Chief Executive Officer's Report for the year ended 30 April 2024

A strategy for sustainable growth

Overview

I am pleased to report the Group delivered these results despite facing headwinds in H1, including the unwinding of COVID-19 related orders, destocking by key customers and a high cost of debt. This performance is attributable to a strong second half of the year, fuelled by recent investments in our commercial and operational capabilities.

Encouragingly, our actions, coupled with positive market dynamics in most segments supported respectable profitability. Notably, several portfolio businesses achieved excellent levels of revenue and profitability, while some others exceeded expectations by year end. The Group remains committed to delivering and developing products that meet the evolving needs of our target markets. We have effectively implemented price adjustments to reflect supply chain cost increases, and many Group businesses are successfully transitioning from a reactive to a proactive sales culture.

Financial performance

In 2024, the Group delivered revenues of £65.8m (FY23: £67.5m), reflecting five-year CAGR sales growth of 28%. The mid-year acquisition of Peak Sensors contributed £1m in sales. Adjusted operating profit reached £9.6m (FY23: £12.8m), representing five-year CAGR profit growth of 20.1%. This aligns with guidance provided at the half-year mark. Gross margins, excluding labour costs, remained relatively stable at 63.1% (FY23: 63.3%), bolstered by the improved performance of higher-margin businesses like Astles and Chell. The second half of the year saw the successful implementation of planned operational and commercial initiatives, leading to enhanced sales, profitability, and cash generation. Cash generated from operations amounted to £9.4m (FY23: £10.9m). Acquisition-related expenditure totalled £3.4m (£2.4m for the acquisition of Peak Sensors, and a further £1m in relation to prior period deferred consideration), with net debt remaining relatively unchanged from the beginning of the year.

Operational review

As noted on page 9, we re-segmented our businesses as a result of our recent strategic review after the year end. Commentaries on the year-on-year movements for our old segment structure are provided in the CFO report. My commentary below focusses on the new structure.

Our laboratory equipment businesses (Monmouth Scientific, Safelab Systems, Synoptics, and LTE Scientific) achieved growth of 7.8% to £26.8m, demonstrating continued adoption of our niche products across various sectors. Market demand for Monmouth Scientific's modular clean rooms experienced strong growth within this segment.

Businesses in the industrial and scientific sensors sector (MPB Industries, Sentek, Peak Sensors, Chell Instruments, and Astles Control Systems) maintained relative consistency, achieving growth of 2.0% to £16.1m. This growth was partially driven by Peak Sensors' contribution after acquisition during the latter half of the year and bolstered by increasingly strong demand for Chell's sensors, systems and services.

The industrial and scientific products sector (Fraser Anti-Static Technologies ('FAST'), Atik Cameras, Applied Thermal Control, Graticules Optics, and Scientific Vacuum Systems) experienced a sales decline of 14.8% to £22.9m. This decline was primarily attributed to a sharp drop in Atik's revenue following the completion of a COVID-19 related contract for PCR cameras. Atik also faced significant destocking from a major customer in the first half of the year, though they managed a substantial recovery in the second half. FAST encountered geographical slowdowns in two key industrial markets, however, strong demand for equipment from Scientific Vacuum Systems and Applied Thermal Control partially offset these sales reductions.

We have made good progress in actively fostering synergies between portfolio companies operating in overlapping markets and/or offering similar products. Safelab and Monmouth have collaborated on successful joint tenders, including a notable £1.6m project. Similarly, LTE has participated in other collaborative bids. Monmouth and FAST have embarked on joint marketing initiatives to promote fume cabinets and cleanrooms with anti-static capabilities.

Additionally, the Group is capitalising on procurement advantages across its supply chain, launching joint digital campaigns, and organising combined sales conferences. These proactive initiatives will deliver enhanced organic growth across the Group.

The Group remains committed to supporting the long-term sustainability of its portfolio businesses through continued investment in research and development ('R&D') and the renewal or addition of a number of leaseholds. R&D expenditure amounted to £1.8m, with significant investments made in next-generation products at Synoptics (Synbiosis and AutoCol), FAST (X-series bars), Chell (pressure scanner products including the DAQ range expansion), and ATIK (ChemiMOS and CMOS cameras). These investments are strategically aligned with our customers' current and future needs, aiming to solidify the Group's competitive edge within the market. Additionally, lease renewals and a new leasehold unit totalled £0.75m, which will not only increase production capacity but also enhance efficiency, staff well-being, product quality, and image.

