Diploma PLC

Good morning, everyone. Happy New Year. Thanks for joining us today. I hope you're all well. I'm here with Chris. Sorry to have missed you in November at the full year update, but I'm now fully recovered and back on it. A few words this morning on our quarter one performance, and then we'll move fairly swiftly into Q&A. So I think the first quarter performance hopefully is fairly self-explanatory from the RNF. Following the excellent results in 2023, we're carrying good momentum and we're reporting a strong start to 2024. Organic revenue grew by 6%, which was fairly broad-based and volume-led. Controls and life sciences have delivered strong growth, continuing the trends from the last quarter of last year. And Seals has performed robustly with modest growth, seeing off the de-stocking the continued destocking in the OEM world. Our reported revenue growth was 10%, with an 8% contribution from acquisitions. And we carry on doing the rewarding small bolt-ons, three more this quarter, which we feel support our high returns on capital. The pipeline remains very healthy. And finally, we're really encouraged by the way we've started with our margins as well in the new year. So overall, we're very pleased with the start to the year. A few words on the outlook. We've got a long, successful track record of sustainable quality compounding. I'd say the market is a bit tougher, but the business model is resilient. And as we've talked about before, our execution of the strategy makes us more resilient. So we believe the current performance is really underlining that, underscoring that and demonstrating that. And we're feeling good about delivering another year of great results in 2024. I'll hand that back to questions.

Our first question today comes from Annalise Vermeulen from Morgan Stanley. Please go ahead.

Hi, good morning, Johnny. Good to have you back. Two questions, please. So, firstly, you know, you've talked a lot about the resilience of the portfolio and the diversified nature of it, you know, meaning you've delivered another good quarter. Can you give any comments on what continues to be sort of the underperforming bits of the portfolio? I know, obviously, at the full year results, we talked about SEALs. and some of the areas there, and you're saying you're still seeing destocking there in the broader market. But I'm just wondering specifically in your business, is there anything that's changed materially for the better or worse, or any trends that you're seeing relative to the end of September? And then secondly, again, you've commented on margins, having started the year strongly. I'm just thinking about your full year guide. from memory, you know, typically your margins are a little bit lower in the first half relative to the second half, very marginally. So would we expect to see that typical split for the first half, second half of this year? Or how should we think about margins as we move through the year? Thank you.

Well, thank you very much, Annalise. Chris will answer the question on margins in a second. I mean, just to your point on, I suppose, underperforming areas. I mean, look... We're feeling, as I said before, pretty good about the strategy and how it continues to diversify the business. I think what we've seen, and this is just through my optic, what we've seen probably is geographically the US probably moderated about nine to 12 months ago. Europe and the UK probably a little harder over the last six months or so. And as we've said a few times, de-stocking in particularly our big OEM industrial type of customer set has continued. And that really affects more than anything the SEALs business, as we've said before. However, I mean, I would just say, you know, there's plenty of reasons for us to continue to be very optimistic about what we're seeing in our revenue numbers. I mean, I would point to the fact, first of all, that, you know, 6%, in a tougher environment. And with the numbers we're lapping, we feel is a very, very good outcome for this quarter. So we're pleased with that. There's plenty of diversification from an end market perspective really gives us both, you know, structural protection and tailwind. And that could be anything from the recovery of diagnostics world, automation, you know, telecoms, electrification, those kinds of things are still giving us nice tailwinds. And I think the final point I'd make, and a few people have asked me about this recently, we continue to see market share gains as well. And this goes to the power of our value-add distribution model, where we have customer loyalty and share of wallets, but we also have the market share gains that come from that reputation. So all in all, we feel that the 6% is a very good outcome. And of course, If it does turn out to be a tougher year, delivering something in line with or even slightly better than our financial model would be a great outcome.

Yeah, and Annalise, on margins, yes, you're right. We do typically pick up H1 to H2. Some of that is a bit of seasonality, obviously with Christmas in H1, but also the growing business gives you operating leverage as we go through the year. We would expect the same.

um this year and you know we're encouraged with what we've seen in q1 putting us on track for the guidance for the full year that's great thank you very much thank you and our next question comes from daniel cowan from hsbc please go ahead uh morning guys uh and happy new year um first question please uh can we talk exit rates um please i think you said exit rate in in NH2 last year was about 7%. How did organic growth develop over the last quarter, please? And second question is, can you give us an idea of the period end net debt?

Yeah, okay. I'll ask Chris to answer net debt in a second, just in terms of exit rates. I mean, I If I'm honest with you, I wouldn't get too caught up. I mean, we're talking about, we're slightly caught up in detail here. I mean, I think from memory, we did roughly 5%-ish, quarter 3, 7%-ish, quarter 4, and we're posting 6% now. So I think, you know, overall, what we see is that we're fairly steady in the 5 to 7 kind of range. And, you know, you shouldn't really necessarily for a business like ours measure us just by quarters. But that's where we think we're trading at at the moment, in that kind of five to seven kind of range. You know, to the question earlier, you know, the market is a little tougher than it was, say, 12 months ago. But we're feeling, you know, pretty confident and pretty optimistic about the diversification, the resilience, and therefore, for us to continue to deliver that kind of range over the course of the year. Chris, do you want to do net debt?

