Diploma PLC

Good morning, everyone. Great to have you with us today. Thanks for joining. I'm here as usual with our CFO, Chris Davis. From agenda, I'll start with an overview and then Chris will take you through the numbers and I'll come back to discuss the businesses. And at the end, there'll be questions as usual. So let's get started. It's been another very positive half for Diploma. We've delivered a strong performance across all of our key financial metrics. building on our long-term compounding track record. And we're executing on our strategy of building high-quality, scalable businesses for sustainable organic growth. Diversifying our specialized businesses is driving organic growth, scale, and resilience. We continue to develop our business's value-add model for scale, and we're encouraged by good margin progress this half too. While we're mindful of the environment, the upgrade to our full year guidance reflects our strong first half performance, the resilience of the model, and good momentum into the second half. In fragmented markets, we can acquire quality businesses to accelerate organic growth, and during the last four years, we have done so with good results. We acquired a further eight so far this year, including TIE and seven small bolt-ons. Maintaining discipline, we disposed of a small non-core business too. I would like to thank shareholders for their support as we raised capital in March to maintain a flexible balance sheet in light of an encouraging acquisition pipeline. Our environmental and social framework delivering value responsibly is progressing well. We have a new sustainability director and I'm pleased to have submitted our net zero plans to SBTI for validation. Now an overview of our performance. Organic growth of 10% was volume led and reflects the diversification of our businesses into structurally growing end markets, penetrating further core geographies and extending our product capability. Our strong reported growth of 30% includes 12% contribution from the quality acquisitions made in the last year. Encouragingly, our margin progressed by 40 basis points to 18.8%. We've worked hard on pricing and cost control, taken advantage of scale and partially reinvested in the scaling activity of the businesses and the group. EPS grew by an excellent 26%, outpacing our long-term track record of 15%. And we've declared a progressive dividend growing at 10%. Financial discipline is key to long-term compounding success. Our balance sheet is strong, reflecting the proceeds of the capital raise and return on capital has increased by 30 basis points to 17.8%. We feel very positive about our short and long-term prospects. Chris will give you some detail on this year's upgrade shortly. But for now, looking briefly at the longer-term picture, the group has compounded revenue and EPS growth at 14% and 15% respectively over many years. In recent years, and this half, we've accelerated that. Our massive potential for growth as we strengthen our business model and sustain great margins gives us confidence in continuing to deliver resilient quality compounding in the future. In a service-led, decentralized group like ours, it's the people that make this kind of track record happen. I'd like to thank all of my brilliant diploma colleagues for their dedication to delivering great service to our customers and for continuously striving to improve our businesses. We benefit from deep-rooted local communities in our businesses, and we focus on creating a healthy and inclusive environment for our colleagues to thrive in. As a result, we have high levels of engagement. This is a significant competitive advantage for Diploma. Our value-add business model lends itself to a decentralized management approach. This promotes an empowered culture of commerciality and accountability, agility and open-mindedness, rigor and continuous improvement. There is common purpose and values, therefore, across the group around which we were able to structure, build capability and promote networks of best practice. The combination of our decentralized culture and the power of the group is also a differentiator for us now and in the future. Over to Chris for the first half numbers.

