thank you very much, David. Yeah, thank you. Okay, yeah. My plan here, I'm going to give an overview of our strategy for organic growth and the tactics that we employ to deliver that strategy. I'm going to primarily use this slide and a brief introduction of the following slide. I'm going to hand over then to Mark and Ian, who are going to go into a little bit more depth around the tactics and also give some examples of how we have implemented some of those tactics.
Yeah, using this slide, I think one of the first points to understand, and David's already referenced in terms of our acquisition strategy, despite having a very difficult year last year, we still executed our acquisition strategy and acquired three businesses. In terms of our organic growth strategy, an important point to emphasize is that we remain committed to it, and our commitment remains undented even though we had a difficult year last year. In other words, what I'm going to present here is the strategy that we have been deploying and we continue to deploy even though last year was a difficult year. Short-term fluctuations happen from time to time. Our strategy is a long-term play to deliver sustainable growth and shareholder value. Think about the fundamentals of our organic growth strategy. Another important point to make is that they don't just start after acquisition.
If I look down the left-hand side of this slide, the first three areas that I emphasize are strong leadership teams, robust governance and finance controls, and also looking to fill capability gaps. It's important to realize that we start thinking about those and having an open dialogue prior to and during an acquisition process. It's not something that we consider only after the company is acquired, although post-acquisition we will also continue clearly to emphasize those points. It's worth highlighting, for example, that TIR Coatings, it was known to us during the acquisition process that we'd need to look at new leadership. Also, that organization was the first company, the first acquisition for which Judges had to do a mandatory National Security Investment Act exercise.
It was important to understand the governance controls that were in place there and whether we needed to help fill any capability gaps there once the company came on board. Those are aspects that absolutely start during the acquisition process before the companies come on board and then clearly continue once the companies are part of the Judges organization. Together, really, those things help us to establish and cement the foundations of what is going to help the companies really operate within the Judges environment, which comes to the autonomy and accountability. We are, in essence, a federation of semi-independent businesses. The autonomy of those businesses is clearly key and important to our model. Autonomy through accountability for the results that those companies are generating.
It is those things, the strong leadership team, the robust governance and finance controls, and making sure that capability gaps are filled that allow us to be confident that those two things are possible. Once a company is acquired, that is really when the elements down the right-hand side of this slide really come into play. Other elements that we look to do include leveraging group-wide experience, promoting excellence, and encouraging ambition. I think it is important there to emphasize that, yes, that is clearly part of my colleague's role and my role, but it is also that we look to leverage expertise around the group. Everyone else who is a leader in other companies within the Judges group has real expertise in terms of their own functional areas and in terms of the markets that we serve.
Although there might not be direct synergies necessarily between all of the businesses or some of the businesses within our group, they still face very similar challenges and problems. Those are the types of opportunities that we seek to make sure that we utilize across the group. Together, those things, leveraging that group-wide experience, promoting excellence, and encouraging ambition enable us to then build out the really important elements, again, fundamental to our long-term strategy, that long-term focus and sustained ambition for growth within the group. Important to reflect, I think, that on my colleague's role, my colleagues' roles, Mark and Ian roles, and my role, we all share a portfolio of companies. Therefore, we are accountable to the PLC board, and we are accountable to David, our CEO, for the P&L of our respective portfolios. We do not run the individual companies.
We do not manage the individual companies. That is absolutely all done with high-caliber, strong local leadership teams that have been established and built up through the sorts of tools and processes that we talk here. Our roles are very much to work with leadership, leadership teams, leaders of each of our portfolio businesses, with a focus on the key fundamentals that we talk about here. The talent, being confident that we have the best talent in place and they are continuing to build the necessary talent to enable the organizations to grow, that they have an ambitious and strong strategic vision, that they are executing operationally very well, and broadly speaking, accountability, which is where the robust governance and finance controls come in. We will move to the next slide. Aligned to those focus areas, this image is broadly the same as we have used in previous presentations.