Yeah, I mean, debt's down a touch, obviously. We've had a quarter of cash flow, and as you've seen in the statement, we've spent a little under... Actually, we put the numbers for M&A, but we're down a touch and in line with what we guided for the full year.

Thanks very much.

And up next, we have David Brockton from Deutsche Numis. Please go ahead.

Good morning. Can I ask two questions, please? Firstly, just focusing on that de-stocking trend. It's clearly within sales OEM. It's clearly been there for a while now. And I just wondered whether you've got any signs as to sort of how that's faring sequentially. Are there any signs that we could be nearing an end there? That's the first question. And then the second question, given the context you gave there, Johnny, of sort of Europe being sort of marginally tough, I just wondered if you could just give an update on the Dixon integration and how that's going. Thanks.

Yeah. I'll say a few words about Dixon. Maybe, Chris, do you want to do the de-stalking point? We're very happy with, you know, clearly, as I said earlier, Europe, I think, as we all know, has been a little tougher over the last however long. So they're operating in a slightly tougher environment. However, we were expecting that when we bought this, and we were certainly expecting for more modest growth in the early period. More importantly, settled in very well. We're very, very happy with the team we've got over there. We're very, very happy with... what we've found as we've got under the bonnet in terms of the ability to keep driving the great organic growth. And they do have fantastic opportunities, both in terms of geography, particularly I'd say Germany, Eastern Europe, the UK, and even the US. They also have great opportunity from a product perspective. And I think the final point I'd say on it is, even though it's very early days, we're starting to link together some of our fluid power teams from different geographies with the potential to drive synergistic revenue over the medium to long term, and that might be with the R&G team, and it's also with the Hercules aftermarket team in the U.S. as well. So I think we feel very happy with what we've got, and we feel very optimistic about the medium to long term.

And on destocking, look, it's early. It's only a couple of months, I guess, since we last updated you. We have, I mean, pleasingly, we've seen a few larger OEM customers returning to slightly more normalized order patterns. But, you know, it is early, and I don't want to call a change in trend on what we've seen. I think we said, you know, it could be one or two or three quarters to flush through. We're through one of them, and I think that's still how we feel. There could be one or two quarters left before this fully flushes through.

Thanks. That's useful context.

I think what I just add to that also is just to underscore how pleased we are with the resilience of the steel sector. You know, traditionally in kind of old diploma, Seals was clearly our most cyclical with its kind of U.S. construction orientation. But the work that's gone on, not just in the last five years, but beyond that, 10 years, I would say, to diversify seals and market geography products as well has really improved the resilience. And if it can continue to see off such a trend as it is doing at the moment, then it will be very pleasing indeed.

Thank you very much.

Thank you. And we're now moving on to a question from James Rose from Barclays. Please go ahead.

Hi there, morning, and glad you're well, Johnny. Two from me, please. Could you give us an idea of trading within Windy City Wire versus the second half last year, please? And then secondly, I think Mr. Gargano was in the UK not too long ago talking about the future of Windy City Wire and the next steps there. Could you give us some insight into those conversations, please?

Yes, yes, yes. Well, Rich and I spend a lot of time together, both stateside and more recently in London and Paris on our tour of the world, Windy City, our tour of the world. How's it going with Windy City? It's going very good. Look, you know, as I've said a thousand times, the first two-ish years of 20% to 50% growth was never going to be the long-term trend, was it? And we would be very happy with returning to what Windy City has done over, you know, a 10, 20-year period. And And that's where we are at the moment. The profit growth in the first quarter was double digit. And we're very pleased with the way that it continues to trade. Volume in a tougher market is still very good. And that's despite lapping some of the market share gains they made over the last year or two from a supply chain, more difficult supply chain, they're still lapping that now, but delivering good volume on the back of that. And we continue to be encouraged also by the diversification of the business and the higher margin growth in digital antenna and data center and other such premium markets. We're very, very happy with that. In terms of how things are going with the management team, Rich has signed up for another three years, the end of the first three-year cycle, if you like. And he's signed up for the next three years. And so we feel very good also about the continuity of management. So overall, as I've said many, many times, Windy City, we expect to return to a good level of business growth as it has done over many, many years. And that's what we're seeing at the moment. And we're very happy with that. Thank you. Thanks, James.

Thank you. And we're moving on now to Keane Madden from Jefferies. Please go ahead.

