Good afternoon, ladies and gentlemen. Welcome to the SDI Group PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time via the Q&A tab that's just situated on the right-hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all of the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll, and if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to CEO Mike Creedon. Good afternoon, sir.
Hi there. We'll just go through the interim results. If we start on the agenda, Amit. I think everybody can read the agenda there. We'll be going through the group summary. Amit will sort of do an intro himself as the new CFO. I will just go through some sort of general narrative, where we're at, or what's happened over the last 6 months. Amit will go through the numbers. We'll look at operations outlook and go just to conclusion. I think one of the interesting things that within this pack, I think you can get your hands on it after the presentation is if you need further research, is go through to the appendices because it's actually quite interesting.
We've actually got 14 business units now and, to get some background information on those, go to the appendices and also go to the relevant websites of the subsidiaries. If you wanna go through that, Amit, to the next one, and I'll leave it to you.
Yeah. Thank you, Mike. Good afternoon, everyone. As an intro, my name is Amit Sharma. I joined the board back in August as the new CFO, as Mike said. I'm not the only new director though. We welcomed Andrew Hosty to the board back in August too. Andrew is an experienced NED on multiple boards, as you can see from his profile. He's formerly Chief Operating Officer of Morgan Advanced Materials, a FTSE 250 decentralized manufacturing group. He was on their board from 2010 to 2016. What about me? Well, just to give you a bit of a flavor of my background, I was formerly the group CFO at Ultra Electronics, where I spent also a large part of my career. Ultra was a FTSE 250 aerospace and defense company. It's a decentralized manufacturing group with a small head office.
I was part of the team which embarked on a buy and build strategy in the late 1990s and early 2000s. A question I get asked quite recently anyway, is, you know, why am I here? Why, why SDI? Well, before I joined, I saw what many of you see, a strong track record of success, a team with a good eye for acquisitions, and a strong collection of successful businesses. Having been here 4 months and having traveled around virtually the entire estate, I'm pleased to say that my initial thoughts have been correct. I've seen a collection of well-run, impressive businesses who understand their customers, have a good portfolio of products, and importantly, are capable of growth. That's all about me. Back to you, Mike.
Okay. Let's start off with a presentation about the businesses. I think people who've been on these presentations have seen this diagram many times. It's got larger. In this sort of calendar year, we've acquired 4 businesses. We started off in 2014 with Opus Instruments. That was the very first. Now today, we've acquired 17 businesses through equity raise on 3 occasions, and then it's through our own cash and debt. As I've said to you before, 4 businesses that we acquired this year, 2 were in this financial year, and we'll discuss those later on in the presentation. One of the, is the strength of this business model.
You've seen the wording on the right-hand side before, but just to repeat myself, we've got all these businesses are run autonomously as separate business units. What we're actually seeing now the group is getting bigger, is synergies within the group as we acquire additional complementary businesses. We'll discuss it further as we go through the pack. All acquired businesses have to be profitable and cash generative, as you well know. We don't rely on a single sector or region. That's why we've actually sort of been quite successful through the COVID period because we have a range of businesses which were selling equipment within the COVID epidemic and some found it itself, but we're very successful as a group.
What I'd actually like to do is just to repeat what I said right at the start, that is please refer to the appendices on the where it's indexed Group brands. Then you can actually see the sort of sectors and regions and the type of products we actually sell within the 14 business units. What we do with these businesses is when we acquire them, limited sort of cost as an exercise, fairly very minimum. What we try to do is to invest in organic growth in these businesses. If we go on to the next slide, Amit. This is a new one for us, U.K. and world presence. What we've actually got here is we're highlighting the 14 business units and where they're located. 14 business units or businesses, they're based in the U.K.
What we've actually got is additional satellite offices. We've got one in Frederick, which is just outside Washington in the U.S., one in Lisbon, in Portugal. The recent acquisition of Fraser Anti-Static Techniques, we've acquired a business in Dresden and one in Shanghai. One thing I'd like to sort of highlight in this is most of our sort of business operations is carried out in the U.K. That's 13 of the 14 businesses. In recent years, what we've actually done is moved the majority of the operations of Atik Cameras across to Lisbon. What we've actually got in Lisbon now is 34, 35 people over in Lisbon. I think it's 11 people within Aldeburgh, which is near Norwich.
What we operate in Norwich now is just the R&D center, sales and marketing, and then the rest of the operation, including finance, is within Lisbon. Yeah, my role is sort of twofold, really, is one is an operation and the other one is to delve into M&A. Over a 6-week period, I've tried to visit all the business units within the UK. I'm actually seeing them probably 6, 7 times a year. With the overseas offices, I'll try to visit them every 3 to 6 months. It all depends on what time is taken with M&A. I said to you, this year, we've accomplished sort of 4 sort of acquisitions within the calendar year, so it's actually been quite busy for me on that aspect.
Like I said, I do like to visit the business units as often as possible. I'd now like to hand you over to Amit, who will go through the financial information.
Thank you, Mike.