As a result of the continued investment in people for future growth, and a conservative view on certain sales opportunities, adjusted EBIT guidance for FY25 has been revised*. Following conclusion of the strategic review, the Group is now well placed for the future and expects longer-term organic growth to be in the range of 5-8%.

*Analysts from our Broker, Cavendish Capital Markets Limited, and from Progressive Equity Research regularly provide research on the Company, accessible from our website, and the Group considers the average of their forecasts to represent market expectations. Prior to this announcement, FY25 expectations were Revenue of £69.7m, Adjusted Operating Profit of £11.5m and Adjusted Profit Before Tax of £10.2m.

Strategy

In 2024, the Group implemented a new strategic framework to ensure sustainable success in a dynamic market environment. This is focused on two key areas that are closely aligned with our long-term growth objectives - growth initiatives for the portfolio businesses (organic growth) and value-enhancing acquisitions (inorganic growth).

Our organic growth strategy prioritises continuous product innovation, operational capability and capacity, and expansion into new geographic markets. As our customer and product base grows, we aim to increase repeat and recurring revenue streams through service, support, and upgrades and replacements.

The acquisition strategy leverages our management expertise, financial discipline, and stringent criteria to identify targets that accelerate overall growth and diversification. This approach strengthens our presence in existing markets and positions us for entry into strategically aligned new ones.

The strategy was borne out of the following Group motivators:

1.   Growth through Acquisitions and Internal Development (Buy and Build) - Focus on achieving both sustainable organic and inorganic growth.

2.   Strong Cash Flow Generation - Essential to facilitate our Buy and Build strategy.

3.   Strategic Acquisitions - Prioritising impactful M&A that maximise value creation for the Group, where possible, creating a "double bump" impact with synergistic benefits.

4.   Transparent Shareholder Engagement - We are committed to delivering on our strategy and demonstrating the value proposition to our shareholders.

Acquisitions and divestments

On 3 November 2023, the Group strategically expanded its product portfolio and market reach through a £2.4m acquisition of Peak Sensors, a leading UK manufacturer of temperature sensors. Peak Sensors specialises in a variety of standard and custom-designed thermocouples and resistance thermometers used in diverse industries such as glass, ceramics, waste-to-energy incineration, cement production, and industrial ovens. Located in Chesterfield, UK, Peak Sensors operates from a 5,300 sq. ft facility and employs 14 people. Peak Sensors fits within our acquisition criteria complementing the Group's existing sensor businesses and broadens its presence into new applied markets. Peak Sensors will be operated separately from our existing businesses and we warmly welcome our new colleagues to the SDI Group.

The Group financed the acquisition of Peak Sensors through a combination of existing cash resources and a revolving credit facility with HSBC. The acquired company generated £1m in revenue in 2024 and has enhanced earnings for the Group.

In line with our focus on maximising synergies in operations, revenue, profitability, and markets, we strategically divested Uniform Engineering (acquired by the Group in January 2021) in February 2024.

Acquisitions continue to form a key part of the long-term strategic development of the Group and we operate a continuous process to identify and execute acquisition opportunities. We are currently evaluating a number of transactions with the potential to conclude one or more in the new financial year. The longer-term pipeline is also positive and we will continue to deliver further value-enhancing acquisitions in accordance with our inorganic strategy.

Summary

I am pleased to report these results, delivered despite a challenging macroeconomic backdrop. Our refined strategy to drive organic growth across our portfolio businesses, alongside our proven track record of delivering value-enhancing acquisitions, will strengthen the SDI proposition. With our refreshed management team in place, our strategic review complete and our focus on three distinct and complementary global end-markets, we have in place a stable business from which we are well placed to deliver sustainable growth from a stable base and create value for our stakeholders.

Stephen Brown

Chief Executive Officer

Date: 30^th July 2024

New segment structure

The current segment structure, comprising Digital Imaging and Sensors and Control, has been in place since 2019. After a strategic review in 2024, the Board considers this segment structure is no longer appropriate for future needs. The Group has therefore decided to create the following three segments with effect from the start of FY25:

·      Laboratory Equipment, comprising Safelab Systems, Monmouth Scientific, LTE Scientific and Synoptics;

·      Industrial & Scientific Sensors, comprising Chell Instruments, Astles Control Systems, Sentek, MPB Industries and Peak Sensors; and

·      Industrial & Scientific Products, comprising Atik Cameras, Fraser Anti-Static Techniques, Applied Thermal Controls, Graticules Optics and Scientific Vacuum Systems.

