Podcast: The CEO that redefined a business and engineered a 15-bagger

James Goodman and Jean Roche speak with discoverIE CEO Nick Jeffries to uncover how he turned the company into a 15-bagger.



James Goodman
Research Analyst, UK Desk
Jean Roche
Fund Manager, Pan-European Small and Mid Cap Team

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[00:00:00.470] - Announcer

Welcome to the Investor Download, the podcast about the themes driving markets and the economy now and in the future.

[00:00:23.690] - David Brett

Hello. I hope you're all well. Today's show is the latest in our series of Mid-250 podcasts, where we speak to the CEOs of some of the biggest names listed on the UK's mid-cap stock exchange. Today, James Goodman and Jean Roche speak with Nick Jeffries, the CEO of discoverIE, which designs and manufactures customised electronic components for industrial applications. Since Nick became CEO, discoverIE share price has risen 15 times. So James and Jean want to know how Nick's engineered the company's success. We hope you enjoy.

[00:00:59.490] - Jean Roach

Hello, and welcome to the Mid250 podcast. I'm Jean Roach.

[00:01:03.870] - James Goodman

And I'm James Goodman.

[00:01:05.640] - Jean Roach

James and I are on Schroders UK Small and Midcap team, and we are broadcasting to you today from Schroders head office here in London.

[00:01:13.950] - James Goodman

This is our fourth podcast in our mid-250 series, how time flies, Jean. We had the Multi-bagger podcast back in March 2023, where to remind our audience, you're more likely to find a multi-bagger in the UK than the US. We interviewed Adam Couch from Cranswick in May, Lisa from Pets at Home in October, and we're really looking forward to our discussion with today's guest.

[00:01:38.050] - Jean Roach

Yeah. So the background is that James and I noticed that a certain UK mid-cap company, in which we are shareholders, had generated a total return of 15 times since a certain chief executive began in the post 15 years ago.

[00:01:52.980] - James Goodman

And as multi-bagger hunters, this immediately caught our eye. But Jean, I think there's a back story here, isn't there?

[00:01:59.890] - Jean Roach

Yeah. So it did seem like serendipity when I spied the CEO at a Christmas party late last year. And as I had him on the spot, I decided to ask him if he would be willing to come and sit on the podcast sofa with us. And he very graciously accepted. And that is how we have managed to persuade the CEO of discoverIE Nick Jeffries. Welcome, Nick. To come and sit on the sofa with us, as I say.

[00:02:29.460] - James Goodman

Nick, to start off with, can we go back to the time before discoverIE, what did you do in roles before joining the company?

[00:02:38.600] - Nick Jeffries

Well, I trained as an engineer in the defence industry, 30 something years ago now. Then moved on into the semiconductor industry, worked for a semiconductor supplier, two semiconductor suppliers, actually. Then ended up in distribution, electronic distribution internationally. Then half of my career has been discoverIE now, actually. That was the first half of my career. The other half is discoverIE, but all from an engineering origin.

[00:03:09.440] - James Goodman

Did you always want to be a chief exec?

[00:03:12.030] - Nick Jeffries

No, I always thought that I would end up doing my own thing in some way. My mother said that that's not a surprise. She always thought that that's what I would do. But I didn't ever anticipate being a CEO of a listed business. That was never on the cards. But I'm not entirely surprised that that's the way it ended up. I thought I'd end up doing my own thing.

[00:03:36.530] - James Goodman

Sure. Did you have any particular mentors during your journey before discoveIE?

[00:03:41.630] - Nick Jeffries

Yes, I did. The first mentor I had, who was really the person that gave me the big break, was when I went from engineering into the semiconductor industry, a guy called Stuart Polter, who was and is a brilliant engineer that went into semiconductor marketing. It was with him, my first project that I ever got involved in was working on the design of the power train for the Channel Tunnel train. GEC Traction in Manchester, Trafford Park, Manchester were designing the Channel Tunnel, the Manchester Light Railway, and various other, Docklands Light Railway, that's got the same concept in it. And with his training and mentorship, he taught me through that, and I followed him basically as he got those high power semiconductors designed in. And there are many on the way through. There's no one person. Stuart was the first. Then really the sequence of events. The other great influence on my career was when I was in distribution at Arrow Electronics, I was in the Nordic region. The CEO and chairman of Arrow Electronics, New York listed, was a guy called Steve Kaufman, who turned that, saved that company and built it. He recreated this buy and build model that consolidated semiconductor volume distribution.

