Good afternoon, ladies and gentlemen, and welcome to the SDI Group PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Please just simply type in your questions at any time and press Send. Given the attendance on today's call, the company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and if you give that your kind attention, I'm sure the company will be most grateful. I'd now like to hand over to Mike Creedon, CEO. Good afternoon.
Good afternoon. This is the interim presentation for our results to October 2023. So I'll start with the agenda. You're going to see the group summary, board of directors. I'll go through a bit more detail this time, and followed by the group overview, U.K. and world and presence, acquisition process, acquisition timeline. Then I'll hand over to Ami, who will go through the H1 FY 2024 results, and then we'll come to conclusion with the trading and outlook. It's interesting since the back. We've shown this on a few occasions, the appendices, whereby it gives in more detail our subsidiaries or business units, where we've got 15 of them now, our financial track record, and also our capital structure. So if we move on then, Ami. It's okay. It's all right. My laptop. Okay.
So I just wanted to go a bit more detail here. So let's start at the top with Ken. Ken Ford as chairman. He joined in 2010. He recruited me as the CFO in 2010. He got Ken's CV and my CV. You've seen it many, many times. It was a turnaround by myself as being the only executive director for about six years, and during this period, I was supported, you know, heavily by Ken. So Ken and I, for the first five or six years, we spoke nearly every day, including weekends. But as we grew, became a lot more profitable, cash generative, we strengthened the board. So introduced with some high-level NEDs, going in recruitment order with David, David Tilston, Andrew Hosty, and then very recently with Louise Sherry .
Their CVs are included within the pack, but what I'd like to do is spend a few moments handing over to Ami and then Stephen, the new boy on the block, with their sort of CVs. So over to Ami.
Yeah. Hi, Ami Sharma here. I think many of you will have seen me before at previous IMC meetings. My background is I was formerly Group CFO for 250-listed, Ultra Electronics Holdings. I was also their Group Financial Controller during the early 2000s, when they embarked on a buy and build, not too dissimilar to, SDI. I'm also a non-executive on the board of Cohort plc, which also follows a similar business, business model to SDI.
Hi, I'm Stephen Brown. I joined the board at the end of September 2023. I have a technical product and commercial background and bring a strong track record of business growth to the executive. Previously, I held a number of senior positions with significant tech-focused businesses, most recently including AB Dynamics plc and BP Launchpad, the business scaling function of BP plc. My initial focus will be on the organic growth of portfolio businesses, in particular, profit growth. In parallel, I'll also be working with Mike and Ami to pursue high-quality acquisitions, as well as building a strong deal flow to support this.
Thanks, Stephen and Ami. Let's move on through the pack now, and we look at the group overview. I don't think this has been shown before, but it would be good to repeat it. We've got a further acquisition on the slide. But the strength of our business model remains unchanged. It's operating as autonomous business units, but we're seeing synergies within the group as we acquire additional complementary businesses. All acquired businesses, they've got to be profitable and cash generative, and we did not look at acquiring blue sky businesses.
We don't rely on a single sector or reason for trading, which has proven its worth during the sort of two-year COVID period, where we were buying, we had a number of businesses who were trading, not in line with budget, but still generating profits and cash, and then we had some real sort of powerful businesses who took us through the COVID years. We acquire businesses and invest in organic growth. As we will actually go through the presentation, we'll probably give some examples of that. You can see on the chart, as we started buying the businesses, there's a greater weighting towards Sensors & Control s. That's due to the acquisitions within this sector. We've added a further business unit, you can see on the end, which is Peak Sensors. We've got a separate slide on that, we'll discuss at length within the pack.
So over the years, I think since 2019, Jon Abell introduced this, these sectors. What actually happened, was that, the City wanted more and more financial data, about what we actually do. So instead of one group of companies, we split it into two, into two sectors. We didn't want to show all the gross margins of the, businesses. It's ranged from 55%-80% on material costs only. So therefore, we set these sectors in place. But as you can actually see from the sectors, many years, in 2019, we only turned over GBP 17 million, and we didn't have as many businesses. Now, the segment structure hasn't worked as well. It's too imbalanced, you can actually see from that diagram.
So at the year end, Ami, Ami's looking at this at the moment, we intend to reorganize the business sectors, still in two segments, but these segments will be reclassified. So what we're looking at is lab products businesses, and the other containing scientific and industrial products businesses. And hopefully, this will provide better information to, for the likes of yourselves. And what we'll actually try, and we'll try to do as well, is to show the before and after. So what we'll show the revenues as is now and as is in the future. So it's still a work in progress for us. We've got an idea of what is gonna go into that group at the moment, and I'll discuss that as we go through the pack.
So if we go on to the next page, which is the world presence, and so we've got an additional business on there, as you well know. So what we've actually got is a heavy U.K. presence in the U.K. , with a growing presence in the rest of the world as we acquire additional businesses. So what we've got is currently 17 sites in the U.K. and four overseas. So we've got Lisbon, so that's attached to Atik Cameras. That's their manufacturing site. We've had that ever since Opus within the business. And then one we acquired FAST, which is Fraser Anti-Static Techniques, based in Devon. They've got two subsidiaries, one in Dresden and one in Shanghai. So again, I think we'll just discuss about China later on.
And then the last one, again, it's been there for many years, and that is Synoptics Inc., which is based in Frederick, which is just outside Washington, D.C. The latest addition is Peak Sensors, and that's based in Chesterfield. What is the acquisition? Oh, sorry, let's go through the acquisition process. Okay. So we discussed this acquisition process at the presentation recently, and it's also been included within the appendices. But it's nice to actually see this within the pack. So we'll just go through this. We've seen it on a number of occasions. What are the acquisition criteria for the SDI Group? It has to be a scientific, technical with a manufacturing arm to it. That's very good for us because then we control the cost of materials, and so it's. It has to, really, for us.