Yes
... half one financial year 2023 results. Okay, this slide shows the key financial highlights for the first half year. These you will have seen from the press release already, so I won't spend too long on this particular slide. The headlines are a strong revenue growth of 28%, which translated into strong operating profit growth of 19%. Both basic earnings per share and adjusted diluted earnings per share also showed strong growth. Cash generated from operations declined by 57%. On all of these, I'll talk a bit further in the forthcoming slides. Okay. This slide shows some extracts from the income statement. The headlines from this slide are total sales growth of 28%, as I said, of which 3.8% was organic.
This was driven by the one-off Atik Cameras order for cameras which go into PCR machines. GBP 6.1 million of the growth came from acquisitions. The acquisition of Fraser Anti-Static Techniques was made at the very end of the half year period, is not included in these numbers. In terms of gross margins, there's a mix effect going on here with our acquisitions having slightly lower gross margins than our existing businesses. If you exclude these, gross margins held. As I mentioned earlier, adjusted, diluted, and basic EPS both showed strong growth, in fact, stronger growth than our profit growth. This was due to the comparative period tax rate being higher as a result of a one-off adjustment to bring the deferred tax charge up to 25%. This slide shows how the revenues have moved compared to the equivalent period last year.
As I mentioned, acquisitions contributed GBP 6.1 million in revenues. The impact of the one-off Atik order for cameras that go into PCR machines is shown here. For the first half of FY 2023, we had revenue growth of GBP 0.7 million on this contract. The revenues in the first half were GBP 6.4 million. This compares to GBP 5.7 million in revenues over the corresponding period last year. This contract ends in the second half of this year, and we have no visibility of any further orders from this international OEM. However, it's pleasing to note that Atik has experienced strong organic growth in the first half of FY 2023 when you exclude this contract. This slide shows the performance of our two divisions, Digital Imaging and Sensors and Control. As a reminder, the Digital Imaging division includes Atik Cameras, Synoptics, and Graticules Optics.
All of our other businesses are under Sensors division. The Digital Imaging growth of 10.4% was driven by Atik Cameras, PCR camera order, as I mentioned earlier. All of the acquisitions made in the last 12 months have joined the Sensors division, all of this division's growth comes from these. Looking at the trading in this division, Sentek and Applied Thermal Control both had very strong trading halves. This was offset by component delays at Chell and Astles Control Systems, a slower post-COVID first half at Monmouth Scientific. Both LTE and Fraser, those new acquisitions in the group, Mike will cover these a little later on. Turning to cash. Working capital increased by GBP 5.8 million over the period.
This is largely driven by GBP 2 million from increased inventories at our businesses to mitigate against component shortages and in respect of PCR camera deliveries scheduled for the second half of the financial year. A further GBP 1.1 million outflow came from Atik Cameras upfront payments, which unwound in the first half. All of these contributed to cash generated from operations reducing from GBP 4.4 million to GBP 1.9 million in the half. Over the first half, most of the acquisition consideration were funded from our bank facilities. You can see this more clearly on the next couple of slides. This slide from left to right shows the working capital movements I've spoken about. You can see the Atik Cameras unwind of upfront payments, the increase in inventories here.
On the right-hand side, you can see the GBP 16.6 million consideration for acquisitions, which was funded by an additional GBP 15 million in bank borrowings. Turning to the balance sheet. The growth of assets and liabilities you can see here is driven by acquisitions. At the end of the period, the net debt to EBITDA ratio was 1x, compared to a ceiling on our facility of 2.5x. After the period end, GBP 5 million of the GBP 10 million accordion option on our HSBC revolving credit facility was exercised after agreement with HSBC. The facility size increased from GBP 20 million to GBP 25 million on the 30th of November. This resulted in the headroom on our facility increasing from GBP 1 million to GBP 6 million.
The acquisition of LTE Scientific and Fraser Anti-Static Techniques required consideration of GBP 14.2 million, a further GBP 2.3 million was paid to the Safelab Systems sellers to close that particular transaction. At the end of the period, GBP 2.5 million in deferred consideration is included within trade and other payables in the balance sheet. GBP 1.5 million of this relates to Fraser's and GBP 1 million to SVS. To conclude, as you're all aware, interest rates are increasing, as a result, interest payable on debt will also increase. The analysts following SDI have updated the interest charges in their PBT models to reflect this. That's all from me. Back to you, Mike.
Okay. Do you wanna just flick onto the next page then, Amit?
Yep.
Okay. Now you've got me right to the end. This is page 16. This is the first acquisition we did in this current financial year. We acquired this in August 2022. This business has been on our radar for the last 5 or 6 years. Ken Forde, my Chairman, and I met Colin Perry a number of years ago in London one Christmas period, and wanted to try to buy the business. We were too small for him, and so that meeting was very short. Over the years, you can actually see we've grown and he's taken an interest in our business, and we acquired, we agreed head to terms, I think it was a number of months ago, then sadly he died. It went into probate.
