Good afternoon, welcome to the SDI Group plc final results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated in the right corner of your screen. 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 the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Mike Creedon, CEO. Good afternoon to you, sir.
Hi, good afternoon. I just want to do a quick intro, really. I've been here some years now, probably 10 or 11 years, and we're in a different situation this year to other years. In the last eight years, we've had a rapid growth within the group through organic growth and M&A. The exponential growth was due to sales from COVID, and this has now come to an end, and we're now on a level playing field with other science and technology companies. This year, we had a few stumbling blocks on the road, which Ami and I will explain during the course of our presentation. But our business model still remains strong for organic growth and growth for M&A. If we turn over to Page 4.
Okay, I'll just do a quick intro on this. Ami's been with the company for about 12 months now, just over 12 months, and we've also appointed two additional directors. As I said, Ami's only been here for sort of 12 months. I thought I'd throw this over to Ami to introduce himself, but also extend that to the two non-exec directors, Andrew Hosty and Louise Early, are new on board for us. Over to you then, Ami.
Thanks, Mike. Right, about me. I introduced myself at the half year, for those of you who weren't on that call, I'll introduce myself again. As Mike said, I joined almost exactly 1 year ago, in August 2022, I spent a large part of my career at Ultra Electronics, which was a FTSE 250 aerospace and defense company. It was 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 early 2000s. I'm not the only new director, though, as Mike said. We welcomed Andrew Hosty to the board in August of 2022 as well. He's a non-executive director on multiple boards, as you can see from his profile.
He was the Chief Operating Officer of Morgan Advanced Materials, a FTSE 250 decentralized manufacturing group with a small head office, and he was on their board, the PLC board, from 2010 to 2016. He's an engineer by background. We also welcomed Louise Early to the board in February of this year. She's an executive with the Halma subsidiary, Navtech Radar, and also sits on the board of SENSIT Technologies, which is another Halma subsidiary. She's a marketing and commercial executive, and she started her career in engineering. Back to you, Mike.
To the next page, Page 5, Group Overview. The strength of our business model hasn't really changed over the years. It's due to having autonomous business units, but the wonderful word synergies is actually coming through, and we'll see this through the presentation, early stages, and as we acquire additional complementary businesses, we hope to enhance the collaboration between the businesses. The second point is we, all, acquired businesses must, I insist, must be profitable and cash generative. We don't rely on a single sector of regional trading. That's why we actually did very well during the two, two and half year period of COVID. We acquired businesses, and invest in growth. I'll give you some examples of that as we go through the presentation.
You've seen, on the diagram on the right, many times over the years, that, it's got larger, with the additional acquisitions we've got, but also in, in the roadshows we've had in the last few days, a lot of people have actually said to us about the sector split. It's very difficult for them to get an analysis of that. Ami, do you want to expand on that? Because you were talking to these, investors about this split going forward, or you questioned it anyway.
Yeah. I mean, historically, we've been segmented as Digital Imaging and Sensors & Control, and it's not inconceivable that we'll reconsider that sort of segment split going forward. We haven't actually confirmed that internally yet, but i t's likely that we will segment the Sensors & Control division into lab products and industrial products. Watch this space. I t's likely to happen in FY 2024, because most recent acquisitions have all gone into the Sensors & Control division. Just forewarning you all that this is likely to happen at some point in the near future.
Okay, just the last point before we go on to the next slide. You know, throughout this presentation, we'll mention collaboration and synergies, which are new to the group, as already mentioned. As a starter, we've seen a collaboration in, as Ami just mentioned, the lab group, which consists of Safelab, LTE Scientific, Monmouth Scientific, Synoptics and Applied Thermal Control. I'll give you further details as we sort of skip through this presentation. If we go on to the next page, which is a new slide for us, really. Oh, sorry, I've gone the wrong way. Sorry. It's a new slide. It's U.K and World Presence. It just shows where all our sites are around the U.K. and the world.
We currently have 16 sites in the U.K. and four overseas: in Lisbon, Dresden, Frederick, at, near Washington, D.C., and in Shanghai. Let's just sort of discuss very quickly the two new ones, which are Dresden and Shanghai. They're new additions to the group. That was via Fraser Anti-Static Techniques. The Dresden one was purely because we came, when we came out of Europe, they needed a German subsidiary, so they could invoice their German s customers. So this was set up, and it's really just a sort of P.O. box number. All the admin, et cetera, is actually carried out in the U.K., and it works very well, and our customers are very happy with that. The, of interest to me, really, is the subsidiary in China.
It was a, a distributor that I'd known for a number of years. He always had a piece of the action. They sent this subsidiary up. George Fenn, the general manager, he owns 60% of that business. We own 70% of that business. I was supposed to be going over there this week to do a presentation. Because of the delays in the accounts, that was sort of canned. What he would like to do is for me to present all the other 13 subsidiaries and their products, because he thinks he would be able to sell some of the products, if not, help us find distributors in China. We do sell into China. It'll be an interesting exercise to see whether he can actually broaden the depth of our sales going forward.
If I hand over to Ami now, and then he can go through the numbers with you.
Thank you. Thank you, Mike. The first slide, this slide illustrates the global nature of SDI today and gives you a snapshot of our current scale. Revenues at GBP 67 million-GBP 68 million in FY 2023, and about half our business is international now by destination. We have over 500 employees, and as Mike has just said, 20 locations. Moving on to the results. This slide shows the highlights for the financial year. You'd have seen these earlier in the week, so I won't spend too long on this particular slide. Strong revenue growth of 36%, driven by acquisitions, and the significant Atik Cameras contract for cameras that go into PCR machines, has come to an end in FY 2023, and the organic growth that you can see on this slide excludes this.