This new segment structure is expected to encourage synergies between Group companies and support portfolio adhesion. The Group will assign existing resources to drive these strategic benefits.

It is expected that the structure will advance the Group strategy by supporting businesses growth and profitability in route to market, enhanced value proposition and exploit value creation opportunities through the sharing and rebalancing of resource, joined up marketing activities and operational economies of scale.

Chief Financial Officer's Report for the year ended 30 April 2024

The financial resources to support investment in sustainable growth

Revenue and Profits

SDI Group revenues reduced by 2.7%, from £67.6m in FY23 to £65.8m in FY24. The two acquisitions in the prior year, Fraser Anti-Static Techniques and LTE Scientific (prior to the acquisition anniversaries), together with the new acquisition in FY24, Peak Sensors, contributed £7.3m (10.8%) in additional turnover. Uniform Engineering, which was disposed of at the end of February 2024, contributed £0.5m in revenues over the period.

From the outset of the COVID-19 pandemic in FY21, our Atik Cameras business received substantial orders from one customer for cameras designed into an OEM's PCR equipment. FY23 revenues included £8.5m in relation to this 'one-off' business. Excluding this, the organic revenue decline was 0.5% on a constant currency basis; 0.7% in absolute terms (£0.4m). If the COVID-19 related revenue is included in the comparatives, the organic decline was 13.2%.

Gross profit (on materials only) reduced to £41.6m (FY23: £42.8m) whilst gross margin broadly held at 63.1% (FY23: 63.3%). On a like-for-like basis (including prior year acquisitions from the anniversary of the acquisition), gross margins increased compared to FY23, which was pleasing. Our overheads have reduced on a like for like basis as we looked to control our cost base.

Adjusted operating profit reduced to £9.6m (FY23: £12.8m) being operating profit before share-based payments, acquisition costs, loss on disposal of subsidiary undertakings, reorganisation costs, the impairment charge (in FY23 only) and amortisation of acquired intangible assets, a reduction of 25%. This was caused by the loss of £5.6m in gross margin from the COVID-19 related contract (as noted above) which ended in FY23. 

Looking at segment performance, on a reported basis, the Digital Imaging segment was impacted by the non-recurring COVID-19 related revenues and the associated lost gross profit. Atik's largest OEM customer also destocked over the period, reducing revenues by £0.7m. Revenues therefore declined from £20.9m to £11m in FY24 and adjusted operating profit reduced from £6.9m to £2m.

The Sensors and Control segment grew 17.6% from £46.7m to £54.9m. Organic growth was 2%, and the remaining 15.6% growth was from the FY23 acquisitions and the disposal in FY24. Adjusted operating profit grew 17.5% to £9.4m.

There are eleven companies in the Sensors and Control segment and several have made good contributions to the Group this year. Scientific Vacuum Systems ('SVS') is a lumpy revenue business: this year it had a strong sales performance (compared to last year) as it delivered a large project in October and started two others in the second half of the year. Chell Instruments performed well with strong DAQ sales. Safelab Systems delivered several school projects. Monmouth Scientific had a strong second half as it delivered a number of clean rooms. Astles Control Systems and Sentek also delivered revenues and profits which were higher than expected.

Reported operating profit increased to £7.3m (FY23: £6.8m), with the comparatives including a gross impairment charge of £3.5m against the Monmouth and Uniform CGU (see note 11).

Revised segmentation

As noted on page 9, we re-segmented our businesses after the year end as follows:

·      Laboratory Equipment, comprising Safelab Systems, Monmouth Scientific, LTE Scientific and Synoptics;

·      Industrial & Scientific Sensors, comprising Chell Instruments, Astles Control Systems, Sentek, MPB Industries and Peak Sensors; and

·      Industrial & Scientific Products, comprising Atik Cameras, Fraser Anti-Static Techniques, Applied Thermal Controls, Graticules Optics and Scientific Vacuum Systems.

If this segmentation structure had been in place in FY24, the results of the segments would have been as follows:

Re-organisation costs

During the period, the Group incurred £0.3m in one-off costs relating to the departure of SDI's previous CEO. This has been included as a non-recurring item.