We talk about the four pillars: strategy and ambition, operational excellence, talent development, finance, and governance. You will increasingly hear us talking about this structure as a toolkit. We have not quite decided what to call it yet, but you will hear the name toolkit or the word toolkit coming. What do we mean by that? It is more than a loosely defined menu of optional extras. It is more than that. It is not a rigid structure of mandatory business processes. It does contain mandatory elements, but it is not something that we absolutely enforce on the companies in terms of everyone operating the same way. It is a mixture of tools, processes, best practices, some of which are mandatory, others of which can be applied to different levels of different companies. It leverages that group-wide experience and capability.
We see it as absolutely key to the scalability and long-term growth of our model. Okay, I'm going to hand over to Mark now. He's going to go deeper into some of these tactics with examples. Sorry, back to slide 22, please.
Excellent. Thank you very much indeed, Tim. I'm just going to talk a little bit about the two grey boxes, and then Ian's going to have a chat about the green ones. We just talk about talent development, first of all. It's important to remember that the businesses we own are truly remarkable businesses. Most of them employ something on the order of just 40 people, and yet they manage to be world market leaders in a particular niche. They've usually been started by an entrepreneur, somebody who's an absolute expert in the subject, either an engineer or a professor.
In common with many businesses, as you grow from half a dozen people to 10- 20- 40 people, one of the challenges that businesses face is that leadership becomes increasingly important. Most of the people who have founded these businesses are not necessarily experts at leadership. Some of you may have read a book called What Got You Here Won't Get You There. That is very much this point that in order to enable these companies to continue growing, the skills, etc., that many of the senior people in the organization have need augmenting with some really good leadership skills, the ability to select a great team and to lead that team, keep them motivated, develop them, etc. What we have done is to develop our own bespoke leadership training course that is very much focused on autonomous businesses like this.
We take a cohort of 12 people, senior people across all the different businesses with various different roles to try and have a real mixture. We take them away for two one-week sessions, which are fully residential. We teach them a lot about leadership, but also they teach each other. It is great to have a few MDs there and a few sales directors and production, R&D, etc., so that they can benchmark themselves against each other, but also benchmark their teams against the other people they meet. That is enormously productive. In fact, we have got one of those running this very week. Ian and myself are off there this evening and tomorrow to contribute to that as well.
We've got about 80% of our senior team through that, but there'll always be a few people who haven't yet been on it because of retirements, recruitments, and replacements. When I talk about recruitments, it's also important to think about how people have tended to recruit. Now, many small businesses really struggle to recruit in an objective fashion because the interview process is not something they're particularly used to. They tend to just, frankly, recruit people who are like themselves. We, again, give the companies some tools, which enables them to do some objective assessment of the candidate pool that they get. Our involvement in that is very much ensuring that they keep the bar high enough. Again, many people go through a process. They get to the end of it. They've got a shortlist of three people, and they pick the best person.
That best person may not be good enough. I've certainly, on a few occasions, said, "I think you should go around again because even the best on this shortlist is not good enough." Ensuring that we keep that bar really high with people we bring into the organization is really important. If we talk about operational excellence, we do quite a bit of that in terms of production. We have some really excellent metrics, really a few very simple metrics, which ensures that the companies focus on meeting customer needs, getting deliveries sorted on time. We do not have a huge number of them that they have to randomly try and comply with. The point is we will give them a few key metrics. As long as they hit those, they have plenty of scope to deliver to them as they can.
We also spend a lot of time making sure that they cross-fertilize with each other. With small businesses, you have many people working in them who have maybe never worked anywhere else. If you have been there 10 or 15 years, it is very easy to get out of touch with what the latest benchmark is and what the latest improvements have been in production or anything. We do try and make sure that operational excellence is continually challenged and the bar, again, is continually raised on that. Not just in terms of production. We do the same thing with sales to make sure that people's knowledge of sales processes, which includes picking great distributors, can be improved. We have some great examples in that.
In particular, recently, we've made some really good changes to our distribution network in China, which we think is going to pay some good dividends in the future using people across China that we already know and can operate for our other businesses. That's all I wanted to say. If I pass across to Ian, he'll talk about the green boxes.