All of the adjusted measures, including adjusted operating profit, show some growth, and we generated cash of around GBP 11 million over the year. We booked a non-cash impairment of GBP 3.4 million, net of deferred tax, against Monmouth and Uniform goodwill and intangibles. This is one accounting entry that's impacted all of our reported results, and I'll talk about this later on. The underlying tax rate has risen this year due to deferred tax adjustments from the prior year. This slide shows some extracts from the income statement. The headlines from this slide are: total sales growth was GBP 17.9 million, of which GBP 17.5 million came from acquisitions. The next slide will be a revenue bridge, which will illustrate the impact of the end of the Atik PCR contracts on our organic growth.
Gross margins include a mix effect, with our acquisitions having slightly lower gross margins on materials than our existing businesses. Excluding this, gross margins increased on a like-like basis. We managed to pass on most of our cost increases to our, to our customers. Adjusted operating profit grew by 6% to GBP 12.8 million, and due to higher interest rates and increased debt levels over the second half of the year, adjusted PBT increased by just under 1% to GBP 11.8 million. The impact of the GBP 3.5 million non-cash impairment charge on our reported results is visible here. As a result of this, reported PBT and reported profit after tax show reductions. The impairment is not deductible for tax purposes, so the fully diluted EPS is particularly impacted.
Adjusted diluted EPS grew by just under 4% to GBP 0.0902, with the FY 2023 effective tax rate increasing to 20.7%, largely due to deferred tax. As a side note, it's worth mentioning that the group's FY 2023 return on average capital employed, using adjusted operating profit and after adjusting for the impairment, is 27.6%. We do now have about GBP 5 million worth of properties which impact upon this percentage. This slide shows how the revenues have moved compared to the equivalent period last year. As I mentioned already, acquisitions contributed GBP 17.5 million in revenues. GBP 11.2 million of this came from FY 2023 acquisitions and GBP 6.3 million from FY 2022 acquisitions, up until the anniversary of acquisition date.
The impact of the one-off Atik business for cameras that go into PCR machines is shown here. As we've said, for some time, Atik's COVID-related business would come to an end, and it has this financial year, with the last delivery in February. Revenues for this business reduced from GBP 10.9 million last year to GBP 8.5 million this financial year, a reduction of GBP 2.4 million. You can see this on the right-hand side. Excluding this, organic growth was GBP 2.8 million, 7.2% in absolute terms, and 6.4% on a constant currency basis. I'll now spend a few minutes talking about Monmouth. Monmouth was acquired in December 2020 for GBP 6.1 million, net of cash, during the pandemic.
At the time, it sold a large volume of biological safety cabinets, which drove its pre-acquisition profits. This sales mix has reverted to a more normal mix, which requires more labor effort for an increased number of installations. Furthermore, Monmouth has moved into a new purpose-built facility in April 2022, the cost of which were higher than anticipated at the time of acquisition. We are annually required to do an accounting exercise, checking the value of goodwill and intangibles is still supported by future cash flows. In the higher interest rate environment, our weighted average cost of capital has increased, and the forecast for Monmouth and Uniform have become more prudent. This has resulted in an impairment of GBP 3.5 million, but it does not impact upon the cash flow of the group.
It's important to note that Monmouth has remained profitable since acquisition, and is forecast to remain profitable in future years. It's also worth noting that if we had accounted for leases under the old way, i.e., before IFRS 16, the impairment would have been about a million pound lower. Business has a new management team, and we are hopeful that Monmouth's performance will improve to the levels that determined the original goodwill valuation. This slide shows the performance of our Digital Imaging segment. The Digital Imaging segment comprises three businesses, Atik Cameras, Synoptics, and Graticules Optics. All our other businesses are in the Sensors & Control segment. As I talked earlier about the Atik PCR cameras, revenues reducing by GBP 2.4 million. If you exclude this, the Digital Imaging segment grew by 16.4%.
If you include the PCR revenue movements, organically, the segment declined by 3%. Encouragingly, the cameras grew by 37% organically outside of the COVID-related sales. This slide illustrates the performance of the Sensors & Control segment. All recent acquisitions have joined the Sensors & Control segment, and as such, GBP 17.5 million of this segment's growth have come from acquisitions. The segment grew organically by 3.8% outside of this. Looking at trading over the period, Sentek, Chell, and Applied Thermal Control all had very strong trading years. Sentek experienced strong demand for its chemical sensors. Chell produced a smart meter calibration device for a large OEM, and Applied Thermal Control experienced very strong demand for its chiller products. Both LTE and FAST joined the group this year, and both have been earnings enhancing to the group, and we're pleased with the progress so far.
Turning to cash. Working capital increased by GBP 4 million over the year. Inventories increased by GBP 2.9 million. Of this, GBP 2.1 million was used to mitigate against component shortages. A further GBP 800,000 related to one business, Scientific Vacuum Systems, who spent much of the year building a sputtering machine for an OEM customer. Customer advances reduced by GBP 3.5 million, due to GBP 2.7 million worth of COVID contract related cash flow at Atik, which will unwound in the period, and GBP 800,000 from a pre-acquisition advance of LTE, which also unwound. Other working capital reduced by GBP 2.5 million. Cash generated by operations was therefore GBP 10.9 million this year.
Interest payments increased to GBP 1 million as a result of the higher debt levels over the second half, as well as in increasing interest rates. SDI moved into the large company tax installment payment scheme this year. We also paid GBP 400,000 of tax in relating to prior period acquisitions. This resulted in the cash tax increasing to GBP 2.1 million. Most of our acquisition consideration was funded from our bank facilities. You can see this more clearly on the next slide. This slide shows the working capital movements I've spoken about and the GBP 21.1 million in acquisition costs. These were funded by an additional GBP 15 million in bank borrowings, GBP 3 million of these borrowings have been repaid by the year-end. Some comments now on our financing position.