[00:05:08.240] - Nick Jeffries

And then following on from that, and probably the single largest indirect influence, because I've never actually worked for him, is a guy called Steve Sanghi. And Steve Sanghi is the chairman of Microchip. And Microchip is one of the world's largest semiconductor manufacturers now, I think $45, $50 billion market cap, perhaps. But back in the late '80s, early '90s, a guy called Steve Sanghi, who I think was a process engineer at Intel or something, somehow got involved and bought or did a management buyout or whatever of an old technology semiconductor line that GE, the big GE, were selling. And from that, he started selling, making more efficiently and more cost-effectively low-technology microcontrollers. They were called the PIC. So things that went in like your domestic thermostat, room thermostat, got typically microchip PICs in. And from that, he built this tremendous business, which laterly started buying up other semiconductor companies and turned it into the enormous company it is today. But over a period of about, I don't know, 40 years, roughly, he built this enormous component business, which is terrifically successful. It's interesting because one of our shareholders in the US actually is a shareholder of that company.

[00:06:40.990] - Nick Jeffries

So we have some tiny piece in common. But then the more recent influences are, I wouldn't be here if it weren't for the first chairman that hired me, a guy called Richard Moon. I'm very lucky to have had three very strong chairman at Acal discoverIE. Richard Moon, who hired me, who was the disruptor chairman, who was took this business that was really in trouble and he realised it needed to change. And then Malcolm Diamond, who built Trifast and has since retired and it since had some trouble. And then now we have Bruce Thompson, who built Diploma from not a lot. So there are a lot of very successful people that have influenced me along the way.

[00:07:24.880] - Jean Roach

And that's interesting, isn't it? Because on our multi-bagger list, Diploma has appeared as well. Okay, interesting. But I'll let James carry on with the quizzing.

[00:07:34.230] - James Goodman

Interesting to hear the buy and build and spec in. Do you think you've taken some of those influences in how you approach discoverIE?

[00:07:41.080] - Nick Jeffries

Well, I was always quite attracted. I remember when I first joined Arrow, the It was all about consolidating the commodity electronic components market. Steve Kaufman was an ex-McKinsey consultant who knew nothing about the industry, but he knew how to run a business properly. He brought that approach to a business that was struggling at that time because Arrow had had a fire. They had a management conference in a hotel, and most of the management were killed in that fire. Just a couple were left, and they needed to rescue the company, and they brought in Steve to help them do that. And that's exactly what he did. And what I learned from him and saw quite early on was that if you had a clear idea of what you were looking for, you could actually build something quite successful if you bought the right businesses in the right way. And I always had a feeling that that was something that I might be able to do. And that actually only really struck me when I started doing the acquisitions at discoverIE, actually. I looked back with hindsight and realised that actually that was the bit I was really interested in, but I wasn't so much conscious at the time.

[00:08:53.520] - James Goodman

Interesting. And what about highs and lows? Are there any particular ones that spring to mind?

[00:08:58.930] - Nick Jeffries

Well, so the career high for me, and the real high is the discoverIE that we've got today. That's half my career, and it's something I'm very passionate about. So that's the high. There aren't any real lows. Covid was a tricky time, but actually, ultimately, it enabled us to show how resilient we were. We had that rights issue back in 2014, but that wasn't a low. The process was like pulling teeth, but it was the big enabler. That was still our biggest acquisition. And without that, we would have made much slower progress. But we did learn that the rights issue process for a small, illiquid small cap stock is not an appropriate process, not by any means. I might even argue that the rights issue process in this day and age needs to be shortened quite significantly. We were absolutely tripped up by the nil paid. I think it's two weeks. It's a two week I think it is nil paid trading period. And that is for an illiquid stock is not a good period because people just drive the price of the nil paid down, wait for the end of that period, which everyone knows, and then jump in at the last minute and bang a bargain, basically.

[00:10:28.310] - Nick Jeffries

But it has the effect of driving the share price down. But you learn from these things, don't you? We were able to buy Norotel with that raise, and Norotel is a very successful business for us. So it was all good in the end.