Thank you, Mark, and good evening, everyone. As David mentioned, I was delighted to join the board in the autumn and just completing my first six months. I think it's just worth reflecting for a second what a great business this is. Obviously, I knew Judges externally by reputation.
Our business is able to drive long-term growth and profit growth, obviously trades at very high profitability, but also, most importantly, businesses which have acquired very well over the years and have the ability to acquire well and grow businesses. Our organic model here is really ultimately how we do that. Now I'm on the inside. I can reflect on some of the details as to how we actually do that. On the top left, we look at the strategy and ambition. As we've said, particularly as Mark's just emphasized, having entrepreneurial, creative-minded, growth-minded leaders in place in each of our businesses is essential. As part of that, we work with them to develop an ambitious strategy which is going to deliver market share growth and overall growth. We will also have some deep dives into certain areas.
Recently, I, for example, ran a workshop on microscopy market where we can look at external data sources, external market information to make sure we are really driving a compelling strategy so we can deliver some long-term growth. The second example I would use in the top left is investment in new products. Obviously, we encourage each business to have a compelling market-driven product roadmap, which drives the innovation and will drive growth. We invest quite a lot in R&D, as we've indicated there. We've also focused quite recently on particularly IP and patents, as Brad mentioned earlier, and that's led on to some Patent Box advantages as well. In the bottom right, obviously, well-run businesses need to have a certain level of financial controls and governance. I think I should emphasize here, these aren't controls and KPIs and stuff for the sake of them.
Absolutely not. These are controls and these are measurements which any well-run business would have. We really focus on empowering the individual MDs, the individual leadership teams to run their businesses in their own way with best practice. That is fundamentally what that is about. Some examples of the processes and controls that we have worked on recently are around order forecasting and pipeline management. Best practice around how to manage future opportunities and then do forecasting of future performance is one area we have worked on quite closely. Just covering off one area around governance and ensuring our businesses are well-run would be around export control. This is a complex area for those who know about this area. It is quite a complex and changing landscape.
We work with our business to ensure that they obviously deploy the latest data, that it's external information, and have internal processes to review all of those areas and ensure they comply with the regulations. Yeah, those are the two green boxes from me. I shall hand back to David to give us a future outlook.
Thank you very much, Tim, Mark, and Ian. We move on to the outlook. Another two pages, please. That's it. The outlook for this year, we started the year with a healthy order book, which is about the same size, a bit bigger than the one we started with, which is a good thing. Mostly core in contracts, which we would have preferred if it started in 2024, but it started in January 2025. That is a very good thing that we have this thing in Japan.
Organic order intake is slightly ahead of 2024 year-to-date. Certainly, as I think Brad explained, we could see definitely a change of direction in the chart. The green line, you probably all remember that. The environment still is difficult, macroeconomic and political environment. We have things which could influence the rest of the year. It looks like every year, there are always clouds in the horizon. A lot of people are really worried about tariffs. We're not so worried about tariffs, and we could benefit from some tariffs and counter tariffs. There is also the budget cuts in American research could have an influence on our business. Generally, we feel we should have a much better year than last year. We believe that we are happy with the market expectations as they are now. The next page explains really why people should have our shares.
What's great about these shares? We repeat the shareholder value pillars, long-term drivers, large deal pool, low capital use. I should add that our obsession with shareholder value and the belief that this is the reason we're going to work every day is good and not uniformly shared by all public companies in the last few years. We have a robust business model. We pursued with discipline. We try to buy only companies which are immediately earnings-enhancing. We're well diversified by geography, by scientific application. We have grown the dividend at least 10% according to our promise for the last 18 years, 10% a year. Actually, we've done much better with a compound increase of 22%. With this, we're going to please to the next page, Rachel, which is Q&A.
Thank you, David.
As a reminder, if you would like to ask a question, please type them into the Q&A box situated on the right-hand side of your screen. Thank you for all of your questions. We've had a number of questions pre-submitted and submitted live. Our first question, is it reasonable to expect one coring expedition per year going forward?
Yeah, I will answer this one. Thank you, Rachel. Yeah, it's not entirely reasonable because we've seen that in 2024, we did not. When we bought the company, we said typically there would be one a year, but we made it clear that it was not necessarily one a year. It would be nice to have one a year, difficult to have more, although it's not impossible.