They have to be, and I insist on this, profit generated and we said this earlier on. We don't want cash flow businesses. It's good to have a strong track record within the businesses. It's a lot easier to do financial due diligence when you've got the historical data behind you. They have to have a strong management team, because head office is us three, and you've seen us. We can't manage these businesses. So when we acquire businesses, we have to make sure, and there's a certain level of trust between us and the subsidiaries we're looking to buy, that we'd like the founders to stay on. If not, then we have to make sure there is succession planning in place for these businesses.
We have actually sort of turned down a few businesses whereby people didn't want to stay with the business, and they were saying, "It's up to us to find succession." Well, we can't handle that at all. We offer businesses a fair price, but we've been buying businesses at a three-year historical price at between 3.5 and 5.8 x profit before tax, net, including net assets. So what I'd like to do, I think we've got this has been in motion ever since we've been acquiring businesses, since 2014, is splitting the goodwill price from the net assets. And that's what, and it's fully open on what we're buying the goodwill at. And the last point in that section is we like strong exporters within the niche sector.
So currently our exports, what's it? It's about 50/50, Ami? So thereabout, you know. The biggest problem we've actually got is we do sell to OEMs, so we don't know in a number of circumstances where that product's going out to. Before we started, we were heavily involved in OEMs. It was 60/40. 60 overseas, and then 40 in the U.K. , but it's difficult to get that data now. Why do people want to join SDI? For the size of the businesses we're acquiring, it's difficult to find owners to find, for the owners to find a suitable buyer. We're looking at businesses between making between GBP 0.5 million and GBP 1 million.
The next point is what we want from the businesses, and that is what the buyer want from the businesses, is still maintain independence from the businesses. You know, we try to leave them as autonomous business units, and that's imperative because what we want to do is to retain the culture and the brands going forward under the ownership of SDI. What we're trying to now, which is new to us, is sharing knowledge within the group. So we're actually bringing these teams of people together, and this includes the strategy meetings. We have the marketing meetings as well. And also recently, with this lab group, we've been bringing together the directors and senior managers to try to share data. Marketing was one of the first ones we actually. Well, sorry.
Strategy was the first one we introduced, and then we've recently brought marketing together. Marketing is a younger kids game today. It's driving people through to the website. There are a lot of tools in driving people through to the website and sharing that data. One of the main areas they're looking at today is, instead of using Google AdWords, there are the pieces of software to drive you through to the website, as well as ChatGPT, they're using as well. What we offer is widely strong financial support within head office, and also what we try to do is to share special resources, for example, technical support. This is another thing, going back to sharing knowledge within the group. After acquisition, what do we do? Well, we implement strong financial controls. The majority of the businesses are using Sage systems.
These days, I think the modern system is Sage 200. Sage 50 is falling away. So we're introducing a couple of the companies onto Sage 200 at the moment, and that seems to be the vehicle going forward with subsidiaries. But what Ami and Jonathan, the financial controller, are introducing now is a consolidated piece of software. So a few words on this, Ami?
Yeah, we're introducing a new financial consolidation system at the center, which will enable us to extract data from subsidiaries more efficiently, and also provide scalability as we grow.
Thank you. But also what we look at as well, as I've already mentioned about strategy, is strategic plans for the businesses. Businesses, when we acquire them, they're concerned about generating profits and cash, which is good for us, but also they probably only go out for a year in the way of the budgeting process. So what we're trying to do is to ask them to think about what the next three, four, or five-year plans are. So within the strategy meetings we held sort of four, six, you know, four to six weeks ago, probably a bit longer, is that the individual business units will actually do very similar to what we're doing in a way of an investor presentation, not just to the main board, but also the subsidiary directors and senior managers.
20 minutes Q&A, which is really sort of organized by Ami. The presentation, sorry, 20 minutes, with a Q&A for 20 minutes, and that's spread over sort of a couple of days, and it worked very well. What people like is, as well as the investor presentations, is sitting around a table for dinner, having a drink afterwards, and talking about business. So it worked very well for us over the last couple of years. So if we move on to the next bit, Ami. Acquisition timeline. Again, this is something which we've had in the pack. It's been in the annual report. So to date, we've bought 18 businesses, the first one being Opus Instruments. That was in 2014, February 2014, and this was funded with bank debt.
Very friendly bank manager, and he lent us, Ken and I, so all the companies, GBP 700 thousand, at GBP 300 thousand on an earn-out. That was quickly repaid. That business was incorporated into Atik Cameras, and then following that, it was a game changer for SDI. It really put us on the map, and that was, first of all, acquiring Sentek, 4x EBIT, including net assets, followed by Peter Astles's company, which is Astles Control Systems. These were funded through share placings. The first one, Sentek, at 8 pence a share. That was just using EIS VCT, so it was very good for the shareholders. So the after-tax, we're looking at sort of, sort of 6.5 pence, followed that by Astles Control Systems at 13 pence.
Sadly, the EIS VCT structure changed, so we couldn't match. The shareholders couldn't latch onto that. Then, for a number of years, we acquired businesses using our own internally generated cash and bank debt, which worked very well. Sorry, I lost my train of thought there. Then in 2019, we acquired five businesses, which required funding over and above the board's comfort zone for gearing. So then we did another share placing, and that was at 34 pence a share. You can actually see on the map there, the five businesses in a row, and thereafter, we've been using bank debt and our own cash resources. What I was actually going to say, when I lost my train of thought is, we set up bank debts with HSBC.