It took us a number of months to get this over the line. It's based in a place called Greenfield, which is near Oldham, Greater Manchester, and it's within 44,000 sq ft facility, single-story building. It's actually a sort of quite a big footprint right in the middle of Greenfield. Nice area, just outside Oldham. That's again, I think this is the second one whereby we had to. Well, we acquired the property. The family didn't really want anything to do with the business. They wanted to get lock, stock, and barrel of the whole business, including the property. We bought the property, and that was part of the asset purchase.
This business actually specializes, if you do some research, it specializes in the supply and service and manufacture of medical and laboratory equipment. It's got a massive range of products which we really need to get through and analyze. The main ones are autoclaves, steam sterilizers, endoscope cabinets, and also laboratory ovens, and also environmental chambers. We do have a sort of a significant order for environmental chambers, which came through just before we acquired the business. You may have seen when I think 83% of you are shareholders, you do look at brokers notes, and you would have actually seen that it's high revenues and low profit. We acquired it on a multiple of just about 4 times PBT. That's a historical 3-year PBT.
We are positive with the synergies, with the collaboration with Safe Labs and Monmouth, that we can achieve increased profitability. What we've actually tried to do, I think it's in the beginning of January. We tried to put together some meetings. I think in the third week in January, myself, Monmouth's MD, Alan, and Roger from Safe Labs are meeting face-to-face with John Lees, the MD of LTE, to say, how can we actually increase our group revenues while still remaining autonomous units? We do actually cross over in a number of areas. I think one of the areas of interest is all three of these actually service equipment. You know, can we actually share some services?
One of the sorts of problems we have in this this year, apart from component shortages, is trying to recruit service engineers. It's become very difficult for us in this period of time. I'm sure, you know, with these 3 guys, they're very sort of positive that we can actually try to increase our revenue share in line with or in comparison to the to our competitors, that we should actually achieve this hopefully within the next sort of year, 2 years. If you flick onto the next 1, Amit. We'll look at Fraser Anti-Static Techniques. We acquired this business in October 2022. It was a bit outside of our sort of area.
The business was brought to us, it was quite interesting really, by a company called Westcotts Corporate Finance. Westcotts are a set of accountants with a side line into corporate finance. They were the advisors of Safelab when we acquired Safelab in this calendar year. They came to me with a very interesting business called Fraser Anti-Static Techniques, or we call it FAST now, and they said, "Were we interested in purchasing it?" This is the biggest acquisition we've actually completed. You know, three-year average historical profits of GBP 1.4 million. It's out of our sort of scale of what we've been buying in the past.
It turns over sort of GBP 7 million, GBP 8 million worth of profit, and it's a very nice business and we can actually think we can actually sort of grow that business. It's a leading manufacturer of anti-static products for a number of industries, but the main area is plastics. It's from sheet plastic to injection molding plastic. What we're actually doing is taking the static electricity away from that machine. If ever any of you worked in sort of the electronics industry with an R&D or an R&D center, you'll actually see somebody has a mat with a wire earthing the desk away from the individual. This is a sort of more sophisticated piece of equipment. The major area we're selling into is Germany, but we do sell all over the world.
Where we think the growth is in that business is going to be in the U.S. and into China. Like I said to you, they have actually got a subsidiary in Germany. That is just for one customer. When we came out of Brexit, then, a German customer couldn't actually trade with us. What we had to do is, set up a German subsidiary, and then we moved product and invoicing through that business. We do sell into Germany, into other customers, but so we don't use that vehicle. China, the distributor has been around for many years. They set up that about three years ago, and I'm sure there's an opportunity to grow that business. As I actually mentioned about multiples, everyone's interested in what multiples we're buying our businesses.
This one was the most expensive to date. That was at 5.8 times PBT. If you look at our sort of scope on acquisitions, we try to buy between 4 and 6, and I think in 17 acquisitions, we've actually kept to that. I think on a couple of cases we've been below 4, but that's the sort of figure we're looking at at the moment. Just another point as well as I look at this presentation. They're based in Bampton, in Devon, and they've got an R&D center which is based in Bristol. It's your old TV studio. It's quite sort of strange how they've actually put a factory, and it's in the middle of a new housing estate.
To get planning permission to build a housing estate, they had to have some industrial premises. At the time, a number of years ago, that the shareholders of FAST actually acquired the land and actually built a nice sort of 3 units on that site, and they're still extending the housing estate at the moment. Bit of an oddball in my opinion, but it serves a purpose for us anyway. If you tick along to the next one. That's page 18. I'm sure you've seen this again on presentations over the years. What SDI tries to do is to gain organic growth and also growth from M&A. In this half of the year, we achieved 3.8% organic growth.
To me, it's including times, because it was difficult time for us, especially with component and labor shortages. Last year was 22%, which was fantastic. If you look at it, 16% of that was actually cameras, with our sort of, Chinese PCR cameras going out of the door. This was a bumpy year, as were previous years, but I think we're getting back to some normality within our business units. We do have one more shipment of cameras to a Chinese PCR manufacturer, and this will ship within this financial year. As we've explained in the financial markets over the last 2-3 years, that this is a one-off and we do not foresee or we haven't gotten any visibility on any future orders for this PCR machine.