Thanks, Johnny. Good morning, everyone. I am delighted to be talking to you for the first time as Diploma CFO and even more delighted to be presenting such a strong set of results. I'm going to take you through some financial highlights now before handing back to Johnny for a little more strategic color. So I'm going to start with revenue. This has been a great first half. We've delivered 10% organic revenue growth and we're up 30% overall after acquisitions and FX. That strong organic growth was broad based across all sectors and importantly was volume driven with less dependency on price. This demonstrates the resilience of our revenue diversification strategy. Controls increased organically by 13% with sustained double digit growth at Windy City Wire in the US. An excellent international momentum benefiting from market share gains in growing civil aerospace, defense and energy markets. Deals was up 8%, with a great first year from R&G driving double-digit growth in international, and North America was boosted by aftermarket share gains as it extends its geographic reach. Life Sciences was up 4%, with accelerating momentum. Q2 organic growth was up 11%. Hospital staffing, surgical procedures, and investment levels continue to normalize. This strong organic growth was then boosted by a further 12% from acquisitions in their first year, and FX contributed a further 8% to drive overall revenue growth of 30%. So I now turn to operating profit. We delivered very strong operating profit growth of 33%. This is driven both by the strong revenue growth I just discussed and importantly by ongoing margin improvement. We've improved operating margin by 40 basis points in the period to a very strong 18.8%. Now I'd like to make two points on this slide. The first point is about value add. I said on the last slide that our revenue growth was volume driven, but we do continue to manage prices to cover off input cost inflation. This is a key measure of our value add model and the solutions we bring to our customers and has driven margin resilience over the long term. The second point is to remind you of our margin formula. Clearly we benefit from performance improvements and operational leverage as we grow, but we continue to selectively reinvest to scale the businesses. Building out management teams, enhancing systems and upgrading facilities to ensure we can continue to deliver our value add solutions at scale. And Johnny will talk a bit more about this later. Let me just round off the rest of the P&L. Now net interest expense increased to 11 million pounds in the period. This was driven both by increased borrowings to finance acquisitions and higher interest rates. Average borrowings in the first half of 2023 were up about 50% compared with the last year, and our blended cost of borrowings was 5.5% this year compared with a little over 2% last year. Now after the capital raise and with lower net debt, that interest charge will moderate materially in the second half, although that is of course subject to acquisitions in the balance of the year. Matt of this adjusted profit before tax increase 26% to 98.7 million pounds and with a tax rate of 24 and a half percent a little lower than last year. And with a seven and a half percent increase in issued shares following the equity placing in March earnings per share increased by 26% to 59.1 P, the base on that strong H1 performance. and our confidence in the road ahead, we have declared a 10% increase in the interim dividend to 16.5 pence, continuing our long track record of progressive dividend growth. Now let's turn to cash. Combination of strong free cash flow and the recent share placing have driven a reduction in net debt to 154 million pounds, driving leverage down to 0.7 times EBITDA. I should note here that the group's cash delivery profile is always somewhat H2 weighted, so 70% cash conversion is a very strong first half result, and we remain well on track for 90% for the full year. Our free cash flow generation is another pillar of the group's resilience, and before considering any further conversion of our acquisition pipeline, would drive leverage below 0.4 times for the full year. But turning back to the first half, we're continuing to carefully reduce inventory in the context of a strongly growing business, and that working capital increase of £23 million is reflective of this growth, net of a consistent inventory reduction through the second quarter. Total acquisition expenditure of £76 million comprises the cash spent for TIE and the smaller bolt-ons, as well as acquisition fees and deferred consideration payments. partially offset by the proceeds received for the disposal of Holco, a non-core lower margin temperature control business, for £23 million. Finally, the group received net proceeds of £233 million from the equity placing completed in March. Now, I now want to say a couple of words on financial capacity. We recently extended the maturities of our existing bank facilities to December 2025, so we have no imminent financing needs. Financial risk is well managed, 70% of our drawn debt is hedged against interest rate movements, and we have in place a 24-month rolling FX hedging program, and our pension is in surplus. We have ample capacity to invest with cash and undrawn facilities of nearly £400 million and significant headroom to any covenant. But this is a fast-growing group, and I'm currently reviewing the right balance sheet structure to take us forward to the next stage of our journey. And I'd like to turn quickly now to acquisitions. As Johnny says, the group has a long track record of successful acquisitions, driving accelerated organic growth. Since 2019, we have invested around £840 million in acquisitions to build geographic scale, access new end markets, and increase our product offerings. These have performed strongly under our ownership. On average, organic growth since acquisition has been a very strong 15%. They're already averaging ROATSI of 16%, and this continues to grow every year. During the first half, we acquired TIE for 76 million, entering the strategically important industrial automation market in the US. TIE has a strong track record of organic growth, and we expect this to continue at accretive operating margins. But we've also continued to add small bolt-ons to our core business units. So far this year, we've completed seven of these for a total consideration of £23 million, representing an average EBIT multiple of under five times. They are expected to deliver £24 million of annual revenue at accretive EBIT margins and will deliver 20% year one ROATSE. And we've also continued to demonstrate portfolio management discipline with the HORCO disposal. So the net of those small bolt-ons and that disposal is increased growth and increased margin for zero net outlet. Investment discipline is an important factor in retaining high returns, with Group Roancy up 30 basis points in the period to 17.8%. Looking forward, we have a strong near-term M&A pipeline with around a billion of active opportunities. Let me just finish with a word or two on guidance. We have delivered a strong first half and the second half has started positively. We're conscious of macro uncertainty and the potential impact on some markets. We also cycle a very strong comparative performance, especially in quarter three. But our businesses are demonstrating increased resilience. I've discussed three pillars of resilience today. Firstly, diversification through our three growth buckets drives revenue resilience. Secondly, value add at the core of our customer offer drives margin resilience. And thirdly, our asset-light business model drives resilient cash generation. So our continued strong growth and resilience gives us the confidence to increase our guidance for the full year. We now expect organic revenue growth of around 7% for the full year. and a further 7% growth from acquisitions. We expect operating margin to be at the top of our previously guided range, around 19%, and free cash flow conversion of around 90%, which would drive year-end leverage to less than 0.4 times before any further acquisition investment. So in summary, we've delivered a great first half and we are increasing our guidance for the year. And with that, I'll hand back to Jonny to give you a little bit more color behind those numbers.