All the banks were actually interested in us, and that was initially with a GBP 2 million debt, with a GBP 2 million accordion. So today, that's been extended, so we've got a GBP 25 million debt with a GBP 5 million accordion. I think that's correct, isn't it, Ami?
Yeah.
I'll hand over to Ami. Ami's got a cold, so just bear with him, I'm afraid.
Yes, I'm a bit croaky, so bear with me. Again, looking at the key financial highlights for the half year, we saw revenues grow over the period by 1.6%. The comparatives include the significant Atik Cameras contracts for equipment that go into PCR machines. This came to an end last year, as we have previously communicated. Excluding this, there was organic revenue growth of 2.2%. Scientific Vacuum Systems shipped a sputtering machine over the first half, and Atik's significant OEM customer for gel doc cameras destocked over the period, and we will talk about both of these a bit later on. It's also worth noting that the tax rate has increased from 19% to 25%, and this impacts upon all the P&L measures. This is an extract from the income statement. Acquisitions provide GBP 6.3 million for growth or 20%.
At a headline level, there was an 18.4% organic decline, and the net of the two gives the 1.6% absolute growth. Gross margins held at 63%, which was encouraging. We've controlled our costs. When looking at costs on an organic basis and excluding non-operating items or below-the-line items, costs have increased by 1.5. Profits have reduced, as we always expected for this financial year. The biggest component of this loss was the loss of the 60% gross margin on the GBP 6.4 million of COVID revenues. And to save you using your calculator, this represents GBP 3.8 million in lower profits. This was partially, but not completely, offset by acquisitions, and the percentage declines on this slide reflect this reduction.
The first half of the year was also impacted, profit-wise, by the aforementioned destocking by Atik's main OEM customer, and this reduced sales in the first half by GBP 1 million. Monmouth also had a slow first half, which we will talk about later. This shows how revenues have moved compared to the equivalent period last year. As I mentioned, last year's acquisitions have contributed GBP 6.3 million in revenues, and you can see the impact of the reduction in the one-off Atik PCR camera business. It is worth noting that over the last two financial years, we have reinvested the Atik camera PCR cash flows into growth for the company, acquiring Safelab Systems, SVS, and LTE Scientific. Looking at our segment performances. Sensors & Control revenues increased by 40% to GBP 26.8 million.
This includes the GBP 3-6.3 million of acquisition growth from FAST and LTE Scientific. Excluding this, organic growth was 6.7%. Astles Control Systems and Applied Thermal Control both had good trading periods. Applied Thermal for its chillers, and Astles had weaker comparatives, which were influenced by component shortages. Scientific Vacuum Systems is a lumpy revenue and order business. It shipped a significant piece of equipment to its major OEM customer in the first half, and this supported the organic growth of this segment. This particular OEM customer has rescheduled its future order profile as a result of geopolitical events, and this has changed SVS's revenue profile for the current financial year. Digital Imaging revenues reduced by 12%, excluding the COVID comparatives, and the segment's profits reduced to GBP 645K.
As I said earlier, there was a GBP 3.8 million profit reduction due to the COVID contract ending, and this falls within this segment. However, Atik's major OEM customer de-stocked over the first half, reducing sales by GBP 1 million. Deliveries to this customer are continuing, and we have order cover for the next 18 months, but the number of cameras are not currently expected to be at the same volume. The de-stocking impact will not be recovered in the current financial year. Turning to cash. Working capital increased by GBP 2.3 million over the period. It's mainly due to a GBP 2.7 million reduction in customer advances since the year end. SVS shipped equipment in the first half, and this is responsible for GBP 1.4 million of this.
LTE Scientific and Astles Control Systems saw customer advances decline by GBP 1.1 million between them. We now have GBP 2.1 million of customer advances on the balance sheet, compared to GBP 5.3 million a year ago. This is a difficult balance sheet line to forecast, as new customer advances are often dependent on contract milestones and order intake, and more specifically, order intake with a customer advance tied to it. As the cost of money is no longer low, customers are less willing to give up front payments. Currently, we expect this to reduce further over half two by around GBP 500,000. Cash generated by operations was GBP 2.3 million this first half, an improvement on the equivalent period last year. Interest charges have gone up due to our higher debt levels and increased interest rates.
Focusing on working capital will be a priority over the second half of the year for us. This slide shows the working capital movements I've spoken about. The tax payments are higher since SDI is paying 25% tax now under the group payment arrangement. At the end of the period, net debt was largely unchanged from the year-end at GBP 13.2 million. Some comments on our financing position. GBP 1.25 million of the revolving credit banking facility was paid down over the first half, as we look to reduce excess cash balances. GBP 10.25 million of the facility was unused at the period end, and the GBP 5 million accordion option is still available to us at HSBC facility.
At the end of the period, the net debt to EBITDA ratio was 1.1 x, comfortably inside the ceiling provided by our bank facility. And at the end of the half year, we had GBP 1 million in deferred consideration payable. This relates to the acquisition of SVS, and this has been paid in full, in the last week or so, and so will be paid obviously in the second half. That's all from me.
Thank you. So move on to the next page. That's it, trading. So when we've been going around on city presentations, this is the sort of slide we start with, because they, they know the history. It's interesting because this is, a slide, sort of in English, saying, "Why did the downgrade occur?" So now we've got 15 business units. Three of those businesses have found trading difficult and responsible for the downgrade during this period. So I'd like to discuss this in more depth on these three business units. So the first one really is Atik, Atik Cameras. So the impact to our annualized profits was a reduction of GBP 1 million. It hasn't gone away, it's just gone to the right. So Atik suffered from just destocking from its largest customer. That impacted the H1 performance.