A number of our businesses are sort of back ended. We're, you know, looking at sort of healthy, sort of sales in the second half of the year. I think we're quite positive of the outcome, but I think we hopefully should achieve market expectations. M&A. This is the sort of the heart of our business, and we still continue to focus on acquiring cash generative, profitable businesses. Like I said to you right the way through the presentation, we've acquired four businesses this calendar year, two in this year. We don't set a target number, but I think on average, we're doing about two a year. We have done since February 2014. Our pipeline still remains strong. We've got a good track record. We're friendly acquirers.
I don't see why this should change or continue or shouldn't continue. Our criteria remain unchanged. That is really, we're looking at sort of scientific, technical businesses with a manufacturing bias, which means, you know, you can actually control the gross margin. As well, as I said before, as you well know, we want cash generative, profitable businesses with a strong management team and also strong exporters within these sectors. Sometimes that's actually quite difficult to actually put across in presentations because a number of our businesses actually are OEM businesses. We actually integrate our product into other pieces of equipment. And that is usually in the UK and then it's shipped overseas, so it's very difficult to see where it is being placed.
The only time we can actually do it is if we actually deal direct on consumer parts. Also, we actually buy businesses at a fair price. If we flick onto the next page. This is a diagram sort of John put together in the last couple of years. Very nice diagram on page 19. If you look at it by, it's 35% compound annual growth over a six-year period. On the bill side, our return on capital has increased from 12% to 34% over the last six years. There are some big numbers coming through over these years. This is due to our strategy to invest in revenue and margin growth within these businesses. I will expand on it over the next couple of slides.
As I stated, 17 businesses, acquired in, what is it? Sort of 8 years. Nearly 8, yeah. Nearly 9 years now. At 6, what we've actually done is combine them into existing business units, and then we've got 11 standalone units. If we move on to page 20, this is where I want to expand on what we had to do in the way of investment in our businesses. What we do is invest in those businesses. I think sort of 3 sort of good examples of that is Graticules. I think we've mentioned it in the results side. What we're doing is refurbishing or getting an old 1960s building. That should be completed by within the next couple of months.
What we've actually done is put a new, a clean room facility, laminar flow cabinets, painted, decorated the building. It was like a rabbit warren, so it's more open. The next phase, if we can actually or Amit, as the new CFO, can look at whether it's a viable proposition, is to expand the building, and that is built on the side of it. Because currently we've got that unit, and then we've got a small service office just down the road. It'd be nice to put everybody under one roof. We have to look at whether we're gonna get a good return on our investment in the foreseeable future. The second point is what we like to do, as you well know, is R&D. A good example of that is with Synoptics.
I don't know whether you've actually looked at some analysis done. They've got a very smart machine called AutoCOL, which is an automated colony counter. Really, it's for the pharma industry. What we've actually done or Kate and Claire with that business, is reduced the headcount, and we've outsourced R&D in a number of occasions. This is one of the projects we've outsourced, this colony counter. This is the version 2. What's actually happened in, especially through the COVID period, not to bore you at all, is the colony counter can count, I think it's up to sort of 90 plates in one stage. The current Petri dish are 90 millimeters wide. There's a new one out of 55 millimeters, which was developed during the COVID period. It's got a tighter lid on it.
We tried putting an adapter in the new machine. It's gonna cost more than the old machine. What we've actually done is developed a new machine. We've ran this over the pharma companies, and they're very happy to take this on board, that they will actually need two another machine. Another area, sort of, again, back to synergy. Another area, this is very recently over the last couple of weeks, and really it's all due credit to sort of Roger Guest, the MD of Safelab. What we've actually looked at is the marketing talent. We recruited a number of specialized marketers or marketing people in digital marketing. These are young kids, and what we need to do is to see if these marketing people can actually help some of our sort of small subsidiaries.
We had a group marketing meeting recently just on Zoom or Teams or whatever it was, to see what we need to do to expand our knowledge and co-collaboration within the digital marketing across the group. There was 2 or 3 people who stood out within the group who can actually help people like MPB Industries, who are sort of behind. Well, not behind the times, but they do need some help with these new tools and techniques within digital marketing. Hopefully, with the resources we've got in place, we'll be able to help these guys drive new customers through to our website. As we've seen in the press recently, supply chain issues have continued to cause problems for us. There is 1 part was highlighted, I think 2...
Last week when I was at LTE, a 52-week lead time on that part from the U.S., but we've managed to actually reduce that lead time by buying it in the U.S. instead of our U.K. distributor. Hopefully, that's alleviating the pressure on production. We're not alone with these challenges. If you've seen on recent RNS press announcements, everybody's got their problems on trying to fulfill orders because of a consumable, sorry, of parts, shortage in parts. Another area I'm sure will come under Q&A is inflation. You know, what we try to do with our price increases, is try to pass on to our customers where possible. The easiest time is with new business 'cause you actually incorporate it into new growth. We do our best.