Thanks, not morning all. Two quick ones from me. I appreciate they're not a direct competitor, Johnny, but MSM Industrial in the States were recently flagging a more optimistic outlook for US trading momentum in 2024, driven by feedback from customers, lower interest rates, etc. I'm just wondering whether you share that positive outlook for your North American business in 24 after some cyclical headwinds for the last 12 months. And then secondly, just wondering what your supply chain integrity challenges look like at the moment, given some well-documented freight issues around the world.

Yeah, Chris will take that one in a second, Keane. Thanks for the question. Just on the US, well, look, I mean... I'm not going to pretend to be a soothsayer, am I? But I am generally an optimist on the U.S. for many, many reasons. In our kind of service-led organization, I think the homogenous nature, I guess the capitalist growth orientation of the market I think is great. So I am an optimist on the US and I hope that they are right, that things will pick up. For the moment, I would say, as I said to one of the first questions, At the moment, I would say that what we see is kind of a level, a stable state at the moment. And that's allowing us to deliver decent performance. Windy City controls a little bit more modest in feel. So it's certainly not a disaster at the moment. It's pretty reasonable, I'd say. And I would hope that a more favorable environment would come interest rates as you say etc. And so I'm optimistic But I'm certainly not going to make any predictions on it Okay, a couple of points.

I think on you know Red Sea and supply chain disruptions Yeah, you know in a handful of our businesses. There will be a you know up to a kind of two to three week delay and on shipments and some cost increase. Freight is nearly 2% of our cost base, just to put that into context. It's not huge. The other point I think was worth making about Diploma is looking back at the supply chain challenges post-COVID where we were a bit of a beneficiary. So in some of our markets where we got closer in supply chains, e.g. Windy City, but also in our businesses where the level and breadth of inventory holding is part of the competitive advantage, those businesses tend fare well through disrupted supply chains.

Yeah, good point. Thank you, Chris.

Thanks, Kieran.

Thanks.

Thank you. And as a brief reminder, that is star one for your questions today. And up next, we have Sam Dindal from Stiefel. Please go ahead.

Morning, guys. Congratulations on the good Q1. A couple of questions from me, please. Firstly, on M&A, are you seeing any change to sort of vendor expectations, I guess, particularly in sales, given the tougher macro there? And then secondly, appreciate the commentary on volume-led growth. Could you give any commentary on where pricing is, and are you still confident that can offset your own cost inflation in the year? Anything?

I'll let Chris take that second one. On M&A, I think the general observation I would make for you is that we – we're not generally buying bad or broken businesses. And therefore, if a vendor is coming to market with a business that we are interested in, they're expecting to command a sensible multiple for that business. Otherwise, what they will do is rather than sell it on the cheap, they'll just wait and pull it and do it another time. So I think what I would say is multiples are a lot more sensible options and balanced than they were, say, 12 months ago, 18 months ago. But I wouldn't say that means that we can, you know, get anything on the cheap. I would say we would pay a fair market price. I think, you know, if I can just expand on the question and say, from an M&A perspective, you know, we're pretty pleased with, you know, with where we're at on M&A. We've done 35 odd deals in the last four or five years. And, you spending just over a billion, and our returns are very, very strong. So we feel good about that. We're going to continue to do the smaller stuff. That's very, very important to us. We've done another three this quarter. I think we did 10 last year. They're great for organic growth for the small businesses. Great returns straight off the bat at a four or five times multiple. And the competitive landscape, to your question, doesn't really change that much in that small business environment. So we'd like to do more and more of that. But as we also know, we'll occasionally do something bigger. We did TIE and DIXA last year. And we've also got a good track record of delivering good returns on those slightly bigger deals as well. And we're well positioned. The markets are fragmented. We are a buyer of choice against generally PE competition. And we've really worked hard on developing our processes around M&A as well. So if, as they say, the market for M&A might be accelerating a little bit in 2024, then I think we're well positioned for that. But I would just underscore that by saying that we're in no rush and we continue to be very, very disciplined. So I feel good. We've got a good pipeline. The market seems reasonably sensible and we'll see how we go.

And Sam, on pricing, as you know, it's a key part of our margin formula to price to cover inflation. And I am confident that we can continue to do that. We're not seeing a lot of inflation, either product inflation or our own cost-based inflation. But in the quarter, yes, we've covered it. I would imagine for the full year, you should expect the same. It's a key... It's a key metric of our value-add, the ability to do that. You know, no more, but the ability to cover that off. We've done it in the quarter, and we'll expect to do it through the year.

Brilliant. Many thanks.

Thank you. Thank you. As there are currently no further questions in the queue, I'd like to hand the call back over to you, Johnny, for any additional or closing remarks.

Thank you. We feel like we've made a good start to the year. We're on track for another strong year of great sustainable quality compounding delivery. And I don't think there's much more for us to say than that at this stage. Thank you very much for everyone, everyone for joining. And we look forward to seeing you at the half year.