However, we have now received the strong order coverage from this customer, so it will take us through H2 and beyond. So, what actually happened with the customer is they moved procurement from Singapore to a centralized place in the Netherlands. They decided to just start moving from three months down to one month, and it was dragging out, but pleased to say that we've actually got the order now, and that will take us over 18 months, right, Ami? Mm-hmm, 18 months, but, you know, it's too late to affect until H1. So we're starting to ship that product in December. You know, last time it was in October, now it's moved to December because of the movement or the reduction in stock from three months to one month.
We have got the sensors in place, and we're ready to actually start shipping the product. There is another sort of positive as well. There's a high expectation of another large order from a newly developed product within one of our core sectors, which is the professional astronomy market. So, that's what our high hopes have been, a significant order from America for that product. The next one we move on to, these are sort of lower level reductions in profits, is Scientific Vacuum Systems. And the effect on annualized profits is GBP 200,000. They shipped a sputtering machine to a razor blade manufacturer in October. I'm afraid it was a bit late. It was delayed by 12 months, due to a couple of reasons, really. First of all, component delays, which we're seeing across the world.
And secondly, due to the component delays, the customer decided to change the requirements of the machine, so there was further delays. That now is complete. They've inspected the machine in the U.K. There was further delays because then they decided their R&D department in Boston, in the U.S., wanted to come and see the machine, as they really like the machine. Now it's been shipped out to Mexico, waiting for the next order, because they've actually said there's gonna be four or five orders for these machines. The next order we're actually looking at, but that won't be until it's commissioned, the machine in Mexico, which is due to be commissioned January, February time. So we're expecting the next order probably to come in from Poland. We are expecting an order.
This was a number of over a year ago from Russia, but of course, with the war in Ukraine, that's impacted that shipment. Since we've actually shipped that product, we've had another sizable order. Again, it's all a bit late for the H1 period, and that's the GBP 2.3 million from another customer, and that's due to start next month. As we pointed out, when we were acquiring SVS or Scientific Vacuum Systems, their orders and revenues will be lumpy. And Ami, if possible, is trying to recognize the revenues at set periods within the contract under IFRS 15. So it all depends on what's written in the contract. So, it's a difficult call for us on that, but at least we've got a substantial order from another customer. The next one we wanted to discuss really was Fraser Anti-Static Techniques, FAST.
That again has had a reduction in profits of GBP 200,000. FAST have seen an economic slowdown from two of its dominant markets, China, but more importantly, Germany. And this slowdown is expected to continue for several months as we move into H2. So they're trading in line with budget at the moment, but it's gonna slow down somewhat in H2. The business has responded rapidly to market slowdown by implementing internal control to maintain the profits. That's currently, and I'm sure it will do so in the second half of the year. So in summary, really, what we've actually got is shortfall in profits from two areas. One is customer related, that's ATK and SVS, and the other one is FAST, and that's due to short-term economic slowdown.
At this stage, I'd just like to give you a quick update on Monmouth, and you'll be pleased to know it's not within that category, but we've had a significant impairment at the year-end, as you well know. It's not trading in line with budget at the moment. It's got a very, very strong order book, and this is reflected across all their product portfolio, but more importantly, towards the clean room sector, where we're seeing increased demand. And that's an easy win for us because it doesn't need a lot of labor to produce these products. They're experiencing operational challenges at the moment, and this is being handled by my good new friend, Stephen, as the Group Chief Operating Officer.
But it's not all doom and gloom within the SDI group. The group's enjoyed some strong performances from many of our portfolio businesses, in particular, Applied Thermal Control, Astles Control Systems, Graticules, but also, I'd like to add Sentek and also Synoptics. They've proved consistent and strong in their order intake and operational delivery or reporting profits exceeding budget. I've got my notes, I'd like to expand it. A good example we've discussed throughout the days is Synoptics. They haven't hit the revenue in line with budget, but their budgeted profits have exceeded their profits. We've actually seen exceeded budgeted profits due to the control of their costs, and that's what we find across the group.
These managing directors and directors of the businesses are very good at controlling their costs, so we don't see a lot of costs going outside budgeted levels. So I'd like to move on to the next one. This is, we've already mentioned this earlier on. This was the latest acquisition. This has been a target for us for many months. It's not a big acquisition, but it's very important to us. But it has some complications in the acquisition process, and that's been delayed by four-five months. We'd hoped this would actually cross the line when the results went out, but we're at the final stages, but there were just some issues on the seller's front that they needed resolving. But now we're pleased that the acquisition process is complete, and we acquired that business in November 2023.
As with most businesses, the founders will stay on board and run the business. What does Peak Sensors do? As you can actually see from there, it manufactures and develops temperature sensors, which are used in various industries, but mainly within glass, ceramics, and incinerators. So what we're actually doing is using temperature sensors in the incinerator, which is generating energy from waste. We've actually said it initially, and in the last presentation about synergies, and it's nice to see one of our subsidiaries, ATC, is now sourcing product from Peak Sensors. And there are a number of other of our SDI business units that are actually interested in this product range. It's based in the middle of England, in Chesterfield. It employs 14 staff.
The property, you can see from the diagram there, it's a nice, clean building within a nice industrial park that is owned by the founder, Peter Smith, and he's leased the premises on to Peak Sensors. So if we move on to the growth drivers. That hasn't really changed, to tell you the truth, even with this difficult year we're having. Organic growth, 2023 organic growth has been impacted by destocking, which we foresee it's only a short-term issue, and also with the worldwide economic uncertainty, as you actually see from the news, and that's impacted a number of our businesses. In the longer term, we still expect organic growth between 5% and 10%, and also, SDI continues to look for synergies within the businesses, and we've started collaborations within the lab products group.