Divestment of subsidiary undertaking

On 29th February 2024, SDI divested Uniform Engineering for a nominal sum. This divestment resulted in a loss of £0.2m, which has been classified as a non-recurring item. Uniform recorded a small loss over the ten months to February 2024. 

Intangible Assets (excluding R&D)

Intangible assets increased by a net £0.7m from £41.3m to £42.0m at the end of FY24. Gross intangible assets (excluding R&D) grew by £1.8m as a result of the Peak Sensors acquisition. £1.6m of amortisation was charged in the period (FY23: £1.8m) against customer relationships, trade names and other intangible assets. The £1.8m in increased intangible cost was split as follows: £1.1m goodwill and £0.7m customer relationships.

Investment in R&D

Under IFRS we are required to capitalise certain development expenditure, and in the year ended 30 April 2024, £0.8m (FY23: £0.3m) of cost was capitalised. Much of the work of our R&D teams does not qualify for capitalisation and is charged directly to expense. Amortisation for 2024 was £0.4m (FY23: £0.5m). The carrying value of the capitalised development at 30 April 2024 was £1.2m (FY23: £0.7m) to be amortised over 3 years.

Interest Payable

Interest charges for the year increased to £1.6m (FY23: £1.0m). This increase was due to the higher levels of debt through the year as well as rising interest rates.

Taxation

The taxation charge for the year was £1.4m (FY23: £1.9m) representing an effective tax rate of 24.9% compared to 33.2% in FY23. The effective tax rate for FY23 include one-off factors, specifically the impairment of intangibles not being deductible for tax purposes. The Group continues to benefit from R&D tax credits.

Restatement

In previous years, deferred tax assets and liabilities have been grossed up on balance sheet. These balances have now been netted down by jurisdiction and the comparative numbers have been restated as a result. This has no impact on reported profits or net assets and is a presentational change only. The impact on total assets and total liabilities is shown in note 13.

We have reviewed the disclosure for the consolidated income statement and statement of comprehensive income. We consider the IAS1 presentation of expenses by nature better reflects SDI's business and hence have adjusted the format accordingly. We have also restated the prior year's results. This is a presentational adjustment only and does not impact on reported profit before tax.

Earnings per Share

Adjusted diluted EPS, an alternative performance measure which excludes certain non-cash and non-recurring expenses was 5.78p (FY23: 9.02p), a reduction of 35.9%. The diluted earnings per share for the Group increased to 4.04p (FY23: 3.72p).

Cash Flow and Working Capital

Cash generated from operations reduced to £9.4m (FY23: £10.9m). This was due to a £2.7m reduction in customer advances and a further £2.5m reduction in other payables offset by a £3.3m reduction in inventories. In total, working capital increased by £2.0m. The £2.7m reduction in customer advances was due to SVS shipping a large piece of equipment during the year (£1.4m). Astles Control Systems saw its customer advances reduce by £0.7m as it delivered chemical dosing equipment and LTE reduced by £0.5m as it worked on an environmental test chambers project for a major OEM.

Taxes paid have increased to £1.9m (FY23: £2.2m). This included £0.2m of FY23 tax relating to acquisitions.

Our investment in fixed assets (excluding for acquisitions) remained similar at £1.2m (FY23: £1.1m).

Acquisition of new businesses remains our largest cash outlay, with £2.4m deployed on a cash-free basis (FY23: £18.7m). A further £1.0m was paid in relation to prior period deferred consideration related to SVS. There was no deferred consideration outstanding at the end of FY24.

Funding

The Group acquired one business over the period, funded through additional debt.

Net debt (excluding lease liabilities), or bank debt less cash, was £13.2m at the end of the year, similar to that at the beginning of the period (£13.3m). This represents a net debt: EBITDA ratio of 1.07x, which is well within the ceiling provided by our bank facility. On 30 November 2022, the Group reached agreement with HSBC to exercise £5m of an available £10m accordion option, which increased the committed loan facility from £20m to £25m. The balance of the accordion option (£5m) remains available to the Group (at the discretion of HSBC) for future exercise. In April 2024, HSBC approved an extension of the repayment date by one year to November 2026. At the end of the financial year the Group had drawn down £14.6m of its revolving credit facility (FY23: £16m), leaving £10.4m in headroom (excluding the additional £5m accordion option).

The Group has an unstretched balance sheet and has sufficient access to funds, alongside its steady cash flow, to acquire new companies and invest in our current portfolio of businesses.

Amitabh Sharma

Chief Financial Officer

Date: 30^th July 2024