Our margins are still achieved, if you actually seen from the presentation, which Amit did earlier on, with our gross margins. I think, yeah, we're in a good, a good place. If you have a look at our businesses, a lot of the business is still run by the founders or there is succession planning in place, and these guys know how to run their businesses and achieve good margins. We don't actually need to use these sorts of stick approaches to try to increase the prices. We've got another area which is quite pleasing, is trade shows are back. We've got 2 big trade shows for a number of our businesses. One is ACHEMA in Germany, and the other one is Analytica, again, in Germany. These are its pretty busy shows.
It's good to get back to our face-to-face meetings with our customers in the marketplace. As I mentioned as well about the acquisition of LTE, we are now able to increase our synergistic opportunities internally with our business units. I'm sure that we'll be able to sort of expand on that across the group over the year. If you go on to page 21. What we've actually got on here, let me see. My hard copy pages. These are our priorities for the latter part of the year. Still, we're gonna continue to manage our supply chains. We've got some very good buyers and some very good engineers. If we do get problems, we're actually re-engineering some of our products. Labor is still a big problem for us, as well as in-inflation.
If you look at Astles, it's a very small business, it only employs sort of 12 people. We've got a shortage of 4 people there, 2 admin and 2 engineers. We're in a very difficult market at the moment. The second point is, as I've mentioned right the way through this, is synergies across our businesses, which we're trying to achieve, and I think we will be successful in that. Like I said, the early stages is gonna be the LTE, Monmouth, and Safelabs. Then we'll expand it across the board.
What we did do this year for the second year, it was stopping COVID, and that is to have a strategy day or a couple of days, that's whereby all 14 businesses presented their ideas of what a 5-year plan looked like and what we need to do to invest in these businesses. It went down very well. How the format was very similar to what Amit and I are doing today, just put a presentation forward. That's what they did. It wasn't just purely to the main board, it's to every sort of senior manager, director of the subsidiaries. There were about 40 people attending that, and it was worthwhile. What we'll actually do is follow that, those strategies up, over the coming year. The next point is bought. Very little to say on that.
There's no change from previous years. We still seek high quality cash generative businesses. We have a strong pipeline. I'm sure we'll continue what we have been doing since February 2014. Just to sum up, just a summary. Again, it's just repeating what we've said in previous years. You know, we still aim to deliver our full year profits in line with market expectations. We still invest in our businesses for growth, as I've already mentioned. We're continue looking for complementary acquisitions. Also what we're actually doing as well is looking for another Non-Executive Director. You know, these days, ESG with governance, you know, it's very strict. We need to make sure that we have the right governance going forward for SDI as we continue to grow.
That, my friends, is the end.
Okay. Michael, Amit, if I may just jump back in there. Thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab that's situated on the right-hand corner of your screen. Just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. Michael, Amit, we obviously received a number of pre-submitted questions ahead of today's event. As you can see in the Q&A tab there, we've also received a number of questions during your presentation this afternoon itself. Thank you everyone on the call for taking the time to submit their questions.
Michael, Amit, if I could just hand back to you to respond to those questions where it's appropriate to do so, and then I'll pick up from you at the end. Thank you.
One question for you, Mike, which is, when we take the revenue and profits coming from COVID, and we strip them out from the core business, can the core business still manage double-digit growth in the coming quarters? Thank you. Great work.
Okay. I can't see why not. Well, not double digit. We've never actually said. Is that double digit growth?
Yeah. Well, that's the question, is double digit, but yeah.
No, we've never actually said that. What our target is high single-digit growth. You know, we've had a great sort of 2-3 year ride with the COVID products, but I don't think it's gonna be double-digit growth. You know, we never actually said that from the outset. My target has always been high single-digit growth. You know, if you look at some other businesses, you know, they're in line with us, but not double-digit growth on organic. Maybe with... I'm sure it will be with acquisitions, but if you just strip out the acquisitions, it's high single-digit is my target.
Okay. You've acquired a lot of freehold property with your recent acquisitions. Are you intending to sell and lease back? I'd like to see you carrying on shopping for new businesses as they go on sale without necessarily maxing out on the accordion. I'll answer that one.
Yeah.
Well, we have. We've acquired 3 freeholds. In terms of there's no current intention to do a sale and leaseback. I understand the question. Obviously, if you do that, you do incur then the P&L charge, albeit it'll be directly in operating. Yeah, we will consider this in the next year or two as well. Not currently, but maybe in the future.
Yeah. Can I just expand on that, Amit, as well?
Mm-hmm.
Yeah. 'Cause when we buy the properties, We actually put a nominal rent charge through on the valuation as well. We've actually got a true reflection of what a rented property would be when we look at the goodwill valuation. We do build that into our valuation. I just wanted to mention that to people. We don't just buy the property and say it's our property, there has to be a rental charge in there as well because at the end of the day, we need a yield on that just like anybody else.
Are there any decisions made to divert any manufacturing from any divisions to move away from China to a different region? If so, where would work better? Thank you. To move away from China or move to China, I think is what the question means.
No.
I don't know is nice and simple. Easy one. Are you pursuing any U.S. deals?
Yes.