[00:10:45.840] - Announcer

On Apple Podcasts, Spotify, or wherever you get your podcasts, you're listening to the Investor Download.

[00:10:56.130] - Jean Roach

So just to recap, in case anybody didn't capture it at the outset, just some of the numbers. I've realised, first of all, I've been pronouncing discover I.E. Incorrectly, it's discoverIE.

[00:11:12.410] - Nick Jeffries

Well, it's how you like to do it. However you like.

[00:11:14.960] - Jean Roach

But it has delivered 19.5% TSR over the last 15 years. In simple language, £1 invested when you became CEO has turned into nearly £15 with dividends reinvested. And multi-bagger hunters, this is a 15-bagger. So just to get back to brass tax, for people who haven't come across discoverIE before, could you give us an overview, a layman's overview of what the business does and where it operates broadly? And what are the big changes you've made since you arrived? Sorry, that might be a long answer.

[00:11:55.170] - Nick Jeffries

No, not at all. So when I'm at parties and people ask me what I do, if they don't happen to be an investor, then I might say that I would like to say that you perhaps, probably unknowingly, have experienced our products. So we make niche, very niche, customised electronic components for, we term it high growth, higher than average growth industrial markets. And by industrial, we mean healthcare, renewables, vehicles, transportation, and some industrial applications. And that's a great marketplace to be in because they tend to be very good growth in good conditions and pretty stable in weaker conditions. And the type of products we make enable our customers, which are OEMs, to make products that otherwise perhaps they couldn't make. So one of the applications that we're very proud to be associated with at the moment is we make the X-ray detector heads that go into the 3D CT scanners for airport security, passenger scanning. So if you go through City Airport now, the scanner's there, have our heads in. And that's going through a very big international rollout. So people are unknowingly experiencing the benefit of the products we do. Very niche, but big enablers for our customers.

[00:13:28.520] - Nick Jeffries

And so what we aim to do is to get our products designed into these forthcoming applications, and that can take anywhere from six months to two years, typically. And then once it's designed in, as the customers then make and roll out their products, then they need to buy our products for every unit they make. And so that creates this recurring, repeating demand. So we have this very heavy focus on the level of design wins that we're achieving in these customers, because even if it doesn't create revenue tomorrow, you know that if you've got the design win, that within the next 3, 6, 12 months, that's going to start creating new revenue for you.

[00:14:08.970] - Jean Roach

And the main geographic locations where you operate?

[00:14:14.060] - Nick Jeffries

Yeah. We operate internationally. We've got four and a half thousand employees. We're in the US and Mexico, all over Western Europe and some areas of Eastern Europe. And in Asia, we're in India, Sri Lanka, Thailand, and China. And so, roughly speaking, of the four and a half thousand employees, roughly 3,000 are in manufacturing roles, and 1,500 are in white collar roles, for want of a better word.

[00:14:46.180] - Jean Roach

Where would you say the main changes have been made? I mean, you've moved out of distribution completely, is that right?

[00:14:54.680] - Nick Jeffries

Yes, that's right. So Acal was a distributor of electronic components, IT, IT spare parts, ATM spare parts, and other bits and pieces. Over time, we've got rid of all of those businesses. But before we got rid of those, we started buying design and manufacturing businesses. So now we design and manufacture our our own our own electronic components. We do pretty much all of the manufacturing in our own facilities. And so we're a completely different business to the one that we were 15 years ago, which is why we changed the name. So we were Acal, and after eight years, we realised that we just couldn't change perception. Acal was inextricably associated with distribution. And indeed, there is to this day, one of the businesses we sold, Acal BFI, is a distributor, and it exists. So it is a Distributor. So that link was always going to remain. But our tagline back then was Discover Innovative Electronics. Sorry, it was Innovative Electronics. So when we came to changing the name, that's what led to the unusual spelling of discoverIE. It was Discovery Innovative Electronics, which is what the name stands for. And having been very resistant to doing that, someone once used the term to describe a name change as Lipstick on a Bulldog.

[00:16:14.050] - Nick Jeffries

I was always very hesitant to do it because it would seem like window dressing. But eventually, it got to the point where I heard back from one of our big investors at the time that one of their colleagues had met someone in a pub in London who had said, No, no, no, no, no, Acal aren't a manufacturer, they're a distributor. And I thought that's it, we're never going to be able change perception. So i threw in the towel and said right we've got change the name. Best thing we ever did. Despite the cynicism at the time, I have to say some investors, one in particular at the time when we announced the name change, threw his arms up in the air and thought we'd lost the plot. But he very graciously acknowledged at the time, a few years later when he exited, that it was the right thing for us. But he said, the trouble is often in the city, a name change is associated with window dressing.

