Judges Scientific plc

Good afternoon and welcome to the Judges Scientific plc investor presentation. Today we are joined by David Siccarell, CEO, Brad Ormsby, CFO, Ian Wilcock, Group Commercial Director and Tim Prestidge, Group Business Development Director. Questions are encouraged throughout this webinar and can be submitted via the Q&A box situated on the panel on the right hand side of your screen. I'll now hand over to the management team to begin the presentation.

Thank you very much and thank you everybody for attending. I will just start reminding you. Next slide, please. What we do, we're doing a buy and build of scientific instrument companies. We've been doing that for about 20 years, and I'd like just to explain why we think it's a good idea to do what we do. And of course, our purpose is to create shareholder value. And we think there's three pillars of shareholder value. One is the long term drivers, which is the growth in the world university population. and of course a lot of our instrument gets sold to universities for the purpose of research and the other long-term driver is constant aspiration from everybody who does something to do it better and if it's something physical then to optimize you need to measure and we sell these measurement instruments so I think these we believe are secular drivers and this is to do a buy and build in a in a sector where you have good drivers is essential. Secondly, large deal pool. When we started this 20 years ago, we measured that there were 2000 companies just in the UK, but we're not restricting ourselves to the UK. So it means that every year there's quite a large number of companies needing to change hands, largely because people retire. and then low capital use so this looks a bit stranger and why is it important to us because we're not doing your traditional buying bill which is uh my shares on a multiple of 20 times yours i buy your shares on a multiple of 10 times and i've doubled my money but this is not what we're doing what we're doing is we're borrowing money from the bank and typically we pay maybe five six at this point a bit more to borrow this money and and we buy companies on multiple on average of five times EBIT which means we have a return of 20 percent on our money so you multiply your money maybe by four instead of two times But you are not issuing a lot of the reason we have created a lot of value for shareholders, which is something like 80 times since we started, if we include dividends is because we only have Double the number of shares since we finished our first acquisition So I think that has been a critical element of success for shareholder value creation. So what we've done we've done this 20 years We've done 25 acquisition only so you don't need to do a lot of these but you need to do good deals on Tolerable values We've distributed dividends Up to 8.6 times the admission price Which was a pound We've created growth of revenue Of 20% compound per year Organic 7% And EBIT has grown 26% compound and 9 organic so this is really what has worked and and and really what makes this thing function is two things mergers acquisition and organic growth so if you don't mind getting the next page please so this is a management team uh Brad and me Tim we're in the room Tim and Ian are also there with us in a virtual fashion Mark who has been our CEO for many years and has made us Colossal progress over his tenure is now on the path to retirement which should happen in about a year and he's fulfilling a number of important central functions for us in the improvement of our business. and RIC which was just started on the 1st of July and is in addition to our management team of one there's now a mergers acquisition team of one and now we have two so we hope to increase the rhythm of which we manage to do acquisitions next slide please so the message of this of course this is an announcement of results for the first half of this year the environment has been mixed we started the year with a coring expedition in Japan so that's a very profitable thing we were very happy to start on the right foot in this year because it was January February we had a lot of deferred order from last year which was a difficult year and a lot of things were laid so we started delivering all these orders which were laid last year with exception of one which is now for 26 and we had a good recovery in china and hong kong which is back to normal But we were severely affected by the US research funding freeze and this has been a big disappointment and this year which was supposed to be really starting very well is now a disappointing year. So we had a weak comparative last year because the first half wasn't great so we're producing good results but we see the weakness in all the intake and we think our year is going to be disappointing compared to what we expected at the beginning of the year and we issued a trading statement in July which means that you know it is no surprise now and now we expect to be in line with market expectation the big issue is obviously the US impact but some other challenges are perfecting some of our businesses and we stick to the market expectation of july we need to address the trading challenges of our various businesses a lot of them are related to the us but there's other issues as there always is we need to restore organic growth we haven't done an acquisition for the last 13 months We not panicking about this because We need to do an acquisition 0.25 every year and so it's not the number of acquisition we do but doing the right one at the right price and we try to be always disciplined and patient about this and and we're increasing the dividend 10% this has been our promise to shareholders since we started paying a dividend 18 years ago we've kept that promise but we've actually increased the dividend on a compound basis of 22% next please and then I'm passing on to Brad because of course this is an announcement about our results and Brad will take you through the results thanks very much David