As I mentioned before, about the sector size, so currently within the product group, there may be changes, but what we're looking at it, initially, is the LTE Scientific, Safelab Systems, Monmouth Scientific, Applied Thermal Control, and Synoptics are joining that group. Why? It's because we've seen market overlap of customers, and that one should provide strong opportunities for growth. I had a meeting this week, I think I've had two or three meetings now, and it's to try to get, additional, orders going in as a team, at a, at a quotation stage instead of, instead of at the individual stage. A good example of that, as we mentioned, in the annual report, is they're building a science park on the Canary Wharf, and we're, in the early stages of, of putting together a portfolio of products for that, business.
M&A, since February 2014, we've acquired 18 businesses. A number of these have merged into the existing business units, so we've actually got Atik. We've acquired two businesses, Opus Instruments and Quantum Scientific Imaging, that's incorporated into Atik. All the manufacturing now is in Lisbon for all those brands and products. The other one is Applied Thermal Control and Thermal Exchange. Both chillers, both in the middle of England, one in Coalville and the other one in Leicester. We've combined the units in a place called Barrow-on-Soar, just outside Loughborough. All the rest are operating as autonomous business units.
There's no change in our criteria, although we are more willing to use short-term earn-outs to reconcile price expectations from sellers, as you can actually see very recently with Scientific Vacuum Systems, where I think it was this week, was it, Ami, we paid out or last week? The remaining part of the price consideration. The key to strengths for us is the value of the target companies, but currently, we've actually got quite a strong pipeline of acquisitions, which all three of us are looking into. So as we come to the conclusion of this presentation, summary and outlook. It's been a challenging year, as you can actually see from the numbers, in comparison to previous years. We've had a few businesses that have not achieved budget, as discussed within the presentation.
But really, this is just a bump in the road for us, and I don't think it's going to affect our long-term plan. I feel confident this is only a short-term issue, and it's... Why? Because when we actually came out of the strategy meeting a few weeks ago, we found that there's a large pipeline of prospective orders with a high probability of landing across the group. So we're sort of quite optimistic going forward. We still continue as a team to evaluate high-quality businesses as they become available. That's on the M&A side. Internally, we're still generating synergies within our business. You can actually see this through the presentation, and we continue to invest in our existing companies to drive organic growth. I think a good example of that, over the years is Sentek.
Sentek, we bought that making a profit of about GBP 500,000, 4x EBIT, we made GBP 2 million, let's say, net assets. And, for investment in that business, Paul got taken on board as the managing director. We're looking at making nearly sort of a GBP 1 million profit. So it's a good business, good solid business, and this has happened with within a few of our businesses. So really, despite the short-term headwinds, we look forward to the future with great confidence from within this business. I've been here sort of 10, 11, 12 years. Ken and I have discussed this many years. This business hasn't changed. The business model hasn't changed. We say year-on-year, we still continue to drive growth organically and through M&A.
Even with the short-term headwinds, we still have to operate driving this the growth organically and through M&A. So hopefully, that concludes the meeting, and let's see what Q&A is coming across.
That, that's great, Mike. Ami, Stephen, thank you very much indeed for updating investors. I will bring your cameras back up for the Q&A. But ladies and gentlemen, please do continue to submit your questions using the Q&A tab situated on the right-hand corner of your screen. But just while the team take a few moments to review your questions submitted already, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your Investor Meet company dashboard. Ami, I may just return to you to moderate through the Q&A, but firstly, thank you to everybody for your engagement, for those that pre-submitted questions and for all your questions throughout the presentation today.
Ami, if I could just ask you to read out the questions and then hand them out to the team for a response, and I'll pick up from you at the end.
Okay. So the first question was pre-submitted: Does Stephen have any observations he would like to share after his first few months at SDI?
Absolutely. So currently, I have the luxury to see the group with fresh eyes, and given my experience, I used the opportunity. The buy and build strategy has clearly been the bedrock of the group's current structure and success, but this is clearly only in the start of the group's growth curve. I've observed that the portfolio of businesses reasonably differ in their potentials, driven by the technologies, products, and markets. I would expect that we will see different growth profiles of more as, as, as that clearly makes sense. I will be understanding more as a deep dive, as I dive deeper into the potential of each individual businesses, so I'll be understanding the CAGRs and supporting long-term strategies.
There are clearly many opportunities for each of the businesses to in product development, market share, diversification, and of course, global expansion, the U.S. being, of course, one of those, going forward. SDI's ability to continue our acquisition growth clearly remains strong and I hope now stronger. I would like to see more consistency in deals, combined with robust group integration plans going forward. These plans need to be not only ensuring a robust autonomous business, as Mike has already said, but post-acquisition, we also potentially strengthen the existing group through synergistic opportunities.
Thank you. Stephen, why did management take so long to buy stock after the share price fall earlier this year?
Let me answer that one.
Thanks.
Okay, so, we-- we're all willing to buy stock, but we're in a closed period. The closed period lasted for some five months. So first of all, we had a closed period with the annual report, but this deal with Peak Sensors has just dragged on. So, the advice of the broker is to say, "You can't buy any stock," and that was the main reason why. Otherwise, we would have bought stock earlier. And we did actually buy stock, you know, a few weeks ago.
Okay. What confidence can you give us that Monmouth and Atik are through the worst now?