Okay. In terms of acquisitions, how is the pipeline looking? Second, with rates rising, I could imagine that we would start to see less leverage buyouts. With that in mind, do you think you'll get less competition from PE firms during the bidding process?
We've only competed with PE on one occasion, and that was with Chell. That's what we were told, PE were involved. We never do. I don't know whether our business is too small or they're outside their scope, but we never see them at all. Obviously, it's a good question, but we never see PE. We never compete with them.
This one I'll answer. How much leverage is management comfortable with utilizing on a debt-to-equity basis? I think the question is, what's our balance sheet sort of targets. We're at 1 times net debt to EBITDA. I think the board is comfortable with 1-1.5 times currently in terms of the leverage. Clearly our borrowing capacity to get us to 1.5 times is probably higher than we're currently using. Yeah, 1-1.5 times is our sort of comfort level. Okay. Could you give some greater insight into customer concentration? How much do the top 5 customers account for with the group? How has this changed over the last 3 years? Does any single customer account for a single amount of a subsidiary company sales over 25%?
How does management view this concentration? Well, we've got one customer, which we've talked about extensively in this presentation, which is a very high percentage of the whole group, let alone any one subsidiary, the Atik camera contract, and that is very high concentration. We've been very open and transparent on the amounts, and that's unwinding over the current year, and we've reinvested some of that cash flows from that in buying new companies to fill that gap. In terms of the rest of the customers, well, they're not that significant in the scheme of things. You're talking max, probably 4% to 5% for one customer. I would say the top five, excluding the really big one, you're talking barely into double digits.
We're quite well diversified with the, with a view to customers, if you exclude the one big contract that we've been very transparent about. In terms of, this is an interesting one. Organic revenue growth of 3.8% looks low, especially with the current inflation situation. What's your expectation for future revenue growth in real terms? I guess single digits is what we've said, Mike, isn't it?
Yeah, high single digits. That's always been the target for us. Like I said, with COVID, we had sort of 3 good companies. We had the Chinese PCRs, we had biosafety cabinets with Monmouth. Right at the outset of COVID hit us, MPB with the vent flow meters, which went into the ventilators. You know, we're getting back to some normality now. It's difficult to actually forecast where we're going to go because we've had such a good ride for 3 years. Yeah, the target always has been high single digit growth for us.
Okay. Both Progressive and finnCap show declining post-tax ROE in 2023 and 2024. Do you agree with that outlook? If so, why the expected decline? I'll answer that one. I think what you're seeing is sort of we're working out the Atik contract in this year and next year. Tax rates are moving upwards in the U.K. next year. I think there's some reflection of that. That we have a higher level of debt, you've got a full year impact in 2023 and a partial year impact in 2024, hence the sort of EPS type movements that you're seeing in the broker notes. Okay. Hello, Mike. Why has the market reacted poorly to today's results, down over 9% before this presentation?
What has been misunderstood in the market, in your opinion? Thank you.
Do you want me to answer that?
No.
Yeah, I'll answer it, then you can come in with some proper comments. To tell you the truth, I don't look at the financial markets at all. I don't even look at the share price. It's only what finnCap told me today. I don't know. I'm not interested in the financial markets. My job is to create shareholder value; I love what I do. To me, the financial markets, you know, I'm not interested in it. I don't know. Amit may do.
Yeah.
I don't.
Well, I mean, it's possibly because of the working capital movements. Although some of the working capital movements have been quite well flagged in respect of the increase in or the unwind of the Atik down payments. That's been well flagged, cash wise. I imagine that the inventory build up is probably surprising, but we're not unusual when it comes to most manufacturing companies having component shortages and having to manage it through inventory build up. It's likely to be, it's not likely to go up any further and we should be back to normal cash in 2024 once we've worked through the unwind of the Atik customer upfront payments. Okay. Right. What else we got? Okay. Let's go to a controversial one.
For a company growing as strongly as SDI, I'm a little surprised that the directors don't have a larger shareholding to demonstrate confidence in future growth. Would you like to comment, please?
Me?
Well, first of all.
Yeah.
First of all, I'll start with this one for us.
Yeah.
A few of us have just joined, so, but, so I've got a small holding, and it's just starting, and we also have LTIP options that will vest in future years, so we're quite new to the board. Typically, NEDs don't have a huge shareholding, although some of the ones here do. Mike?
Yeah, I think we will answer that and the next question, Amit, about why I sold my stock.
Yes. If you want to do it.
I'll do it all in one.
Yeah.
First of all, as I mentioned before, I'm not really interested in the financial markets. I don't understand them. I think my job is, which I enjoy as MD or CEO of the group, is to create shareholder value for you guys who's sitting here today as shareholders. I sold it because there was a number of our employees and ex-employees were going to sell stock. My job is to speak to you and also institutional investors. There was demand for shares, we agreed, I think it was about three-quarters of a million GBP in shares with finnCap to sell, at the last minute, our employees and ex-employees backed out because the share price wasn't high enough for them. I didn't mind. I sold the stock. What have I done with it? Stuck it in the bank.