[00:17:14.310] - Jean Roach

Well, we can be a very cynical bunch. It's good to hear that we go back to the great idea coming out of the pub as well, knowing that that's where the name change was needed. Just a little side question on your operations in Sri Lanka. Is it very important to manufacture in lower cost countries? What are the advantages there? Or can it be quite complex?

[00:17:41.070] - Nick Jeffries

Yeah. I mean, low cost manufacturing is great for us. We have Sri Lanka, India, China is not so much low cost, rather, I like to think of it as mid-cost these days, but certainly the others are low cost manufacturing, and that enables us to be competitive and ultimately, develop our margins, frankly. And Sri Lanka is one of those major regions. It's a big region for us, a big site for us, and it's very effective. There are these well-publicised economic difficulties that they've had, but our site there didn't miss a beat all the way through that. At one stage, we had a huge diesel tank out the back with a backup generator in case the electricity, the grid supply went down, but fortunately, it was never needed. And we had food parcels coming in for staff and all kinds of things at one stage when the unrest was at its peak. But we didn't really struggle with any import-export delays, surprisingly. We kept manufacturing going and the business ticked along quite well. So for us, Sri Lanka is a very efficient site. It seems to be quite able. It's a very strong local management team, which is the ethos of the whole group, really.

[00:19:11.120] - Nick Jeffries

We're very decentralised. We have something like 36 operating sites around the world, and that is the success of our group is dependent upon the management teams in those local sites. So we spend a lot of time making sure that we've got those right teams. And that's what enabled us to, as to keep the wheels turning properly in Sri Lanka. And that's not to say we weren't a bit concerned at some stages that things may go south a bit. So we had contingency plans to move production to India, China, and possibly Mexico, if it really was needed, but it wasn't in the end.

[00:19:52.490] - Jean Roach

It's quite interesting, isn't it? Your model, it's quite a slim head office and then strong local teams. What do you think that gives you? Is that great to have a tight team at the head office? Then is it important to then have people being close to your customers in some cases as well with those regional manufacturing facilities?

[00:20:15.630] - Nick Jeffries

Yeah. We have 38 people in the head office, that's it, out of 4,500 people. It's very slim. We like it that way because the real bench strength of the group is all these local management teams. We have, within the 36 or 38 sites that we've got, then there are really 100 key managers across all of that group that really run the group. And so the job, as I always say internally, the job at the central office in Guilford is not to command and control and tell, it's to ask the right questions and steer. And if we've got the right people running the business units, then they'll listen to what we say. They'll typically internalise it and apply it to them in a way that works for their business, which doesn't always exactly concur with exactly what we want, but there'll be a venn diagram, there'll be an overlap. And that's very effective because as COVID demonstrated, when unpredicted stuff happens, it's down to the local teams to respond effectively. And they did. And we were very... Our performance with COVID was very, very resilient. And that's all testimony to the fact that they take and internalise the strategy of the group and apply it in a way that works for them.

[00:21:36.170] - Nick Jeffries

And it's exactly the same with the way that we work with our customers. So we have these four target markets that we focus the group on. But within that, we have businesses that have those four target markets, but they may also have one other target market of their own, which is what they call their target market. So for example, we have a business in Scandinavia, terrific business in Denmark called products, and they have roughly, I think it's about 60% of their revenue is in the group's target markets, but they then have their own target market, which is the space sector. It's very successful for them. We get lots of benefit from that because we can develop a high-rel product that we then apply into some of our target markets, but that's right for them, and so we both win. And that's all because we have a team locally that applies the strategy in a way that is in the spirit of the group strategy.

[00:22:32.790] - Jean Roach

And high-rel? What does that mean?

[00:22:34.420] - Nick Jeffries

Oh, sorry. High-reliability. So in between space and commercial, you have high-reliability. So it goes in things like aeroplanes.

[00:22:40.910] - James Goodman

Those four target markets that you mentioned, could you just tell us what they are and why you've decided to focus on them?