The revolving credit bank facility was extended by a year to expire at the beginning of November 2025. It can extend by another year at HSBC's discretion. At the end of the period, the net debt to EBITDA covenant ratio was 0.9x , comfortably inside the ceiling provided by our bank facility. We have GBP 9 million of headroom, plus a GBP 5 million accordion option available to us, again, at HSBC's discretion. The acquisition of LTE Scientific cost GBP 2.8 million net of cash acquired, and this acquisition cost included the property, which is worth GBP 1.7 million. Fraser Anti-Static Techniques required consideration of GBP 12.8 million, net of cash acquired. This included FAST properties for GBP 1.8 million. A further GBP 2.4 million was paid to the Safelab Systems sellers to close that particular transaction.
At the end of the period, we had GBP 1 million in deferred consideration. This relates to the acquisition of SVS and will be assessed over FY 2024. That's all for me. Over to you, Mike.
Okay, got it. Cool. It's me now. I'll just take you through the last pages of the presentation. If we look at LTE, we discussed this, I think it was at the interim stage. It's a pretty similar slide, but I thought I'd have an opportunity to give you an update of where we're at and what LTE is doing. It was acquired, as it said on the calendar, in August 2022. It's a manufacturer of autoclave sterilizers, environmental rooms, endoscope storage cabinets, and laboratory ovens. This year, the main sort of source of revenue and profitability from this business has been the environmental rooms. It's been a lucrative source of sales revenue for us.
We acquired this business with a three-year average PBT of about GBP 300,000 a year, and since acquisition, we're reporting annualized PBT of GBP 600,000. So it's been a fantastic acquisition for us. I think there were some question marks about it in the early days, but to me, it's a very good business in a way. It's profits and revenue, but I'll explain some more as we go through the presentation. We're pleased with the management team, as they are focused on growing the business. We've actually got John Lees, the MD, and Zoe Turner, she's the production director. She's a newbie on the block. Also, I'd like to sort of highlight...
I keep saying about this sort of collaboration and synergies around the group, but, you know, as, as people we commended here, and that is, sort of John Lees is the MD of LTE Scientific, and Roger Guess, MD of Safelab. These are new guys on the block, and they're aiming at driving growth by collaborating with the companies in the group. These include, as I've mentioned before, Monmouth Scientific, Synoptics, and Applied Thermal Control. I keep saying this is a new territory for the group, but as we've because we always actually stated right at the start, what do we look for?
That's autonomous business units or federated structure, same dance thing, but we still want that in place, but what we, we can think we can do, is actually to gain additional revenues through total lab solution packages. I think it's an interesting exercise. Well, we've got our first face-to-face meeting with the group on the 2nd October, which is pretty exciting, I think. The next area really is the acquisition. When we acquired the acquisition, we, we had a 44,000 sq ft of freehold property. You can see it on the diagram in the bottom right-hand corner. It's right stuck in the middle of a housing estate in Greenfield, which is on the outskirts of the Peak District. Very pretty area. We're the only industrial unit within the within the town.
The only other one of our size is the Tesco, that's across the road, that's about it. Myself and the management team, about three weeks ago, I think it was, or thereabout, so that was John and Zoe. We discussed the future for LTE and its facilities. This building's pretty tired, and it's expensive to run. It costs about GBP 200,000 in electricity bills, so. When you compare it against the other 13 businesses or 15 sites, it's bloody expensive. What we're actually doing is we're currently reviewing whether we actually move to a more smaller unit.
We're probably looking at 25,000 ft-30,000 sq ft building, because there is a lot of old engineering units, or kinds of machinery written down, we don't really use anymore, and it will provide a better, and probably more efficient working conditions. This is early stages in discussion, and what will we do with the building? Well, we bought it with a valuation of GBP 1.6 million. It's still there or thereabout. And what we could probably do is, Andrew Hosty, our NED, did mention about change of use. We're actually looking at change of use and also planning, so it could be sold for housing.
This is, like I said, in the early stages of the group, and we're That's for us, that'd be extracting cash from these sort of invest in assets, and then we invest it in projects which will give a higher return than the yield on the property. As an interesting sort of fact, side, sideline is, when we actually were looking to acquire LTE, so was another body, and all they were, were, Was the building. They weren't too concerned about the business. It was just the building and to do the same as we're actually intending to do with the building. If we go on to the next slide, let me have a look. Sorry. There we go. Cool. The same thing with this one, Fraser.
We discussed this in the interim stages. Same old slide, but again, let's give you a little bit of an update of where we're at with, what is it? Seven or eight months on. We acquired that in October 2022. This is the most expensive deal we've, we've had, and you can actually see, how big the debt is. Well, that is mainly due to this, this business here. It's a leading manufacturer of anti-static products, and it's, involved with a variety of businesses, as is listed here, but just to highlight sort of three, the main interests for this business are plastics, packaging, and printing, and that produces a lot of static electricity. What you've actually got is an anti-static product, which is bolted onto the machinery to drive away the anti-static.
It operates again in a freehold site in the middle of Bampton, in Devon, and it's got subsidiaries in Dresden and Shanghai. This is a sort of strange concept. When the housing estate was built, the housing estate was built, and what they actually wanted to do was to bring in some industrial units into the middle of the site. I don't know why, but prior to us sort of acquiring the business, Bob Fraser actually bought all the industrial units. I think in an earlier presentation, you actually saw the buildings. I was trying to get little starter units, but that didn't happen, we've got the whole site.
As with LTE Scientific, I'm not in favor of acquiring properties, as it's a far lower return that we should be able to get on investment, looking at investing in our current and future businesses. We didn't want it to be a deal breaker, so this is an action or Amy and I have got that we need to review going forward. Next page is operations and synergy on this page. What, what we've got here is oh, no, I wanted to backtrack, to tell you the truth. I've just thought of something else I wanted to mention as well, and that was it's in there about sort of the James Cater.