We can move on to the next slide please. Let me take you through the results and on the face of it we've delivered a better set of figures compared to the disappointing first half last year. But in fairness they were well below our expectations at the start of the year and we were affected both as David mentioned by US research funding cuts and also by certain separate trading issues at some of our businesses. and the consequence of that is we had to reset market expectations in July so looking at the results total revenues up 15% to 70 million and that's a combination of 7% organic revenue growth partially supported by 4% growth in organic order intake and also contribution from our more recent acquisitions the growth in revenue Fed through to profit and adjusted operating profits were 14.3 million up by 16% and a similar percentage increase To earnings per share with adjusted earnings per share progressing to 141.4 pence The improvement in financial performance was driven by the delivery of a coring contractor geotech expedition earlier this year which was delivered in the first half and also if you look at geotech as a whole better performance across it however if you take geotech's performance out of our results the rest of the organic businesses went backwards by a third and i'll show you the effect of this illustrated in the profit bridge slide a little bit later moving from p l to cash flows and we our group over its history is that a strong track record of turning profit into cash and we generated 12 million of cash from operations so the cash conversion of 87 percent and it's believing that we're going back to historical norms and i'll come back to this a little bit later about cash conversion but also about working capital where we still recognize there's some work to do but our cash conversions serve to support Our policy of providing shareholders with progressively increasing dividend returns and we've increased the interim dividend to 32.7 pence per share, that's up 10%. It's our minimum increase given the weaker performance. And our cash generation also supported reduction in our net debt and adjusted net debt reduced from 51.7 million at the year end to 45.7 million at the end of June. Gearing or leverage was one and a half times down from 1.7 at year end. And we have significant headroom, continue to have significant headroom in our covenants and a strong balance sheet. So looking at the rest of 25, and it's clear we still have some work to do to deliver the rest of the year, but it's primarily related to execution of delivery rather than needing lots of orders. But we continue to have tricky trading conditions, particularly in the US. global geopolitical and economic conditions remain uncertain and also unpredictable we have lots of work still to do to ensure that we can end this year in a good position to start next year so moving on to the next slide having talked through most of performance just going to touch on two things one on tax where our effective rate on adjusted earnings is 23 percent UK's headline corporation tax rate of 25% partially offset by those of our businesses now in the patent box regime and as a quick reminder for everyone in relation to R&D tax scheme we're in the large company scheme which really means that it's less effective than it was when we were small in the SME scheme and also most of those benefits end up in operating profit And then lastly for those of you not as familiar with our P&L, we do have adjusting items that take us to the statutory result. The largest of these being 5 million non-cash amortization of the intangible assets that we're required to recognize when we acquire businesses. And moving on to the next slide please. And really, a key for our business is order intake. We share every year a graph with you showing what we look at every week. So just to quickly walk you through it, there's three lines on it. There's a red line, a black line, and a green line. The red line is our internal sales budget, which we set internally every year as part of our budgeting process. That's our target. The end of the graph is the end of June this year. the black line then which we're we're aiming to to and to be meeting if we can by the end of the year the red line is our trading 12 months of orders and the green lines the last four months of orders multiplied by three so annualized and that is a much shorter term measure it's a lot more jagged what we're hoping for from that is for at least be touching and hovering around the red line so we've got maximum capacity so what actually happened in that period and actually it's important to take you back to the start of the second half last year and what you can see is we started with momentum increasing both the black and the green line from july last year and it kept going and you can see the black line ticking up quite nicely you know almost in a nice straight line as we got into this year as we got to the end of q1 but then it stopped as we get to q2 and you can see the the drop off towards the end of the graph where the effect of the the reductions in funding in the us started to hit us and consequently why organic order intake was only up by four percent and since the end of the first half through july and august Organic order intake is now flat compared to the comparative period And that's not a great picture because really what that's saying is we've gone from plus four to zero in the last two months Really driven by events in the u.s If there's any any high spot in this any any positive positive? Positivity you can see that we're up by 120 percent on china but sadly The us is sort of covered over that Moving on to the next slide. And I said I'd come back to this later. So this slide really reconciles between the first half EBIT contribution of our businesses before Central Cross. 