Yeah, I can take that. I think optimistically, we can really see the light at the end of the tunnel. As Mike talked to, with Atik, it's very much a short-term issue, where order coverage from its biggest customer was delayed due to destocking, and that's commonly across the public domain. We've now received order coverage for that, so that risk is now gone, but really, we're seeing the down turn in the figures down driven by purely timing. Going forward, we're looking to make our business a lot more robust, so we're currently looking to reduce the dependence on a single customer.
We're looking within the same industry to diversify and take on other customers within that industry. Secondly, we're also looking at a different industry as well, as Mike alluded to earlier, we're looking at the professional astronomy industry as well. In the coming months, we're expecting a strong order from that, which is the first major one demonstrating our technology. Our technology is equally as applicable to those as the life science market as well. So really, the answer to that question is to ensure robustness across our business. Now, turning to Monmouth. Monmouth is seeing a very strong order intake at the moment.
This month, it was a very strong month, and our visibility going forward remains extremely strong. And I think that this is really important because the optimism within that business is growing. There remains challenges from the operational side of the business, and we are working with the management of Monmouth to resolve that, to unlock that, but really, looking at the order coverage because we really understand what the issue with the operational side of the business really is, we all we can see is very much an optimistic rest of the year, for instance, next year.
Okay, thank you, Steve. Mike, can you provide insights into SDI's strategy for creating recurring revenue streams within either of the company's two segments, whether through M&A or by exploring new lines of business?
What we do, so recurring revenue streams from the business is between 15% and 20%. That is mainly through servicing, so we've got a good service revenue stream at LTE, at ATC, at Safelab, and also at Monmouth. With Monmouth, now we've actually got Stephen on board, we're actually looking at improving that service. It's not as high as we would like there. Also, we've actually got some consumer side of the business as well, which is Sentek Sensors. Also, I forgot to actually mention about Astles' control systems. 50% of their revenue stream is service and support of their dosing machines. Is there anything else we can think about? I think that's it, really. It's the main ones. But we are—it's good to have. It's nice to have that recurring revenue stream.
Many years ago, it wasn't. It was just CapEx, but now we can actually see that growing, and I'm sure it's going to improve as we grow the business.
Okay. Has it been considered to hold off new acquisitions and pay off existing debt in that high interest environment? Well, I think we've-- Mike's already-- I'll answer this one.
Yeah, yeah, yeah.
I think Mike's already stated that we will continue to look for acquisitions because that's part of the business model of this company, and that strategy is unchanged. We will continue to pay off existing debt in the high interest environment anyway. We are focusing on our working capital. I think that's kind of what that is telling you, that we will be trying to generate more cash from our working capital in the next six months. You know, we are continually trying to pay off our existing debt. That process is ongoing for us. There is another question here from Terence. "Can you please inform us of the current gross and net debt, excluding leases?" Well, the net debt excluding leases is GBP 13.2 million at the end of October, as I mentioned in my presentation.
The value of leases is about GBP 6.7 million on balance sheet, so you can add GBP 6.7 million to that to get the gross figure.
But this is including the leases on property and the book standards.
That's right.
Yeah.
And leases is, is an accounting where they gross up the leases, and the other side of it is usually, fixed assets. So it's your assets and your balance sheet. So it's, the banks exclude this normally from their definition of net debt. That's why we quote that particular metric rather than any other.
Yeah.
All right, it seems that acquisitions now come with lower margins and a more expensive multiple versus some years ago. What are the reasons for this deal size? More competition on deals, focus on growth versus return on invested capital?
I don't think so.
I'm not sure that's true, actually.
No, I think when we do an acquisition, it goes out to say, "This is the total consideration." And in recent acquisitions, we bought the property. But if you just purely look at the goodwill element of it, we're still within that 4-6 parameter, which we've always said. So it all depends on what the net assets are. You know, if the net assets is only GBP 400,000, which is sort of working capital, it's a low multiple. But if you're adding on with FAST GBP 1.6 million of property, yeah, it does increase the multiple. That's why I like to separate the goodwill element from the net asset element, because it just skews it so much.
But we always stick to this principle, well, we have always stuck to the principle of 4-6, but I think 3.5 is the lowest we paid for an acquisition.
Okay. So this one's asked twice: How is it possible on the 29th of September, that you gave a higher guidance for FY 2024 when there was only 1 month left for H1 to close? And this is, you know, it's been around Atik, isn't it?
It's all around Atik.
Yeah. Do you want me to talk about it?
Yeah, I'll talk about it. It was quite frustrating because this has been dragging on for a period of time. We knew this order was going to come through. We've got the goods in stock, the finished goods in stock. We have all the components, the sensor components. What actually happened with Atik, with the customer, is they moved the procurement from the base in Singapore to a centralized base in the Netherlands, and they decided to actually reduce their exposure from three months to one month, and it dragged on for months. We thought we could have a good shipment going out the door, even if it's the last month of the year, it all could hold off, but sadly, it didn't.
So it gave us a big hole in the H1 figures, and all it's done is move it to the right. The other two, GBP 200,000 of each with FAST and SVS, respectively, you know, that's small compared to Atik. Atik, which is too big a hole for us. So we had to hold our hands up and say, "Look, this is not coming through in H1." And it was just last minute, which is a shame, and it's sad for me.
This is probably for you, Mike. Have you changed your approach to M&A in view of the tougher outlook? Are valuations expectations adjusting, and what is your view on the increasing debt at this point in the cycle? I'll probably do that last one, but you can-
No, I can do it all. It's fine.
Sure.
Yeah. It doesn't change. The model hasn't changed. We're still looking at the multiples. At the moment, we've got three of us looking at it now. We talk heavily about the acquisitions. They're all ranging between £500,000 and £1 million. You know, Peak Sensors is actually lower than that. It only sort of generates sort of £400,000 worth of profit, but a good business. How we fund them going forward, that's what we're discussing at the board at the moment. Because at the end of the day, I think our multiple on debt is about 1.1x?