Yeah, sadly, Bruce Clothier, the MD, he decided to retire for personal reasons, a few months ago, which is sort of really sad, really, because he was a really great guy, and I really got on well with him. He did provide us with adequate notice. I think it was about six months notice to find a replacement. We found James Cater. His background is completely different to Bruce's. James is on the sales and marketing front, and this differs to Bruce, who was really involved with production, general manage that sort of thing. There's a gap between the two roles, but, there was no worries there because they've actually got really skilled resources within there to support James on a day-to-day basis.
Really, it's somebody who's gonna have a look at it more than a strategic role going forward. What we actually did plan, and we were saying to all the institutions, was when we were recruiting James, we decided that the best way forward for this new person was for James to recruit him, not for us, and then he can actually bring in his own sort of person for this role. As I mentioned earlier, I'm still keen that the businesses take advantage of our sales and marketing resource in China and use Fraser China as a vehicle to sell their products. Now let's get on to the operations. Sorry about that. Just missed it. Operations.
What we've actually got there is I'd like to give you sort of a few examples, but some of the interesting projects we've actually got or undertaken in the group, just two, really, so we're not too bored of it. Scientific Vacuum Systems, that's a niche company, and it designs and manufactures high-end sputtering deposition equipment. What the hell is that? Well, what it is, is depositing a thin film of material on a substrate. Within this case, as Ami has already mentioned, it's a razor blade. This machine will coat 416,000 razor blades in about 20 minutes, costing the customer GBP 1.8 million, plus a spare parts pack, which is about GBP 200,000. SVS or Scientific Vacuum Systems, has sold a number of these machines over the years.
The first one, I think, started at 90,000, and then it went up to about 250,000 razor blades in about 20, 30 minutes. This is one hell of a beast. The machinery has been factory accepted, tested, so there's no worries on that score, and the customer is absolutely overwhelmed with the machinery. We were due to ship it some months ago, but what has actually happened with the customer is they're pleased with the machinery that they're bringing their R&D department from America over to see it from the U.K., and also hopefully for the next customer. This one's going to Mexico, by the way. It's delayed for a couple of months while they actually bring their the party of the customer over here. Why?
What it has to do is a fair old-site machine is gonna be stripped down and then shipped to Mexico, which is gonna take a couple of months. They'd rather see it work in our environment. By the way, as already mentioned, there is another one totally due, and there's an interest from the customer to actually replace some of the low sort of turnover ones at 90,000 and 200,000 units to be coated in the near future. The one to mention is Applied Thermal Control. I felt Sanford Robert, the MD there, it was a really hard time for them selling chillers. Two industries they're in. They're in life science and engineering.
As we all know, everything's shut down, but he's come out of it very strong, and last year, he had record sales and profits, and this year, he's going really strong. One of the reasons is because the U.S. is onboarding, i.e., it's bringing all its semiconductor manufacturing back into the U.S. from Asia. These semiconductor plants, I think it's Intel, they require cooling, and that's what we're doing. We're providing the chillers for the semiconductor plants. The next sort of category on this schedule is investment. What are we doing with ourselves? Well, some examples of that is, we've just bought a CNC machine for Atik Lisbon, and that was short in product development times.
I think we've actually got one down for Chell as well, in the, in the near, recent future, as it's a lot more cost-efficient and time-saving, actually doing your own CNC or your own machining in-house than actually sending it outside. Another area we've discussed on a number of occasions over the year is the refurbishment of Graticules in Tonbridge. Old 1960s building. We've completely gutted the interior, and it's a really up-to-date, modern chemical etching facility. Two-thirds of the products, as I've mentioned before, is graticules. What we've got there, I think it's five laminar flow cabinets and a clean room.
It's all coming to an end in the next couple of months, and the good thing about it is they actually worked right the way through the refurbishment exercise. It's a bit of hard work, but it's all coming to an end. Last one there is laser etching machines. You probably think it's quite boring, but I think it's quite interesting, and that is the first one we bought was for MPB Industries, then we did Graticules Optics, and that was followed by Scientific Vacuum Systems. Let's give some examples of their use. With MPB, it's precision engraving on glass. With the flow meters, we're actually putting the ventilators through COVID, we're engraving on the side. It's like a test tube. That was used to be undertaken manually.
We've taken that away, and now it's all done through automation. Another example, which is very exciting, is Scientific Vacuum Systems. They've got a very expensive machine there, and what we're actually doing there, there is engraving part numbers on each component, and we had to do that for this machine we've just discussed, this sputtering deposition machinery, and they're very sophisticated machines. Also, what you can actually do with these machines is engrave a QR code or barcode as well. When you take a part off, you can scan it and automatically email it to us or to your supplier, and then they can actually easily determine what the part is and then ship out the part. It's good leading edge technology.
Back onto the word of the day, synergies. I'm very enthusiastic about this and what action are we seeing within this? Just a quick slurp. About October last year, we decided to put together a group marketing meeting. Marketing these days has changed fundamentally when I first joined this business. It was hard copy-bound catalogs. These days, it's using social media, which my daughter's involved in, so it's using Twitter, LinkedIn, et cetera. Different way of actually marketing, completely different. What you're trying to do is to drag people to your website. What we decided to do, first of all, we had a Zoom call last October, and then this year, a couple of months ago, we organized a meeting, face-to-face meeting in Weston-super-Mare at Roger's place, Safelab.
It went down very well. I think we had about nine of the marketing people, all young kids there. I think it's the most nervous I've ever been on a meeting, but it went very well. What they were discussing is ChatGPT, as you've heard on the news, people are using that these days. We're using YouTube videos as well. I think one of the good ones these days for us is Atik Cameras. All these are done in-house, so we don't use professional people to do it, and that's how YouTube works. I don't know what other exercises we've actually got. I think they're, they're the main ones. Oh, yeah, also as well, what we were discussing is, especially with the lab group, there's a big exhibition, called Analytica.