Hey, thank you, Chris. Now to review our businesses and first a reminder of our strategy, which is to build high quality, scalable businesses for sustainable organic growth. The group has massive potential for growth. We diversify and scale in three buckets, positioning behind structurally growing end markets, penetrating further in core developed geographies and extending our product range to expand addressable markets. All of our businesses have fantastic organic growth opportunities, and we continually improve our capability to execute. By diversifying our revenues, we will grow organically, build scale, and increase resilience, as Chris said. As a group, we focus the portfolio around key scalable business units. This means acquiring businesses which complement and accelerate this organic strategy, and occasionally there may be the odd disposal as we tidy up the portfolio. Our value-add distribution business model underpins everything we do. It drives customer loyalty and therefore resilient growth, pricing power, and therefore attractive margins. We have a framework for our businesses to journey towards their target operating model of the future to continuously improve their core competencies and capability so that they can deliver their value-add proposition at scale. We're also scaling our decentralized group effectively, evolving the structures, capability, and culture to sustain our success for the long term. Delivering value responsibly has become central to our commercial and operational strategy. It's a source of value creation for all of our stakeholders. We're making really good progress delivering this strategy, but we're only just getting started, and I feel as excited now as I've ever done about Diploma's prospects. More on this at our investor seminar in June. A few words now on the sectors. The progress and controls this half has been excellent. Organic growth was 13% and reported growth 24%. Windy City Wire has delivered another strong performance with organic growth of 10%. Volume growth has naturally moderated through the half against very tough comparators. However, having doubled profit in the first two years in the group, Windy City will deliver fantastic profit growth this year too, and the returns on that investment will surpass 20% in this third year. The prospects are really exciting. Structurally growing end markets, differentiated customer proposition, well-invested operating platform, and a winning team and culture. International Controls has delivered an excellent performance with 15% organic growth. The sector is benefiting from structurally growing end markets such as energy, defense, aerospace, and our growing exposure to electrification. We now have much better geographic presence with small and fast-growing positions in Europe and the US across our principal business units now established. And we've extended our product capability with further bolt-ons into the Texil Specialty Adhesives business units and entry into automation through the TIE acquisition. Scale benefits and performance improvements have increased margins by more than 200 basis points. Controls has again made excellent progress, and the momentum is exciting. During March, we announced the acquisition of TIE, a market-leading value-add distributor of aftermarket parts and repair services into the fast-growing U.S. industrial automation end market. CIE is a diploma-style business with a really strong value-add proposition based on deep technical expertise, breadth of product offering, and speed to market, all of which result in high levels of repeat business from a large and loyal customer base. Its focus on refurbishment and lifecycle product support means it contributes nicely to a circular manufacturing economy, enhancing its ESG characteristics too. The business is completely aligned to our three buckets for future organic growth. For example, industrial automation is an attractive, fast-growing end segment that we have been looking at for some time, underpinned by the onshoring of US manufacturing, tight labor markets, and a growing and aging base of installed CNC machines and robots. Secondly, we can support TIE with geographic penetration within the U.S. beyond their Tennessee base with access to our OEM customer base in other regions. And finally, TIE expands our addressable market through product extension. We can continue to add to its product capability over time. The business is growth, margin, and EPS accretive in year one. Seals has been our most resilient sector through and beyond the pandemic and has progressed really well again. Organic growth was a resilient 8% and reported growth 44%, the latter reflecting the acquisition of R&G last year, as well as a number of bolt-ons since. International Seals has delivered another great performance with 12% organic growth. We see the increasing benefits of exposure across a wide range of end segments, including wind, water, F&B, and medical. R&G had a fantastic first full year in the group, delivering scale for seals in the UK, broadening our fluid power product offering, and delivering 15% organic growth since acquisition, 13% specifically in this first half. We've also completed five R&G bolt-ons in the last year. Following a fantastic 2022, our North American seals business delivered 4% organic growth. Our industrial OEM business has been a little slower, mainly due to the rundown of inventory in certain consumer facing appliance manufacturers. We