Yeah.
Something like that.
Yeah.
Do we actually increase that? Shares... I-- We don't know, but it's not going to stop us doing M&A. So that's what we need to discuss going forward as a board. You got anything to add to that, Ami?
Nothing. Stephen, one for you. Can you please provide detail on the plan to boost organic growth?
Absolutely. To look at that, really, we need to look at individual business level because the drivers are quite unique to each business. A common denominator across the group seems to be very much looking at geographic expansion and taking a number of the businesses into new geographic markets. For example, US, and that seems to be a very low-hanging fruit across the board. So really, it's looking at... First of all, categorizing the businesses across the group as the stable businesses and also the higher growth businesses. And really, the higher growth businesses developing a strategy of how they're going to grow.
So as I say, it's not only—it's going to be geographic markets, probably initially, but also looking at product development, looking at approvals, and really looking how to diversify into those markets. So, there is a journey ahead, but, it's really focused on the characterization of the business.
Okay. A question for me. Someone's asked: Am I correct in hearing the segments will be rebalanced? If Sensors & Control segment is too large, why not simply break the segment into two or three segments in total? By reclassifying, you prevent the reported segment organic growth numbers from being validated. Well, first of all, I think we explained that we are resegmenting. We had a good close look at this. Because clearly, the reason behind this is that the size scale is too large, but do we keep Digital Imaging going as a division or do we, and how or how, what would the future look like? Well, first of all, we have a bunch of lab products businesses that we can see synergies with, and it's really helpful to have them all within the same division.
There'll be one or two more within it, but that seems the most sensible approach, given our future strategy. So it's not really trying to, you know, obscure previous data, because we will provide, you know, before and after data at the current year end. But, the idea really is more to support the business going forward, and it just seems more appropriate for us to live in the really.
Yeah. It was just to say, we're not shoehorning these businesses into lab products. They're actually talking, and they think they can work together, so it makes perfect sense, and to put that into the group. So I think that started the exercise-
Yeah.
Going forward, and then we actually looked at it and said, "What should we do with the rest of them?" It could be in time, it could be right to say we should have sort of three segments, but currently it, it's going to be two. And, you know, we may move it out, but I think initially, the lab group works, and that's what we, we, we've agreed. So we're-- that's how we're running at the moment. We've got meetings, as I said before, about it, and it's the rest of the businesses, you know, how do we bring those into a seg-- into a meaningful segment? If you look at it historically, as I said it before, we've only got three businesses in the Digital Imaging , which is Atik Cameras, Synoptics, and Graticules. So really, Graticules is chemical etching.
It's not Digital Imaging , we just put it in there. So what we need to do is to have a better look at our businesses and put them in the correct segments, and that's what we intend to do.
Of your M&A pipeline, how many do you expect to exit through in 2024? And, will this take you on to a growth step level, and then you-- and will you remain comfortably covenant compliant? Well, to answer that question, we'll always remain covenant compliant because we have to. So whatever we choose to do, it will. And in terms of how many we expect to exit-
We never put a number on it.
We never put a number on it.
Correct.
Because it's just not a sensible thing to do-
No
simply because, you don't really want to be forced into doing a number just for the sake of doing a number.
Correct.
It should be the right deal at the right price, and often, just the process itself takes a while, longer than you think it will do, usually.
Peak is a classic example of small business.
It will. So there's any number of reasons why I can't put a number on it, really. In terms of M&A, what do you think differentiates you from other competitors such as Judges or Halma? Are you seeing a clear trend of higher prices paid? This may seem strange in an economic situation like the current one, but the prices should be lower. No, I agree with you, prices should be lower, so I can agree with you on that.
So, right.
But, um-
They're not.
I was thinking—what differentiates us? We don't tend to compete with any of those, do we?
We get them at early stages. So if you have a look at it, we've got one in the books, which has been around for sort of three years. We're still talking to them when the time is right, and then you look at FAST. We turn that round in sort of three months. So there's no sort of time limit. It's just talking to people, talking to businesses, and if they're interested, to come across. But also very few people like Judges, Halma, et cetera, are looking to buy businesses within the profit range of sort of GBP 500 to GBP 1 million. It's just outside private equity as well. So they're, they're good businesses for us.
What expectations should we have for long-term gross margins, and where do you see the business in 10 years? And what is the competitive environment like for the companies you own? Well, I'll answer the first one about long-term gross margins. I mean, I still see more than 60% for gross margins. I mean, obviously, mix plays a part with the M&A that we buy, so-
Yeah
... you do find some of the acquisitions we make, the gross margins are below our 60% on materials. But that gives us opportunity, as we've seen on Monmouth, actually. I don't think we mentioned that Monmouth—you know, we, we're working to improve their gross margins, and we've had some success there. And we will look to do that elsewhere, too. And so that answers that one. So where do you see the business in 5-10 years? I wish I knew.
Sure.
But, you know, much, much larger, I think is the answer. We, if that's strategy, and we continue our strategy as we've articulated it today, then it should be significantly bigger.
What we do know is each of the businesses is gonna be quite individual, and the growth of each business is gonna be very different. There are some higher growth businesses within the group, and they're gonna be considerably larger and look very different to what they do right now. But some of the businesses will look very similar to where they are right now, so it really depends. What we do know is all the businesses will be still autonomous.
The competitive environment, I don't know if that's true, James, to compare to. So not, not at what's the competitive environment, is it tougher?