It's in Munich, to say, should we actually combine all the, all the, business units into one stand? There are many stands, which is like when you go to the NEC with specialist areas, but when I went last year, you get people like AMETEK, they're all under one roof, so it may be worthwhile looking at that going forward. The other area is group tenders. This is what I've been harping about right the way through the presentation. What we have, as you can actually see, is an opportunity to tender for. On Canary Wharf. There's a science lab, just like Cambridge Science Park, just down the road from where I am today, being put up on Canary Wharf.
I didn't realize it this week, HSBC and a lot of the financial institutions are moving out of Canary Wharf, they need to replace it with something. They're looking at planning permission, I think, was in place two weeks ago. What actually happened, we've actually found out through Roger Guess of Safelab, who the building contractor is, which is Kier Construction. He knows the procurement director. I suppose it's who you know in this world. What we actually did, we put together this flyer, you can actually see on this page, with all the business units on there. He had a meeting, so he was sharing it, and we'll see where it goes. I think it's two years away, but it's something we can actually focus on.
We've actually got 14 business units, 17 acquisitions. It's an area where hopefully we can actually sort of gain additional revenue streams. It's all right, my screen's just died. The last point is, we've been running this for sort of three or four years now, is group strategy sessions. That's in Colloid Mill. It's in Congle ton, if you know Cambridge at all. We usually hire that out for two days. What we're actually doing is just like Ami and I doing this investor presentation to you chaps, these guys will do a presentation to all the subsidiary, directors and senior managers, myself, Ami, and the non-exec directors. Then there's Q&A from the floor. It worked very well. We stopped it during COVID.
It started again last year, then we're gonna go introduce it again. I think it's in November this year. It works very well. Like, we actually said, the synergies work in some instances, but it's good when people get in a bar and have a drink and talk about business. You know, a lot of founders have got a lot of knowledge about business and running businesses, so it's worthwhile, you know, people actually sitting down and listening to these guys. Let me flick onto the next page. What have we got here? Oh, yeah, growth drivers. You've seen this on many occasions on these presentations, so I won't spend too long on it. Yeah, this remains unchanged. Organic growth, it's still going there. We're still getting organic growth.
We still expect organic growth to be what it's actually said here, organic growth to be 5%-10%. Yeah, I always like it to be in the high single digits. That's my aim. M&A, no change really. We're still doing on average, probably two or three business businesses a year. The last one was Fraser in October, so we did two that year. I'm sure we'll do two or three in this financial year. We acquired 17 businesses since February 2014. We've merged a number of these businesses, so we've actually got 14 operating units, we've got a very strong pipeline, we've got a number of strong opportunities that I hope we will be able to crystallize in the short term for the group.
I'm afraid it is the last page of this presentation. Summary outlook. Just to sort of repeat what I said earlier on, it's been a challenging year in comparison to previous years. I'm disappointed that I was unable. I've actually said this for many years, previously as a Finance Director, but now as a CEO. My personal goal was to deliver shareholder value, and it's difficult for me. I'm actually quite disappointed for this year. We still continue to sort of grow organically and through M&A. Trading for the first couple of months has been pretty good for us. We've got a strong pipeline of acquisitions that I feel pretty optimistic sort of going forward I'm afraid that's it from me.
Perfect. Michael, Ami, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab, which is situated on the top right corner of the screen. Just while the company take a few moments for you those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the Q&A, can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation, and we also received a number of pre-submitted questions. Ami, at this point, if I could just hand over to you to chair the Q&A, that'd be great. Then I'll pick up again at the end.
Great. Okay, first question: Do SDI Group management look for high growth opportunities amongst the existing SDI Group constituent companies? Is it not the case that there's a possibility that there is a better growth opportunity for the group amongst existing group than elsewhere? In other words, do organic groceries compete with acquisition opportunities for the free cash flow available to the group? The, the answer is, Mike, you're on mute. The, the answer is that no, there's no competition here. We, we look at every opportunity on it on an individual merit. There's no competition in that way between acquisitions, and existing group. If there are opportunities to invest in existing companies, we will do that, and we have done to generate organic growth. We look at each opportunity on, on an individual basis.
Yeah, I just.
Exactly.
Yeah, yeah, good point. There, there's sort of two areas where, where they have an opportunity to shop for investment. That is one at the budgeting stage and then one at the strategy stage. We're looking at short term and medium term, and we'd never sort of turn it away because they're the ones who are running those businesses, and they know more about it than Ami and I. It never it's never happened.
That answers the next question as well, is how do SDI Management apportion reinvestment in existing group companies? As Mike says, it's through the budgeting process. We, we work through each investment proposal. Were you surprised at the market reaction when you announced at the end of the one-off pandemic-related orders, given you had advised that there were one-offs? Mike?
Too bloody true, I was. I was shocked, to tell you the truth, on this, on this aspect. Yeah, I know in May, we actually said about the trading update, but this time around, I was really shocked, to tell you the truth. Also, Ami and I had a really busy time in the city, and it, it wasn't sort of negative. They actually understood what was actually going on with us. You know, at the end of the day, we're, we're still generating plenty of cash. It's just that, through accounting standards, we had to take this write down, but at the end of the day, we're, we're still generating cash. The model hasn't changed. It's still buy and build.
We invest for organic growth, so to me, it's still a good, strong business.
What are the monthly metrics you look at for all subsidiaries? Well, I, I look at sales versus budget, wages versus budget, overheads versus budget. We look at debt to days, credit to days, stock day, and stock days, level of stock, gross margins. There's multitudes of things that Mike and I look at every month for each company in the group. Anything? You got nothing to add there, Mike?
No, you said the list.
Yeah. As you get bigger, is it becoming more difficult to find acquisitions that can be provide the returns that you, you've achieved in the past?
Not at the moment. I think the, the problem I actually got at the moment is delays, as I've actually said in the city. You know, I think it's October was the last time we, we did a deal. I'm sure we should have done one, in my view, probably May time, but it's just, just drags out. You do the DD, you shake hands, and then you hand it over to lawyers, and what happens? It sits there in a box somewhere. I'm still confident, we're gonna do sort of a few this year. Ami's got the cash there to do it, I can't see any reason why we shouldn't. The multiples haven't changed at all.