[00:22:47.110] - Nick Jeffries

Yeah. So it all goes back to when I was working in the semiconductor industry, we had in the early '90s, the windows had been launched and demand for personal computers were booming. And what I saw and some of my colleagues saw through then is that following these periods of huge boom, there were huge slowdowns. But the constant that we saw all the way through that was that some of these industrial markets just kept going. They grow a bit, they slow a bit, they grow a bit, but they just keep going. So the compounding effect of those markets was tremendous, and it was much lower risk. So when we got to focusing the discoverIE group, we went back to those basic principles. So which are the best markets to be focusing on? And we didn't want to be focused on high volume consumer markets, like consumer, like tier one automotive, because we were too small. We could never compete. The commercial terms often are very challenging. We focused on markets that were more in tune with our size, but which fundamentally had these better growth prospects. They are, transportation, which is things like rail, very highly regulated market, very long term revenue streams, very difficult, high barriers to entry, very stable revenue streams, but a growth market.

[00:24:11.820] - Nick Jeffries

Medical, similar. Renewable energy, which when we started it, I think we launched, I think we publicly launched the target markets about eight or nine years ago. And at the time, renewable energy was seen as a bit of a risky area to be in. And then what we call industrial and connectivity, which is basically industrial automation and the wireless connectivity of all of that, and it's all interrelated. And those market areas are markets that generally are going to grow over the short, medium, and long term, more steadily and more sustainably. People talk about structural growth markets. Well, the electronics market, electronic components market in total, which is about a $900 billion global market, has been a structural growth market for at least the last 60 years since the semiconductor was first really commercialised in the '60s. I reckon there's at least another 30 years because electronic components enable, they are the enabler of the modern world. We're surrounded here with microphones and lights and cameras and all the rest of it. They're all powered by electronic components. And so all we do is focus on those markets where their customers are making very high-end or high-performance differentiated products where a standard component won't do.

[00:25:40.730] - Nick Jeffries

And we're avoiding those markets which are very cyclical because we wouldn't be able to compete with those. So we focus on those four market areas, and they've created the platform for the growth of the group. And because we're a small cap or mid-cap listed business, we knew even back in the early days that we wouldn't stand a chance if we were in these high cyclicality markets. So we just had to focus on markets that would not be maybe as exciting in the short term to begin with, which they weren't, and people question that. But Over time, would start to show the benefit of... Share their benefit, and that's exactly what's happened.

[00:26:23.120] - Jean Roach

Yeah, and I think moving in through that. So you're speced in to lots of products, so you're specced into lots of products So that makes it very sticky, which is what we always like to hear as investors. And so how does that work as well with your engineers and the customers? Do you have somebody in a discoverIE shirt sitting next to the customer engineer in their plants? Or how close are you in with the customer?

[00:26:49.380] - Nick Jeffries

Yeah. So we have engineers all over the world in all of the main markets that we operate in. Most of the engineering specification work is done in the Western market, so UK, Europe, US. So we have a lot of customer-facing engineers there, but we also have engineers in our Asian plants working with customers there. And we operate discoverIE is the group's name, but the individual businesses operate under their own brand names. And we have engineers working in those different op-cos with the customers and their engineering divisions. And so what we aim to do is to get, and it's very important for us to get, because it's an engineering-led sale, and our customers engineer is designing a new piece of equipment, you have to get in at the very, very earliest stage. So as they're developing the concept of the next product they want to create, at that exploratory stage, the customer engineer will be thinking about what the art of the possible is. And they typically have a... They start with a high-level idea. They're trying to design something that will achieve these to this technical performances to this specification at a system cost of around X.

[00:28:05.780] - Nick Jeffries

And then they go through the discovery stage to work out, well, what can they actually do? And that's when we need to be front of mind. Our engineers need to be front of mind with the customer engineer so that we're in that conversation. Because it's not like it's something you can find on the web. There'll be bits that the customer will be able to work out online, but there'll be a whole bunch of questions which will be be around, well, can we achieve this performance in a unit of this size with the thermal performance of this at a system cost of about that? And it requires an engineer with a very specific knowledge, product knowledge, product knowledge, by one of our product engineers to be able to answer that question. And so we'll typically respond and say, well, you could do it like this with solution A, or you could do it like this with solution B. And solution A may be the best technical solution, but it might be a bit bigger, or it might run a bit hotter, or it might cost a bit more, or you can have solution B, which is a bit more of a compromise, but it might fit what you're trying to do.