Physically, and given the limited customer base for these expeditions, which is just four governments, which is the U.S., Japan, India, and China, and the fact there are only four boats capable of doing that, and now there is a fifth being built in China. Having more than one is not very likely, but it could happen. Having less than one is also something which unfortunately can happen, as we have seen in 2024.
Thank you very much. The next question, most, if not all, of the instruments you sell have shelf life of years, which would indicate sales are very lumpy as customers would not return to make another purchase with such frequency. However, if we look at your organic sales and order book over time, it is constantly on the positive side.
Are you constantly finding new and more customers, or your current customers return more often than one would expect?
Mark, can I ask you to answer this one, please?
Yes, certainly. I think that it's certainly a combination of that. We have a number of different customer bases. There is quite a pool of our instruments which go into R&D, and we've seen the enormous growth in universities, and particularly the research departments of universities. China had a target to build 1,000 new universities, which is pretty difficult to comprehend, but they're well on the way to that. Lots of countries are investing both in the government, but also in commercial R&D. We're just seeing more and more of that. As economies grow, we see a disproportionate increase in that R&D to try and get the edge.
In terms of repeat purchases, we certainly see many businesses coming back. The business expands. They want to open a new office, a new research lab, etc. We do get the odd new entrant to the market and old company closing down. It comes from a mixture of different areas. The other point, of course, is that the old instruments do not tend to get recycled, frankly. If a new player comes along, they buy new, but the existence of old instruments does not hamper that. For instance, we have a number of companies who have benefited from trends in green technology, be it wind farms or electric batteries of one sort or another. Those have obviously been doing pretty well recently. We also see some of those happening in advance of market conditions because clearly today's R&D is maybe five years times products.
Not all of the trends are visible on the marketplace. Tim, I do not know whether you have got anything you wanted to add to that or.
Yeah, I mean, I think you have covered that really well. That is just emphasizing, I suppose, that any instrument sale that we make is not necessarily the replacement or just the replacement for an existing instrument that is out there. Clearly, that is included, but the secular drivers, as David referenced on the first slide, the underlying growth drivers, the demand for research in academic and industrial environments is growing or has grown and is growing in the long term. The overall opportunity for us tends to be growing in the long term. As well, as you pointed out, there is a level to which those scientific techniques or discoveries then find their way being deployed, for example, in more industrial applications.
In other words, the application for the instruments or the peripherals to those instruments that we tend to manufacture becomes broader over time. That sort of explains the increasing opportunity for us.
Maybe I can just add in one final comment. Of course, quite a lot of our businesses will sell via OEMs. We are getting multiple orders from OEMs when we're not selling directly to the end user, and that is a driver of big growth for us as well. It is a mixture of end user sales and OEM sales often.
Great. Thank you. The next question is, if the Geotek coring contract is coming in 2025, why is there an impairment in Geotek? Is the coring contract or rest of the business not performing well?
Thank you, Rachel. I'm going to ask Brad, who's an expert in how to do the accounts of the holding company.
Yeah, thank you. Firstly, I'd like to thank the person that submitted that question for reading my report. I always fear that most people get to the end of the chief executive reports and just switch off at that point. Thank you. A couple of points, really. We have to perform an exercise. If you look at an impairment test, we have to perform an exercise, particularly when a business hasn't performed as well in the current year. In Geotek's case, when there wasn't a coring contract last year, its performance was lower. Consequently, our auditors will look more conservatively at future cash flows from that. We're in an interesting situation where when you look at the group and the group's goodwill and any intangible assets that are related, we have significant headroom across all of those for every single one of our businesses.
However, when you then look at the parent company investment, particularly in Geotek, it's substantially higher. Now, for accounting reasons, that was whilst we bought the business for approximately GBP 80 million, including its earnouts. We have a parent company investment of around GBP 100 million. A significantly higher valuation that we're having to justify. When you do these impairment calculations, you're using very high weighted average cost of capital, around 16%. You have very high discount rates. You need to be able to justify significant ongoing cash flows from this business over a long period of time, but they get discounted at significantly higher discount rates. On top of that, our auditors will then look at that and go, "Given it had a not-so-good year, what else might happen to this?" They will then perform a form of sensitivity testing to that.