We're still looking at between GBP 4 and GBP 6 there on goodwill. I can't see any reason why not. Over to you, Ami.
Okay. As you no longer expect any more orders from the PCR OEM customer, how do you expect earnings and free cash flow to trend over the next several years? I know you have said that you aim for single-digit organic revenue growth. I'll answer, I'll answer this one.
You got it, Ami.
Yeah, I'll answer this one. Yeah, we do still consider single-digit organic growth. Earnings will continue to grow as a result. Clearly, interest rates are higher, so as long as we have debt, then those interest charges will be a factor. Tax rate is increasing to 25% for everybody, so that, that is a factor for everyone. Earnings, we should increase. Free cash flow, the sort of working capital unwind that you saw this year will, will not happen again. It's not likely to. Free cash flow will improve over the next 24 and beyond. Yeah, we do expect it to trend upwards. Will you consider share buybacks anytime soon? The answer is probably not.
The best use of our cash currently, I think, is to buy companies, acquisitions, and that generate greater shareholder return. Buybacks are, you know, clearly, we do consider them, but, at this point, we have no plans to do so.
I agree, Ami. Yep.
When you look at large industrial conglomerates like AMETEK and Danaher that run a decentralized model while also implementing a system of operational excellence, do you envision SDIs following that sort of playbook? That's a tricky one. I mean, part of the reason I'm here is help us grow, really, and obviously, I've been in larger companies, decentralized companies, and some of the board have as well, alongside Mike. We, we all sort of see the growth path, and we'll expand our headcount and all, all that sort of stuff in line with. It's up to be at the right time for the organization. We will develop our organizational structure as we go along, as we get bigger. Mike, you have anything to add?
No, I just, just a couple of points on that. I support Ami on that. If you look at, I think the classic model is Halma. Halma were like us in the 1980s, and as they grew, and people were doing, three jobs for one, then they had to increase the headcount and the structure. I'm just concerned that you actually increase the structure before the revenues come in stream. We're not doing that anyway. Yeah, I agree, and support Ami on that.
Hi, Mike, please help us understand better your thinking behind the company's acquisitions over the last two to three years. Some of them don't look cheap optically, i.e., high enterprise value, EBIT multiples. I guess that's because you expect earnings to improve significantly near term. The Monmouth case makes one question the quality of these acquisitions. Grateful if you could share your thoughts on your acquisition criteria going forward.
Okay, twoc parts to that. First of all, the acquisitions. I think what you need to do is, I do for the board, is actually separate the, the cash, total cash consideration. What we're doing is, first of all, we split it into two or thre. First of all, part 1 is goodwill, what we're paying for goodwill, and that's usually a multiple of, of profits, profit before tax. We take a three-year historical average. Sometimes it could be an earn-out, but it's always a very short earn-out, and multiply that by the multiple. It's four, five, six . The highest we've ever paid was at Fraser at 5.8x, and if you go down, further down, it was 5.5x, 5.6x the Safelab.
Our lowest was at four, so that's what we're paying. On top of that, we pay for net assets. We never pay for the cash. We hand the cash back for that. The problem is, is in reef acquisitions, the net assets have been very high because we're buying property, and that's where it skews it somewhat. In some instances, you don't actually see that in the broker's note, but I've actually said to the brokers... This is what the people were discussing this week at the investor presentation. It's two-fold for us. It's the amount of net assets and the goodwill, so it skews it. If you actually look at it, it's a total sum. Well, go Monmouth. What have we got for Monmouth? Is it the Monmouth-
Well, quality of these acquisitions, if, it just makes one question that is the.
Yeah, I think Monmouth, and people said, "What's your thoughts on Monmouth?" Well, well, we bought it at a three-year historical, so it was making GBP 500,000 for a couple of years, and then it had a really bumpy year with COVID, and it made GBP 1.6 million. You know, three average was GBP 700,000-GBP 800,000, which was fair. The stumbling block was, was the property. They had six or seven properties scattered around Bridgwater. They'd already got planning in place for, for this, for this property, and it... I think it just got out of hand on the, on the fit out for it. Did we get it wrong? I don't think we got it wrong. We might have probably got it wrong on a multiple of five.
It could have been 4-4.5. The numbers are not that big, but we. Nobody can look in a crystal ball to say what's gonna hap- after COVID, you know, because at the end of the day, they were shipping 10,000-15,000, 10-15 biological safety cabinets out to hospitals, trusts, et cetera. It only needs one or two service engineers to commission. That, the, that model's changed now. We ship in two or three and a variation of other products. Your overhead base goes up, so your service engineers are, you need more service engineers. One of the biggest problems we've actually got is finding service engineers. We've actually got service departments in a lot of the businesses. You know, one of the questions asked is, do we share those?
You know, a good example is LTE Scientific, Safelab, and I just mentioned Monmouth, have all got big engineering teams with vans. Do we share it? I, I don't know. It's something we're talking about at the moment, so this is all part of this sort of collaboration we're talking about, so it's hot off the press, really.
Can you confirm whether you are seeing any changes in valuation expectations from vendors in the current market environment? Are you still aiming to get 4x-6x?
Yep. No, no change.
Okay, next one. In the past, you've said that the target is to have mid-high single-digit organic growth. 2023 was lower, even excluding one-off from Atik Cameras. What is your current view on the organic growth going forward? Well, actually, it is, if you exclude the Atik Cameras revenues, then the organic growth was 6.4%, which is within the, the sort of range that we talked about.
Yeah, before that. Yeah.