[00:29:05.940] - Nick Jeffries

So that's how it starts. And then it evolves over a period of months in the highly regulated markets, like medical and transportation, is a on-off conversation over a period of maybe 6, 12, 18 months. Then eventually, they get to a stage where they lock down the design. That's it. That's the system design, and that's when we're designed in. And then if it's in a highly regulated application, particularly, it could take another 12, 18 months before they start production. Typically, it's sooner than that. But you know when you're designed in, then when they start production, they're going to start taking your products, and that's when the sales start.

[00:29:45.840] - Jean Roach

So we often complain about regulation, but this is a case where regulation is very much your friend and a central part of being in certain sectors. Yeah. And what's the most highly regulated? Medical?

[00:29:57.420] - Nick Jeffries

Yeah, definitely. You can't even change the colour of the print on a sticker on the medical market. It's very tight.

[00:30:05.740] - Announcer

Get in touch with us by email @schroderspodcasts@schroders.com. Com or visit our website, schroders.com/investordownload.

[00:30:16.990] - James Goodman

Can we talk a little bit about capital allocation? You pay a dividend, but we've spoken about this being a buy and build strategy. Why pay a dividend? Why not keep the money for more acquisitions?

[00:30:30.690] - Nick Jeffries

Well, that's a very good question. And yes, one that we are increasingly frequently asked. I think the answer is because most of our major shareholders expect it, and there are other bigger and greater industrial peers than us that do similarly. Yeah, but it's a perfectly... We'd have quite a bit more to reinvest if we didn't. But that's, I think, the game. I think it's the term of engagement with our major investors. If they en masse were to determine that they'd prefer us not to, we would work with that. Certainly, that's something we could certainly go with.

[00:31:13.240] - James Goodman

Very interesting. In terms of acquisitions, what does the ideal acquisition look like? What features and characteristics are you looking for?

[00:31:20.640] - Nick Jeffries

We're looking for a business that is engineering-led, has very niche/customised, probably customised customised products, mostly customised products. It's probably generating an EBIT margin of 15 to 25%, typically around 20%, Typically got a very long track record. It's been around for probably 15 years minimum. It's probably making an EBIT of £1 to £10 million, something like that. Probably privately owned, owner-led, probably looking for some exit route to de-risk. They either want to retire, but more typically what they want to do is they want to lock in the value they've created. They can see the potential for growth in the business, but they don't want to risk everything that they've created because it changes. If they were to scale up, it changes their personal situation, financial situation, quite dramatically. Whereas if we take it on, then obviously, they lock in the value they've created. We're typically looking to pay, we say about 8 to 10. We've made 23 manufacturing acquisitions and the overall at any bit multiple of eight. Four of them have been over that. But typically, we're paying... At the moment, we're typically paying about seven or eight at the moment at this stage in the cycle.

[00:32:53.780] - Nick Jeffries

Last year, it was a bit higher. We're looking for business with a long term future that are not necessarily selling into our target markets much today, but they'll probably be selling a bit, but have the potential to sell into our target markets. That's the ideal acquisition for us.

[00:33:11.430] - James Goodman

And one of the comments I've heard you make in the past I thought was really interesting. When you think about that small M&A team you've got in Guilford, actually having engineers on that M&A team being important, why is that important, do you think?

[00:33:24.080] - Nick Jeffries

Yeah. So we have five people in our M&A team. Two of them are engineers, including the person that leads the team. So the reason it's important is that with an engineering background, they can understand and identify how niche the products are that we're buying, how differentiated they are, how much potential for development in certain directions there could be, product development directions, how much opportunity for collaboration with other of our existing businesses there are. And they can form a case, which is a commercially engineering-led business case that says, We should consider buying this business because it gives us this, this, and this, and we can do that with it. So it's not just a profit and price discussion. That's still very important, but you get both angles of it. And so I think it enables us to identify businesses that have the potential for something in a way that maybe not everyone would otherwise see. We've just bought a business, actually, that just about five weeks ago in the US. And one of our engineers in the M&A team identified that if we bought it, we could create another product within our existing cluster that no one else had spotted.