24 versus 25 so reconciling between these you can see there's big improvement in organic growth in the period largely supported by geotech but at the same time a chunky drop in organic performance as a consequence of some of our other businesses and Tim and Ian will talk through a little bit about some of the things we're going to be doing are going to be doing are doing at the moment in relation to writing this the last little block the effect of the post of the acquisitions that are not in the organic group overall not the picture we expected at all at the start of this year and moving on to the next slide You've actually in cash flows really two things want to quickly pick up one is as I said before cash conversion We've had a good first half of the cash conversion 86% which in on the face of it may look a little bit lower than our usual Target of 90 plus percent, but I need to take you back to last year first when cash conversion for the full year was a hundred and twenty two percent and that was inflated a little bit by the advanced payment on the geotech coring expedition and Without that advance payment we would have been at about 104, 105%. So a good year for us for cash conversion. The same thing applies from the unwinding of that advance payment in the first half this year. So that 86% is actually more than 100%. So for the last 18 months, we've had typical good judges cash conversion. And having said the year or so ago, we need to make sure we focused on this, the businesses responded, and we've delivered that well. So that is back to normal for us, something we'll keep continuing to focus on. That's an important thing that we've kept going over the last 18 months. Now what isn't yet better is working capital as a whole and we've always had our own target of working capital being 10% of annual revenue. It's now more like 20% but quite a bit of work's gone on. David mentioned Mark now doing some cross group work and he started work with all of the businesses and operations director about getting more granular information. for our inventory and we believe there's some good opportunities to start bringing this down and I'm sure Tim and Ian will touch on a bit more of this later as well. In terms of net debt we've reduced our debt a little bit in the period that's because we've been able to pay the bank back from some of the cash generation So leverage reduced to one and a half times. We've got significant headroom on our covenants. We have significant available funds to be able to use out of our facilities and we continue to have strong support from our banking group. lawyers Santander and most recently HSBC who joined the group post period ends I mentioned in my CFO report at the end of last year that we need to make a change because Bank of Ireland who were our third member of the banking group were pulling out of UK lending and HSBC I'm pleased to say have stepped in to take over that debt overall we have significant firepower for the foreseeable future from our banking facilities to enable us to acquire the right businesses for our group despite the fact that we haven't bought any in the period yet to date. So moving on to the next slide. Return on total investor capital, another key measure for us and very quickly to walk you through the graph. you know what it's an important measure for us it's a function of the multiples we pay for the businesses we acquire in its purest form you start on the left-hand side with ftt when we acquired it for a little less than five times the total 20 percent growing logic thereafter requires improved financial performance and or buying businesses at low multiples as you go across the graph three key points to look at gds scientific and geotech acquisitions which are big acquisitions for us we paid six six times and seven times respectively but smaller acquisitions affect erotic minimally now and through the period for the last six months we've improved erotic to 17.9 percent from 16 and a half at the year end it's not where we want it to be we want it back above 20 percent we work hard to ensure we do that and ideally keep working and pushing that in the direction of 30 where we really really believe if the group's performing in as well as it should be able to we can get to that over the long term so moving on to the next slide My ultimate one on diversification and quickly going across from left to right you can see the first pie chart just split of all our businesses by revenue and there's no single company that overly dominates. We manufacture scientific instruments for different end markets and so we're diversified by scientific application. We sell across the world more than 85% of our revenue we export and there's no single country or region that overly dominates but it's useful to see in this period the effect of the contraction in north america and also the better period we had in china and then lastly the right hand end the analysis by a market geotechnical part the the orange part is usually around 25 the consequence of the first half and geotech performing particularly well including the occurring expedition means that that wedge is a bit bigger than usual so going on to my final slide please and this summarizes some key financial metrics about the long-term success of the group and revenue and profits owners per share have all grown strongly over the history of our group and despite our more recent subdued trading we still have compound growth in revenue on an organic basis of more than seven percent and the related EBIT growth of more than 9% dividends have grown by at least 10% per annum over the history of the dividend and compound growth in the dividend remains above 20% with increase of 10% to the interim dividends of 32.7 pence and our focus on cash generation and cash conversion ensures we're able to quickly reduce our acquisition debt make space for more acquisitions fund that progressively increasing