Give some to my kids, so they can get on the housing ladder. You know, I'm not that overly concerned about the money side, you know. If I had buy shares in it, like I said, I'm not interested in the stock market. For me, I think I do, hopefully do a reasonable job for you guys. To me, I'm not motivated by having lots of shares in any business, really. I've said I don't follow the market. I'm just being honest with you. Just like I've been honest with the people at Mello and all the institutions where we've been going around today.
Okay. Do you expect to be able to get the gross margin of your acquired companies up to your existing businesses?
That's a good target, yes. Is the answer.
Okay.
I think we need to.
Yeah, I think so. We will work to do that.
Yeah.
I'll answer the next one. In the next 1-2 quarters, do you expect inventories to go down? The answer is probably not. Some of it will, because we will ship out the cameras on the Atik contract in the next month. There will be some decline. Whether there will still be an increase likely in inventories by the period end. It just may not be as high as GBP 2 million, but there will be an increase at the full calendar year-end. Okay. I think we might be coming to an. I can't see any others. Well.
Oh, yeah. I've got one here. This is a real cool one from Patrick Lynch.
Okay. Okay, go on.
He's done some real good research.
Go ahead.
He's seen a photo of a new CNC machine delivered in Atik Lisbon, which is cool. What we're actually going to do is, yes, you're right, it is outsourced currently, but what we want to do is first of all is use it purely for developing new cameras. It could be going forward that we use it in production, but initially, it's just developed cameras. What we've actually done is we've got a really sort of a quite a big factory or facility just outside Lisbon in a place called Santa Iria de Azoia. We took the top floor, and it's a nice clean room environment. Downstairs is just purely storage. What we decided to do was to buy a CNC machine and just test it because it is expensive developing new products or the casing.
What we're actually doing, as you well know, with a CNC machine, you get a block of aluminum. What we're doing is drilling out to make a casing. There's a lot of waste there, which is all recycled anyway. Very good spotting, Patrick L.
What is the largest acquisition you'd consider consideration-wise, and how would you finance it? That's controversial, isn't it?
Yeah. I can say about it. Well, it's just something we've almost said before. As long as it's not a reverse. You know, at the end of the day, I think Fraser was a big one for us. That was over GBP 13 million. You know, our debt. What's our debt? Is it GBP 19 million, is it, Amit?
It's, yeah, net debt's about GBP 15 at the minute.
15. Okay. Yeah.
Approximately, yeah.
Yeah, it really sort of took the money out of the piggy bank for us. I think we have to do it on a case-by-case basis. When we actually do due diligence, it's an 18-month process, and we go through everything. We have to really tick the boxes. What worries me more than anything is you see a lot of people who do our M&A, buy a big deal and cock it up. You know, the biggest one is really HP and Autonomy, which has gone through the courts. We have to make sure it ticks all our boxes because the problem is, if you don't make a mess of a big acquisition, then it affects you guys, the shareholders, and that's what we don't want to do.
Okay. I think this is the final one because I can't see anything more. What is the percentage of Atik sales that are actually COVID related? Can you also talk about the nature of recurring revenue in our business? I presume that means Atik and the margins that come with it. The percentage of Atik sales which are actually COVID related, which the PCR contract is, which is extremely high, is what I'll tell you, percentage-wise. Can you talk about the nature of the recurring revenue in our business and the margins that come with it?
Well, do you want me to answer that?
Yeah. Why don't you have a go at that one?
Okay. Well, we have got 14 businesses. We do like every likes recurring revenue stream. I don't know what the figures are. If we go through the subsidiaries, Sentek, they make sensors, which really is a recurring revenue stream. It's a consumable item. You look at Astles, as we've said through presentations, 50% of their revenue is service. Again, recurring revenue stream. We have service in Safelab, we have service in Monmouth, and we have service in LTE. They're the major areas. Also we have service as well in Applied Thermal Control. They're the main ones coming through. Let me just have a look at the diagram, see if there's any other recurring revenue streams for us. All right. We go. Oh, Graticules. Yeah, they make Graticules and Graticules.
A lot of that is a recurring revenue stream as well. That's it, really. I think it's about 20% of our revenue is recurring revenue stream. I worked out roughly. That is, and I actually sort of include service on that.
Okay. I think there's one more actually that I would like to just wrap up with.
Yeah.
Are there any specific goals you plan to reach within five years, for instance, in terms of growth efficiency ratios, business quality, and position? Then there's a final financial one, which is, someone's found GBP 2.86 million labeled cost of development. Does this item express the overall R&D spending for the whole group? I'll answer that one. Do you want to answer the first one? I'll answer that last one, which is, no, it's not the overall R&D for the whole group. It's just those that are specifically intangible assets which have a recurring revenue stream, which we can reliably and certainly ascertain to that spend, so that the accounting rules are very specific about what you can capitalize. It isn't all of the R&D.
No.
Over to you for the other question. Are there any specific goals for the next 5 years?
Well, for me, it's hard enough actually forecasting or looking at the next 12 months in this strange world of uncertainty. I think.
Yeah, I think single digit, high single digit growth, I think is probably what you think.