When you then get to that point, quite often, they will create and find a reason that they think that the carrying value of your parent company investment, which is higher than what you paid for it, may actually be impaired. In this situation, we've ended up going from an investment carrying value in our parent company, and that's not the group, the parent company of GBP 100 million, that's gone down to just under GBP 92 million as a result. That GBP 92 million is still above the enterprise value we paid for the business in the first place. If that doesn't sound slightly illogical, then I'm almost sorry at the end of my answer to have explained it this way. It is a slight accounting quirk, if I'm honest about it.
Yeah. I'm super grateful, Brad, that you explained this.
I hope our audience has found it interesting. Rachel, next question.
Thank you very much, Brad. How much of total revenue is recurring? Are these efforts to increase recurring revenue and possibly to reduce future cyclicality and protect downside?
Yeah, Brad?
Yeah, thanks. I'll take that as well. In terms of how much of our revenues are recurring, we're not necessarily aiming purely just to quite try and pivot the group at all into a more recurring revenue environment. We are a capital goods business. We sell instruments every year. That's our core purpose. That's the first thing to say. Now, having said that, we do have revenue streams that are service-related. Some of those services are recurring annual contracts. Some of it might be servicing.
Most of it comes from multi-year contracts for service work, such as, as we've talked about before, digitalization, of course. We are looking at somewhere in the region of it's less than 10%, between 5%-10% for recurring revenues. We have repeating revenues as well for some of our revenue where we have consumables. We have a couple of our instruments that have some consumables, so that's maybe 1 or 2% of our revenue as well. It is not a significantly high proportion of what the group sells in a single year. We are not necessarily saying, "Right, we should be pivoting towards recurring." It is very nice to have recurring revenues because they are repeating and they are consistent. Our overall model, our strategic model, is to buy instrument businesses. If we are lucky enough to be able to add some recurring revenues to that, then that is fantastic.
Can I just add a point to that, which I think is really important, which is that our instrument businesses are very much niche businesses, and we try and avoid competition. If you apply that mindset to service businesses, you've got to be careful that what you're not doing is actually competing with your own customers. For instance, if we're selling a lot of instruments to laboratories, and then we set ourselves up as a laboratory, we're competing with our customers, and there are actually hundreds of laboratories, and therefore, that's actually not a particularly attractive business to be in. We tend to look at performing services when there are very few or no other people performing those.
Our service business is very much aligned with the same concept that our manufacturing businesses avoid lots of cutthroat competition and just focus on where we have a really, really strong niche.
Thank you. The next question is on acquisition pipeline. How is the acquisition pipeline looking? Have valuations changed given the macro conditions? And over the next five years, what probability would you assign to being able to deploy 75% of your free cash flow?
Yeah, thank you, Rachel. I think I will deal with this one. I would say that first, we always have a pipeline, and we never comment on the pipeline because deeds is something which is always exciting and therefore price-sensitive. We only talk about the deeds we have actually closed. I know some other companies do talk about the deeds they are going to do, but we prefer not to do that.
The other question is, of course, are we able to identify changes in the pricing? I have to say, not really. I would say it could be a bit surprising because, of course, private equity should be very sensitive to interest rates. You could have expected that in the period of higher interest rates, private equity was actually the big competition in larger deals, deals of over GBP 1 million EBIT a year, would be less aggressive in their pricing. The problem is they have a lot of dry funds, dry powder. I think if they pay a bit more for their debt, if they have more dry powder, they're still quite keen to do the deals. We haven't observed any change in the pricing structure really over the last 20 years. There has to be that, as I said.
There is a question: is our free cash flow, well, can we spend 75% of that? I have to say we prefer to think in terms of our deal equity because, of course, if we buy a company, say, a small company making GBP 500,000, and we pay a multiple of four times, typically that is what we would pay. That is, for instance, the example of Lucio that we bought this year. Really, the bank will lend you three times the factor of that GBP 500,000, and you only have to spend GBP 500,000 of your own money. You can use more than 100% of your free cash flow to do deals. I did not want to correct your question. I would say, yes, I think we would be able to spend 75%. It depends on opportunities.