[00:34:52.450] - Nick Jeffries

And then when they identified that to the team, the cluster management, they immediately agreed. And so what went from being a fairly small acquisition suddenly went to being a very attractive small acquisition. So from an initial screening where there was a, really, is it worth it? It's only a tiddler, should we bother? They suddenly became very excited about it. And it's early days, but I think that's going to be borne out.

[00:35:19.930] - James Goodman

And those five people in Guilford, are they sitting down waiting for an investment banker to call them? How do they source them?

[00:35:25.670] - Nick Jeffries

No, they're not. One of those five, and one of those five and one of the two engineers is responsible for pipeline development. She works with OPCOs, the individual businesses in the cluster management, to identify target opportunities. We were very fortunate to a have founder her, but she's an engineer who then went into management consulting and has now come to us. So not only does she understand the products, she's able to apply a consulting process to communicate what she's trying to do and what might be a value to our businesses. She draws up target lists with the business management. But all the businesses are part of their nonfinancial objectives are to identify acquisition opportunities and make acquisitions. They have their list of possible business targets, and then she brings a whole bunch more. They then get together and to prioritise and screen We can work that all through. That forms... That's the bulk. It's probably the bulk of our hopper of opportunities is created that way. Then in addition to that, we have the investment community coming in ad hoc. We also have a section on the website which is remarkably effective. Businesses pop up on there and contact us and tell us they'd like us to talk to us.

[00:36:55.110] - Nick Jeffries

And so that, too. There's an element with M&A that you have to just throw enough mud at the wall and then see what sticks and then work through it. And in order for that to be effective, you got to have a very clear pattern of what you're looking for. And then as the mud sticks, then you can work out whether it's the mud you want it to stick. So that's what we do. So that team works with the OPCO all the time, working through that list and reprioritising it and engaging discussions. And then we have bankers that we work with, investment bankers that are specialists in certain sectors, and they then often form part of the outreach, because we found over the years that it's better to use a third party to make the outreach with a very well targeted. We produce a document that says, we're discoverIE. We're interested in your business. We do this. We think you do this, and therefore we think this could be a really good combination. And that's written by our engineers in the M&A team. And so we find that that has a very high strike rate to getting to door opening.

[00:38:06.730] - James Goodman

Terrific. So if we put the acquisitions piece together with the organic growth, what does the medium term financial goals look like for discovery?

[00:38:17.160] - Nick Jeffries

So we target all of our businesses to grow 10 % organically through cycle. Over the last six years, we've grown 10 % organically. If you exclude the COVID year, if you include COVID, it's about 8.2 % CAGA. And over 10 years, it's 6 % CAGA. So we're always aiming for that 10 % organic growth. Obviously, it's lower than that at this stage in the cycle, but through cycle, it's got to catch up on the up cycle as it did last time. So we're looking for good levels of organic growth. We're looking to get to a 15 % operating margin by around March 28, which is our midterm plan. We're looking to generate a return on capital of about, capital employed of about 15 or greater than 15 %. And that includes the effect of acquisitions coming in, which are obviously always dilutive in the early days. And we're looking for... Our business is a capital-lite business. So we're looking for a very strong cash generation. So we're looking for free cash flow and operating cash flow of around about 85 or greater than 85 % of operating profit and underlying operating profit and PBT. And we've done that.

[00:39:35.300] - Nick Jeffries

I was looking back at the numbers, actually. Over the last 10 years, in the first 10 years, we doubled EPS. So in the first five years, we doubled EPS. And the For the second five years, we doubled EPS. And that's, hopefully, the way the model will continue. That's certainly our ambition.

[00:39:56.940] - Jean Roach

Sounds great. I think People always want to know, though, a bit more about the human side of being a CEO and what it takes. And so James and I do always like to ask our CEOs on the couch, what does a normal working day look like for you, and how do you get organised, and how do you fit it all in? So are you up at five in the gym for an hour? What does an average working day look like for you?