Yeah, it is. I think we're going to be. I mean, I've become a lot cleverer with it. Now we've actually started to introduce this strategy days. Also, I think, one area we've got to do is this, going around the subs dynamic. Do you want to expand on that, which we're setting up?
So in terms of going around the subs, we are going to spend more time of regular meetings with them to discuss strategic objectives, starting at the beginning of 2023. These strategic objectives have come from our strategic meetings. We're linking our regular meetings in terms of business management. We will do that in the next year. There will also be more stuff on ESG. We'll be working on ESG, and that'll be a high priority for us in the next 5 years. Certainly in the next year, for sure. You'll see us talking about our impact on the environment. That's a high priority.
We've got 9 minutes. We got another one here.
Okay.
This is from Jonathan R. About the Atik ChemiMOS camera. This is a new area for us, the ChemiMOS. What we've actually got is Atik camera. The majority of their cameras are CCD sensor-based cameras. You know, Once you sell to the PCR manufacturers, the majority of our cameras were developed by sort of Steve Chambers and Rui Tripa many years ago. We've got a new R&D team, and what we're doing is moving out to the CMOS sensor. Just like your mobile phone or your digital camera, it has a CMOS sensor. What we're trying to do is develop these cameras using a CMOS sensor. It's a completely different type of technology. We've got one developed, you've actually seen it on the website.
What this does is go into gel documentation systems. What we're doing is taking a picture, a digital picture of a gel. It's to do with protein, analyzing proteins and DNA. It started in the early days with Atik Cameras selling to Synoptics, their Syngene division, which is their gel documentation systems. Then we've actually been selling out these older cameras, the CCD cameras, to another manufacturer of gel docs. What we're trying to do with this ChemiMOS is to be a sort of world leader and to try to sell it to other gel documentation manufacturers. The top ones are the US, which is Thermo Fisher, Bio-Rad, Protein Science, and also Azure. They're the major gel documentation manufacturers.
You've got one called Vilber, which is in Europe. That's what we're trying to do with that. That's the new technology coming through. This is based on a recent tweet coming through. I think you're fully up to speed on what we're trying to do with Atik.
Okay. I think that answers one on Unite, from Unite, who says, "Can you talk about future Atik opportunities?" I think you just did. I saw Atik was expanding greatly into other industries. How big can that be?
I think that's a difficult call, really. I think this is what we're trying to do at the moment. I'm sure that'll come through when we go through the budgeting exercise, which is gonna be in the next couple of months with Panos, the MD of Atik Cameras, and also through our strategy sessions.
Following on from what you just said, I think. Okay. Sorry, hold on. How frequently are we currently meeting our subsidiaries, and how much are you going to increase this to? I think we go out fairly frequently. You do certainly, don't you, at the minute?
Well, like I said, every six weeks, I'm out. I go round. I'm seeing them six, seven times a year in the UK, like I said, and then quarterly with the overseas subs. I'm always out on the road. I'm out on the road probably three or four days a week.
For me, yeah. For me, having been here only four months, I've visited each place once, and I will increase that to... We'll do it every quarter for sure.
we've got Jonathan, the financial controller, as well. He goes as well.
He regularly visits as well. We're regularly going out. We're just going to formalize it a little bit more. It'll involve me and Mike. I've got a question, interesting one. I'm delighted to see you're looking for a new NED. Have you met any suitable female candidates perhaps?
Yes.
Yes, is the short answer to that. Okay. All right. If it isn't because of having a substantial stake at SDI, why are you incentivized for staying at the group, to remain at the group?
Who, me?
Yeah. I think.
That's why.
We do have incentivization to stay. If you look at the back of the presentation, you'll see, we have long-term incentive plans in place for both myself and Mike. We do have options, some of which are quite valuable to Mike. We are incentivized and they're performance target related as well.
Money is not an incentive for me, to tell you the truth. If you speak to Ken Forde, I'm probably unusual beast. It doesn't bother me. I like my job, and I like what I do, so I'm not that bothered about sort of these type of incentives. We've got them in place, good. You know, for me personally, I haven't got a high standard of living. I don't drive around in big expensive cars, so I'm not that bothered.
Okay.
I love doing my job.
I think that's it.
Yeah.
I think that's it.
Michael, Amit, if I may just jump back in there. Thank you very much indeed for being so generous with your time and addressing all of those questions that came in from investors this afternoon. Of course, if there are any further questions that do come through, we'll make these available to for you to review. Add any additional responses, of course, where it's appropriate to do so. Michael, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great.
Okay. I think you've known me. I've been here for sort of 10 years. I'm pretty blunt and truthful in what to say. Hopefully, I've answered all your questions. I've got nothing else to say apart from I hope you have a very nice Christmas and a prosperous New Year in these difficult times. I think it's gonna be a difficult sort of 12, 18 months going forward. Hopefully, we can make some success during this period.
Michael, that's great. Amit as well, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. This may take a few moments to complete, but I'm sure be greatly valued by the company. On behalf of the management team of SDI Group plc, we would like to thank you for attending today's presentation. That now concludes today's session, so good afternoon to you all.
Bye.