We are very, very, very fussy with deals. We have done only 1.3 deals a year in the last 20 years. We have still created shareholder value by multiplying shareholder value by about 100x if you include the dividends. It is not the number of deals that you do or even the money that you spend, but it is making sure you are buying sustainable businesses at reasonable multiples. It is not at all impossible to spend 75% of our free cash flow, yes, in the next five years. I think it is entirely realistic.
Thank you, David. The next question is, as U.K. businesses are facing higher taxes and wage costs, how will this affect your U.K. order book?
I would say first, we have to pay more taxes, and we have to pay more national insurance.
In our release, we said that we estimate that the decision of the last two governments, which is one to increase corporation tax from 19%- 25%, the last tranche of that was, of course, in 2024. The increase in national insurance, which is starting in a few days, I would say these two things we estimate will cost us something like GBP 3 million a year. GBP 3 million a year is like 10% of our profitability. It is a pain to see the government pinching that from us with not much effort. Okay? We have to live with this because this is the government, so we have to comply with what they say. Talking about our customers is different because a lot of our customers are government-funded in various places because we only do really maybe 10% of our true sales in the U.K.
We say 15% in our accounts, but we have a lot of OEM business, which is done with U.K. companies, but the goods are re-exported as part of a more complete system. We depend on many different countries and many different fiscal regimes. Of course, a lot of universities do not pay tax, and the question does not apply to them. You have commercial companies which are trying to launch new product or test new products or test the compliance of their product with standards which are compulsory or not compulsory. Those, they need to do what they need to do. I do not think the taxation will have a big impact on order intake.
Thank you. The next question is, could you discuss any impacts of the Chinese government's volume-based procurement initiative on JDG?
I have to say, I find it.
I'll take this one.
Can you take this one? Yes, please. I'm grateful you could answer with that card.
Our understanding anyway is that that relates primarily to pharmaceuticals. Forgive me if I've understood that wrong, but that's our understanding that it relates primarily to that. There is not all of our scientific instruments, and certainly some of those play into research and might be related to that. To the best of my knowledge, we haven't seen any sort of impact. The impact might be secondary if it's through OEMs that we sell to, for example, but nothing material as far as we're aware.
Thank you very much, Tim, for saving the day for me then. Rachel?
Thank you. The next question is, did I understand from Mr. Prestidge that the three execs are focused on each specific business within the portfolio?
Tim, that's for you.
Again, if I've understood the question correctly, no. We each have a portfolio of businesses. In other words, of the businesses within the group, we split those out between the three of us. We each have a portfolio of businesses that we work with. No, it's not all three of us on every business, if that makes sense.
Thank you. The next question is, is your gearing used solely for acquisition purposes, or is it used also for capital expenditure at the companies you own? How is this determined?
This is a financial one. It's for you, Brad.
Thank you, David. I guess there are two things. A simple answer would be, yes, we're really only using it for acquisitions. Let's just make sure it's clear about why, because our businesses are profitable businesses.
They generate good profitability, good margins, and turn those profits into cash. The group's model is to be fed that cash such that it can repay the acquisition debt. If you're then thinking about what do our businesses need to do, in a normal year, their investment as a whole is in R&D and some investment in pure CapEx. Most of that, under normal circumstances, is not that big. If we talk about 6% for R&D, that's usually through cash flow. Any additional CapEx, usually through cash flow as well, because our businesses would always retain a certain amount of working capital in order to be able to continue to operate comfortably. That usually would include their expectations of CapEx.
From that perspective, if we're approving CapEx, it will be through the annual budget and then through their regular meetings with Ian, Mark, or Tim, depending on how they're performing as to whether or not it's appropriate at that time for them to enter into that CapEx. Basically, that should be covered by their own cash flow. Where we may, as a group, need to be involved is perhaps if, let's say, one of our businesses needs to move for growth. Instead of being able to find a building that it can move into to rent, it actually needs to buy. In a situation like that, they're never going to have enough capital to be able to afford to do that, primarily because we've already had most of their excess money via dividends, etc., up to group.