I think w e're quite happy that the year was actually, you know, within our line of what we expect., I'm not sure quite what you meant by this one. So this is a question about impairment. Are there any other hidden, you know, headroom issues on other companies? If you go, can I guide you to note eight of the press release, and that talks about headroom and other companies? It is there in the press release, you don't have to wait to the annual report to have a look at that. Next one is interesting one. Operating expenses, excluding impairment, are up an eye-watering 51% year-over-year versus 2022. It's a much larger increase, and revenue is up 36%. It is, but it includes acquisitions, so that's the bit, both 2022 and from FY 2022 and FY 2023. That's all in there.
You got annualized 12 months of 2022 against the shorter stub period in the prior period, and you got the full half year or whatever for the acquisitions. Yes, they have gone up, no question.
Lots of reasons. Trade shows have restarted, traveling has restarted, audit fees are up, salary, inflation is there. We, we haven't been able to avoid it. We have put increases up on it for our payroll, for our lower-paid employees. Clearly, we're not immune to the sort of inflation, well, inflation out there. Yes, it has increased, and, so, no, your point is well made. Anything to add to that, Mike?
No, none at all.
Okay. Bank debt sat at GBP 16 million at the year-end. In the absence of further acquisitions, how fast do you expect that bank debt to be repaid? Circa 2, 2.5 years is probably, you know, depending on how quick we can get the cash in. Circa two years, I would say. Is it possible to explain the impairment of GBP 3.5 million in relation to the profitability of those companies? I think you have done, we may have done. The cost of the property cost was certainly about GBP 300,000-GBP 400,000 higher than we anticipated. And that's... You bought it at multiple, for multiple, what was it, Mike? It was-
Four times.
Four times, about.
Five, five times.
Yeah, five times. it's about GBP a few hundred thousand off the profitability of those two companies, but it's still These are still profitable companies. Monmouth, the CGU, is profitable. Will the increased interest rates influence your decision to fund acquisitions through your debt? In other words, is there a scenario where it's better to pay off debt in the current environment?
Good question.
Hmm, it is a good question. Clearly, the accretion on acquisitions is less with the higher interest rates. There's no, no doubt about that. You have a higher tax rate as well. We don't buy businesses for one to two years. You buy them for three to five years beyond. Our model is to increase profitability of these companies. I don't think we see any change. Yeah, there is a scenario where it's better to pay off debt. I'm not sure we're there yet, but I don't think we are. Do you have anything to add, Mike?
No, not at all. But that's what you've been saying all the way through the sort of last few days. Yeah.
Yeah, last few days most investors. Is the new management team at Monmouth hired from within the company or from outside the SDI Group? They're from outside the SDI Group.
Out... Well, gray area on that for, for the, the Managing Director, Julian Mussett, he's ex-Merck, but would already include the recruitment of the sales director.
Yeah.
On a, on a short-term MD role. He's now a consultant. He, he decided he didn't want to stay on for, for that long. He's still around helping us, which is a, he's a nice guy. Kim Lock, she is the finance director, but what she also does is operations. What we've actually got within Monmouth now is a similar sort of management structure to the all the other 13 subs as well. You've got one or two directors and then senior managers. Before, it had an MD and three directors, three very expensive directors. We've actually sort of phoned that back now, and it seems to be working. What we're actually trying to do with Julian, as it's new, is again, just a collaboration.
We've had a couple of subs and MDs going down there, ready to look at fabrication at Uniform, and they've stopped in at Monmouth. What they've actually found is they've got a fantastic sort of portfolio of products, which is ideal for, for overseas, for the overseas market. They've got quite a limited distributor base. The likes of LTE, Applied Thermal Control, and also Synoptics, have got a massive distributor base. We're trying to sort of making sure he taps into that base, because there's no point in inventing the wheel when it's already there. That's what we're trying to do with it. I went out on a bit of a limb on this, but I thought I'd cover it. That's okay.
How would you calculate the total addressable market for SDI? That's actually an impossible question at a group level because of our business model. We have 14 companies, most of whom are in different markets, different segments, other, other than lab products. Outside of lab products, you've got, you know, each business has its own total addressable market, which is completely different, independent of each other. It's not a question with our business model that we can actually answer. How much of the revenues are recurring and non-recurring in each division?
I've worked this out when you were talking.
Aha! Very good. Very good.
Cool, eh?
Um-
I haven't done it by division, I've done it in to- in total really. And it's roughly what we thought, about 20%, but I'll just highlight some areas. Virtually all the businesses actually sell spares, but the service side, the book as a service, I've already mentioned, is LTE, Safelab, Monmouth, Astles. It used to be 50% of their revenue was, was, service. I think it's gone back that way now with Astles. SVS, they sell a, a batch of spares, I've just mentioned with the, with the razor machine and Applied Thermal Control. They're the ones who offer spares, which is about GBP 6 million. Then you've actually got businesses which is solely recurring revenue streams, which is Sentek, Sensors, and Graticules, and that is about GBP 7.5 million.
In total, it's about GBP 13.5 million. You're looking at 20%-21% off the top of my head. It's not far off, I don't think. There you go, Ami.
Very good. The next question is. The question is, the net debt, we refer to a GBP 13.3 million, the balance sheet shows a figure of GBP 22.7 million. Difference is lease liabilities. We don't classify lease liabilities as debt in the same way. Most banks don't include IFRS 16 lease liabilities within their debt calculation. The bank, our banks will look at net debt without lease liabilities. That's the difference. How do you reduce the risk from acquisitions failing? That's a very good question.
Bugger me. Bugger me.
It's, due diligence, usually.
Yeah, if we do due diligence, we still don't know what's underneath it. I, I think the classic one is Monmouth. We didn't know that COVID was going to end. That's the biggest one. We've, we've had another problem, and that was issue, that was with Thermal Exchange. We rectify it. For us, or my view on it is when we look at acquisitions, is, is to make sure that one is, as Ami's rightly said, is DD, not overextend. If we overextend and get too big an acquisition, then we're in the limelight. At least if we actually do nice niche ones between GBP 500,000 and GBP 1 million profit, at least you've got some bandwidth to get it out of jail on, really.