expect this to pick up as the year progresses. We remain very excited about North American aftermarket and its attractive exposure to US mobile machinery repair markets that will increasingly benefit from US infrastructure investment. We continue to drive market share gains in this business. Our US MRO business acquired in 2019 is performing very well too. We provide highly technical ceiling solutions that reduce customers' costs and improve environmental performance. Their quality and safety record provides significant market share potential. Margins in the sector came down this half as expected, mainly driven by the dilutive effect of RNG's first year in the group. As the year progresses, however, we will see the benefits of RNG's improving margins and of scale and performance improvements across the sector as a whole. I'm very optimistic about the future for SEALs. The momentum in life sciences is really encouraging. As I said in November, we expected life sciences to grow modestly for a quarter or two, with healthcare markets still disrupted by staffing shortages and the impact on surgical procedures. That has been the case. However, elective surgical procedures are returning closer to pre-pandemic levels and investment into medical equipment and diagnostics has also improved. We've worked hard to drive the strategy and performance and we're seeing some of the benefits come through earlier than we anticipated. Growth in the second quarter has been strong and this will continue into the second half. Margins have been extremely strong in the sector in recent years, albeit moderating in this period. In part, this is driven by some dilution from the aqua science acquisition done this time last year. There's also mix related with more capital this half, which will translate into more consumables and margin strength going forward. We're excited about life sciences for the medium and longer term. We will benefit from the catch up in surgical procedure backlog and increased investment in clinical diagnostics. We've expanded our geographical presence in Europe and continue to build our product portfolio. The sector is very well positioned for long-term growth. Acquisitions are an important part of the strategy. As Diploma has always done, we look for businesses that satisfy three core characteristics, value-add distribution with strong gross margins, organic growth potential, and management teams that we can back. We have, over the last four years, complemented this with a more strategic and structured approach to developing a pipeline across our businesses and in our three core organic growth buckets. Our pipeline is as strong as it's ever been, roughly 50 targets in the medium term with an EV of around a billion. In fragmented markets, the pipeline is well diversified by sector and geography. And with an average target size of 20 million, the pipeline is consistent with the typical diploma-style deals. We'll continue to do the small bolt-ons, which accelerate the business unit organic strategy at fantastic returns. And we will occasionally do slightly bigger ones that satisfy more group or portfolio strategic needs. I believe that this approach can continue to support organic growth, compound our earnings, and at high returns over the long term. Delivering value responsibly, our ESG platform is at the center of our strategy and our culture. We have a clear framework and measures. It's embedded in our commercial activity and we're starting to see the early stages of improvement across the businesses as they start to implement their plans. We've recently submitted our net zero plans to SBTI for validation. These anticipate net zero by 2045. We have some bold plans to reduce our emissions in the next few years. As I mentioned earlier, our people are critical to our success. We have great engagement, but we are not complacent. We ensure that we have a healthy, inclusive and developmental environment for our colleagues to thrive in. Diploma is and can be fantastically positioned for the new sustainable and circular economy. Our products and services face into global investment trends such as wind and renewable energy, decarbonisation and electrification, water management and engineered fluid sealing solutions. And of course, preventative social medical care, sustainable growth, sustainable group. To help drive these efforts, we've appointed a highly experienced sustainability director who has joined our executive team reporting to me. So in summary, but a strong first half performance and the upgraded guidance for the full year demonstrates our resilience and our trading momentum into the second half. We're excited about the massive potential for organic growth ahead and our strong acquisition pipeline to support that. We're focused on scaling the businesses and the group to sustain our value add model and margin for the long term. So I feel confident in continuing to deliver quality compounding in the future. We'll move to Q&A shortly, but before we do, I want to remind you of our investor seminar on 20th of June at 2pm at Numis' head office. The event will provide an opportunity to hear from members of the senior management team who will provide insight into Diploma's differentiated value-add business model, why we are so excited about our organic growth potential, and how we scale the businesses and the group to ensure sustainable long-term delivery. Look forward to seeing you there. And now we'll hand over to questions.