In a situation like that, we're happy to then loan back to them in a circumstance when we think it's the right thing for them to do to be able to move to a separate property and make that big capital investment. Generally, the answer is yes because they will come to us with a sensible, well-thought-through business plan for this, and we'll be able to see the long-term benefit in it.
Thank you very much, Brad.
Thank you, Brad.
Rachel, can I ask you, do you have a lot more questions in the pipeline?
Yes, we have. I think we've still got a number of questions, David. At least 10.
At least 10. Can you pick the best two, the most interesting in your view? Because we will have to bring this to a close. Absolutely.
I hate not to answer questions, but they will probably keep coming if we carry on. We cannot abuse the hospitality of the room we are using.
No worries at all. The next question in that case is, how do you believe tariffs will affect your sales to the U.S. over the midterm outlook?
Okay, let us deal with this one, and then you can have three because this one is going to be fast. We believe that tariffs is not an enormous threat for us. We have tried to quantify the worst of the worst. What you have to see is the tariffs at this. The threat of tariff was all-encompassing and was for all product everywhere. In fact, it is a lot more limited now. It is about French wine and about Canadian aluminium. It is not about everything everywhere.
The enormous threat was, I believe, personally, more a tactic than a proper strategy. What you have to see is that we are sitting on the fence in the U.K. If there is a lot of tariff war, say, between the U.S. and China, of course, we will suffer in our sales to the U.S. If we have an American competitor, they will find it difficult to sell to China. We may benefit from that. We do not think it is a clear-cut case. We think that in any event, it will not have a very significant impact on Judges.
Thank you, David. The next question is, is there any possibility of a second Geotek coring contract in 2025? If there was one in the pipeline, we had not talked about it.
We cannot talk about it.
The truth is, it's difficult to do two in a year. It's not terribly likely that it will happen. We should count on it. In fact, I would prefer if the next one was in 2026.
The final question is, if we are achieving a return on EBIT of approximately 20%, would it not be beneficial to not pay a dividend and use those funds for acquisitions or paying back debt?
Thanks. Yeah, it's a question I've been asked for often. I have a very long answer that I will keep for another day. I would say there's several things. First of all, we want people to be able to make money not only by selling shares, but also by keeping their shares.
If we're telling people to make money, you have to sell your shares, then we're encouraging them to sell their shares. We see the only way you can make money. When you are only making money by selling shares, you're, of course, dependent on two things: it's the performance of the company, but also the state of the market when you do sell the shares, because maybe the company is doing very well, but you're not doing well at all. We had this example in 2008. In 2009, when our shares were GBP 0.60, the company was doing very well. Some of the original shareholders needed the money, and they were selling. Everybody needed money in 2009. They were selling shares. It was not our fault, but they were losing money. We prefer having a progressive dividend.
We believe that the value of shares is very connected to the discounted value of all future dividends. This is why we make the promise to pay a dividend increase in 10% per year. Like this, people can calculate that discounted value, and they will see that although the dividend is not enormous, when you discount the progression of 10%, it is quite an enormous value. That is why we pay. We realize we are big fans of Berkshire. I realize that also, I have been to Omaha quite a few times. We have a lot of shareholders, our Berkshire shareholders. They all think the same. We should not pay a dividend. I must say I am a great admirer of Warren and the poor Charlie. They do not like to pay dividends. I have to say they love to receive dividends.
I think our shareholders also deserve to receive dividends and to keep their shares for however they want and make money on the way there.
Thank you very much, David. That's all we have time for on the questions front. I will hand back over to you, David, for any closing remarks .
Yeah, first, thank you very much, Rachel, for organizing all this. I'm really grateful to my colleagues, Brad, Mark, Tim, and Ian. I'm mostly grateful to all the people in the audience who have put up with us for all this time. I'm so trying to put an end to this, but it was a pleasure answering all your questions. Bye.
Thank you for joining us today. That concludes the Judges Scientific.