Not really. I think, there's—we've acquired 18 businesses. We've only been in competition for with two of the businesses. That's one is Chell and the other one was FAST, but that's when they used corporate people to sell the business. But then it wasn't a bidding process at all, because we stick to our, our valuations. But they like how we work, and that is autonomous business units. You know, we're not the type of business, but we've seen on many occasions, we'll buy the business, and then after 12 months, and we don't change it, but then they've got hobnail boots on and put SAP or JD Edwards in place. You're filling boxes in, and that's not what we do. So we like to run them as autonomous units, but what's coming through now, as I say, is synergies. You know, these businesses are talking to each other.
Okay, I'll answer this. How much do you anticipate the Synoptics revenue to contribute towards the overall revenue of the group? Approximately for the first year, it'll be around GBP 1 million or so. For an annualized basis, probably between GBP 2 million and GBP 2.5 million. Mike, when you're acquiring companies with property assets, how do you think about return on investment? Do you intend to sell these assets or keep it? How long does this take?
I think we, we've talked about this before. I think the only return on assets, I think we've mentioned this about the property. So we've got about GBP 5 million worth of property on the books. Usually, you're only getting between what? 6, 7, 8% yield on it, or we're getting return with 15% on, on a business. So we, we are actually talking as a board to say, "Should we actually move those business, those properties on, do a sale and lease back?" But then in this market, you know, you got 7, 7.5% interest. Is it worth doing it? So it's a discussion point, to tell you the truth, at this moment in time.
Okay. Can it be that the companies acquired during COVID were inflated on revenues, so SDI Group was overpaid and the acquisition not creating the expected value? Well, there's only one. We do an impairment test every year anyway, so, you know, this one does come out really is not creating value. We've had one Monmouth public, I was suggesting that was right in the heart of COVID.
That was.
We've done the adjustment. I think we spoke about that at length, really, at year-end.
Yeah, absolutely. I can repeat it. I think one area we're never gonna avoid, and that's that, IFRS 16, I think it's sixteen, on the leasing. You know, with that, that was nothing to do with COVID. That was just, interest rates and property valuations. But the rest of it, the GBP 2.5 million, we did a 3-year average of that business. And, what actually happened is we didn't, nobody realized that COVID would just drop off a cliff. So everybody shut the doors, and, nothing came through. But the order book was still strong. But then we had, an operational logistic issue whereby instead of people buying between five and 10, 15 of these, biological safety cabinets, they're only buying two or three.
So we didn't have a service department, to actually service support, and deliver the product. So with Stephen on board, that's what we're trying to do now. You know, the biggest problem is, you know, for us, really, as soon as you actually jump and make that impairment, then you can't actually reverse it. So Ami and I, we discussed about this. It looks really quite healthy going forward. You know, Monmouth looks a good business, but it just happened to be for that period of time, it didn't actually deliver in line with expectations. So therefore, we had to take that hit.
Okay, we're running short on time, I think.
Okay.
What are your plans to return Digital Imaging segment to profitability? Do you count on the increase in volume to optimize cost structure as well? Digital Imaging really at, in terms of scale, and first of all, it's still a profitable division, both all the companies within it-
Yeah.
will be profitable for this quarter, just to be clear. Do you count on increasing volumes? Well, I think we've talked about it. First of all, we have-
Absolutely. Yeah, we've already addressed it, and it's really that focus purely on Atik.
Yeah.
And what we've done to improve the robustness of that business really ultimately addresses that.
Have there been or are there any plan to be further write-downs of intangibles? No, we don't plan to do this. Usually, it is something that... It's an annual calculation that we have to do. And as I've explained to some investors when they ask me this question, it depends on the circumstances around the individual business at the time that we do the calculation, which is usually in the summer, and the interest rate environment influences our weighted average cost of capital, which then influences the calculations. It's a really tough one to answer.
There's variables in there.
There's lots of variables in this calculation. Admit it, that we've done, we've done a write-down on Monmouth. The other one where we had a bit of less headroom was on FAST. But beyond that, we've, you know, we're in a reasonably good shape, but it does depend very much on circumstances, at the time we do the calculation. So sure, there's no certainly planned ones, but, we, we do the calculations annually. So I think we're coming close to...
Perfect. I mean, as we say, we're coming up to the hour anyway, and for every question that you do seem to ask, there seems to be another one coming. So I guess we could take another hour or so of your time. But, if I may just say thank you to everybody for your engagement. All these questions, Ami, we'll make available to you post the meeting. So if there's anything we haven't covered off in the presentation or through the Q&A, we can add an additional response and publish those, if it's appropriate, of course, to do so. I know investor feedback will be particularly important to you all, and I'll shortly redirect those on the call to give you their thoughts and their expectations via feedback.
I wonder, before doing so, Mike, if maybe I could just return to you just for a couple of closing comments, brief comments, and then I'll redirect investors to give you their feedback.
Yeah, it's this has so far been a challenging year compared to previous years. As I said before, we've got a few businesses that have not achieved budget. I think mainly is Atik, really. It's a shame that it took so long for this all to come in. This is just a bump in the road for us, and I don't think it's gonna affect our long-term plan going forward. We're still gonna create or drive organic growth with our existing businesses, and also we're gonna do M&A. So for us, you know, I think, especially with the... In the short term, we're looking at a large pipeline of prospective orders for the high probability of landing across the group. You know, I just think this is a short-term sort of blip for us, really.
That's great. Mike, Ami, Stephen, thank you very much indeed for updating investors. Can I please ask investors not to close this session, as we'll now automatically redirect you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SDI Group plc, I would like to thank you for attending today's presentation, and good afternoon to you all.