[00:40:30.480] - Nick Jeffries

Yeah. Well, I have a fantastic assistant who organises everything. It starts first thing, starts about 6:30 in the morning at home with all the overnight emails, all the news coming in and all the rest of it and digesting all the information. There's a lot of transactional information coming and going all the time. But the way I like to look at it more in weeks and months. Typically, the week starts with a review of trading. We get these trading reports at the beginning of each week that look at the prior week, by OPCO, by unit, sales, orders, and all the rest of it. We look at that, and that's very important because you can pick up, you can pick up what's going on. It's very important to stay close to the trading detail. I always have the beginning of each week, either Monday afternoon or Tuesday morning, catch up meetings with the two divisional heads, which covers all manner of issues. It could be trading, it could be a recruitment matter, it could be expansion of our Indian site, it could be an IT implement, all kinds of operational stuff of which there's a lot going on which needs managing and coordinating and decisions inevitably being taken on.

[00:41:56.110] - Nick Jeffries

This week, we're in budget mode at the moment, so we spend a A lot of time this week. On Tuesday, we spent two and a half hours working through, analysing all of our trading patterns, our backlog patterns, and what we think next year, next year, which is April for us, is going to look like. And then typically it goes into either an OPCO or a site visit or an M&A visit, target acquisition visit, or an investor meeting. Typically, there's a day a week in London on investor matters. Typically, there's a day a week either out in an OPCO or... The OPCO stuff these days tends to be in batches, but I'll be out and about in OPCOs. I'm just planning a trip to the States where I'll visit six of our OPCOs in one week. This week, I've had meetings on our group insurance policy renewal. Good. Yeah, it's a very big number. I've had a meeting on... We're going through an audit retender process. So although I'm not formally part of the audit tender process, I'm involved in that at a peripheral level. Yeah, lots of operational stuff. I broadly break it down in that roughly 40% of my time is on business operations, around about 30% of the time is on, 35% of the time, I would say, is on M&A.

[00:43:39.050] - Nick Jeffries

Yeah, this week we had another two and a half hour review of our M&A pipeline, two of our live deals, one of which we've parked, another small deal that's about to happen. That takes up quite a lot of time, both in terms of the identification, confirmation of the identification, the negotiation, the due diligence. There's quite a lot that involved with getting these deals away. The team do most of the work, but there are decision points and review points that are needed all the way through. And then the balance of the time is generally on investor matters, which is about 25% of the time, I think. I don't think it does.

[00:44:25.960] - James Goodman

As a chief exec of a publicly listed company for the last nearly for 15 years now, what are your reflections on that public dynamic? Is it working for a company like discoverIE, or would it be better if you were privately owned?

[00:44:41.310] - Nick Jeffries

I think the public markets for us have been fantastic. We had an enterprise value back in 2009, about six million pounds, and we're now about 800 million pounds. And the growth that we've achieved has been enabled because along that way, we've made five equity raises. We've stuck to our side of the bargain. We said, this is what we want to do, and this is what we think it'll enable. And investors have backed that and supported us. And so we've been able to raise a very substantial amount of equity and to create a group that is where we are today. And so I think that's a great... For us, that's worked very well. And when you are able to do that, then the investors give you the space to get on and do that. I think where we're at currently is that the UK market, particularly, the listed market is struggling, and capital out for all the well-publicised reasons. And I think today's market isn't as easy to operate in as it was. I think the investors are still often as supportive as they always were, but the backdrop, the regulatory backdrop, the wider environment is not as good.

[00:46:05.110] - Nick Jeffries

And one has to hope that government and interest rates and other things will start to change that. But the first 12 or 13 years were absolutely fantastic as a public company, but we're not in that space now. We need to re-find our mojo, I would say.

[00:46:24.590] - James Goodman

I think we definitely share that sentiment. Fingers crossed for a rosy outlook over the next few years. But thank you very much for coming to speak to us, nick. This has been a great conversation. Congratulations on the first 14 or 15 years. We look forward to watching your progress again in the future.

[00:46:39.900] - Nick Jeffries

Thank you.

[00:46:43.340] - David Brett

That was the show. We very much hope you enjoyed it. You can subscribe to the investor download wherever you get your podcast. And if you want to get in touch with us, it's schroderspodcast@schroders.com, and you can find out much, much more at schroders.com/insights. New shows drop every other Thursday at 05:00 PM UK time. In the meantime, keep safe and go well.

[00:47:07.850] - Nick Jeffries

The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. Information is not an offer, solicitation, or recommendation of any funds, services, or products, or to adopt any investment strategy.


James Goodman
Research Analyst, UK Desk
Jean Roche
Fund Manager, Pan-European Small and Mid Cap Team


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