If you actually really extend yourself, you, you're knackered. A good one we looked at was a really good acquisition. It was turning over, you know, GBP 20 million-GBP 30 million. Fantastic acquisition, the only customer base was the NHS. Ami and I discussed this and said, "No, you know, if that fails, we're knackered.
I mean, we also introduced people, improved quality of some of the people. As necessary, we might get a qualified accountant, perhaps, to be the financial controller. You know, you upskill some people as well. There's various different things you can do.
We do mention it in the annual report as well as a key, as a key risk. Re-share repurchasing, I think we've said that we're not at this moment looking to do.
Can you explain management M&A process, for example, criteria that need to be met, the number of targets, valuation? We haven't got long enough, I don't think. Management your DD process.
Okay, well, the DD process is. I've just sent it over to one of the institutional investors who might have interest. It's like a 50-page document, so what you're actually looking at is a constitution, personnel, property, intent, patents, litigation, IT. You're looking at so many different, so much information with it, within the, within the potential acquisition. It's not that difficult. It's probably a week, two weeks work, and it's a good way of actually speaking to the staff. In a lot of occasions, we know that the seller has already informed the staff, so it's actually working with these guys to get under the table. Number of targets currently, I think we've got six or seven at the moment. We've got a couple in the U.S. Valuations, well, we've already discussed that already.
You know, we're looking at between four and six . The U.S., somebody actually mentioned about the U.S., it's a little bit higher. They're looking at five to seven We're all, we're all on the sort of ballpark. We're not seeing anything sort of above that, really.
Is the GBP 9 million of headroom available sufficient, sufficient for meeting for M&A? Yes, the answer is in the short to medium, short term, yeah, there is. Management's process for dealing with slow inventory, we review it quite closely on a monthly basis and quarterly basis, and we put provisions in for slow-moving. We have reports from each subsidiary. What's growth like in the April-August period? Well, we've been in line with budget for April, and sorry for May, June. It's kind of what we said in our report. In your federated business model, are there any costs, not benefits, of synergies? Interesting.
No, not at the moment.
Not really. Not really.
Not really, because everybody's being paid by their subsidiary, we're not driving any additional costs through there, through this. The fly cost is virtually nothing, not really. You know, I think the, the, the pleasing thing for me is now everybody, all those five companies have actually bought into it. They understand it, now they want to talk about it, it's good for us. I think the major area for me is how you split the profit, because all these subsidiaries are bonus related on their profits, making sure that the profits are allocated correctly if you go into a tender. That's the only question I have for the subsidiaries, that's it.
Could, yeah, could you elaborate on the COVID-related profitability of the revenue recognized in 2023 of GBP 8.5 million? Was it in line with profitability within the division? Yeah, it's okay gross margins of the division. Buybacks, no. We talked about... For Mike, for better recurring revenue, would you consider acquiring maintenance, service, or software-orientated businesses, please?
Well, software, I'm a bit apprehensive about. That's what my wife's involved in, so I don't really understand it. Service, maybe, but as I already mentioned, we have got probably GBP 5 million-GBP 6 million worth of service, and what we're trying to do is, is expand that internally, so it's not buying. I think, the answer, if you want a yes or no, is no, because it's cheap for me to do it internally.
What are the drivers for the reduced forecast operating margins going forward? It's a mixed effect. Clearly, the Atik OEM had super profits really at, and that's, that's operating leverage there, where you've lost the sales at the gross margin. It's re-replaced by acquisitions that have a lower net margin, and that's the driver. We suggest that the pre-COVID margins between 15% and 20% seem a bit of a sensible range for this group. Would you consider hedging your interest paid rates? Yes, we would. It's always on the table. Valuation, what are the EBIT and EPS forecasts next year? Well, I'd suggest you have a look at.
Our broker note.
The broker notes, and there's Progressive notes. How do you source ideas for your acquisition pipeline? Do you get ideas also from managers of the divisions?
Yep. There's a number of routes for that. We have a third party, a couple of third-party people who are on commission only. For me, as soon as you acquire the business, we do a presentation to the staff, and one of the questions top of the list is: Who should I acquire next? We've actually been acquiring businesses through that. A number of routes, we get them. I've had sort of like four or five emails today from different corporate people about selling businesses, not just here, in Europe as well. They come from a lot of areas because we're actually well known as an acquirer.
Okay, I think, well, there's quite a few q- questions that we haven't quite managed to get to. I think we're nearly at the end of the hour. If we've got time, then what are the risk of further impairments, given the Monmouth experience? That one, it, it's, it's always... You, you have to do this every 12 months, and it depends on the, the weighted average cost of capital in 12 months' time, how performance is during the course of the year. There's lots of variables in this, and it's a mathematical calculation, really. I can't... All I can guide you is to have a look at the annual report and see whether, we t- we do give some guidance where there's less headroom.
Notate of the financials, of the press release gives you some, some color, and then the annual report will be coming out within a couple of weeks.
Perfect. Michael, Ami, thank you very much for that.
Thank you.
I think you've addressed as questions as you can from investors. Of course, the company will review all the questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors, provide you with their feedback, which is particularly important to the company. Michael, could I just ask you for a few closing comments?
Yeah, just a couple of sentences. Yeah, I, I'm pleased that, that, we're, we're finally businesses collaborating together. They're not just sort of standalone businesses. Synergy is a wonderful word, but I think it's coming together. I'll keep saying that right through, through my presentation. We'll continue to invest in companies to drive organic growth within the businesses we got, and we'll also evaluate businesses as they become available to bring into the SDI Group. I think that's it. Thank you. Thank you for your time.
Perfect. Michael, Ami, thank you once again for updating investors today. Could I please ask investors not to close this session, as you'll now be automatically redirected to provide your feedback, in order that the management team can better understand your views and expectations. This will only take a few moments to complete and should be greatly valued by the company. On behalf of the management team of SDI Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.
Thank you.
Thank you.