Diploma PLC

Good morning everyone. Great to have you with us today for our half year update. Thank you for joining. I'm here as usual with our CFO Chris Davis. I'm going to start with an overview and then Chris will take you through the numbers and then I'll come back to discuss the businesses questions as usual at the end. So let's get straight into it. It's been a great half for Diploma. We've again delivered a strong performance across all of our key financial metrics building on our long-term compounding track record. We continue to diversify our specialised businesses to drive organic growth, scale and resilience, particularly pleasing to see strong growth in a tougher environment. We've brought six quality businesses into the group, spending £284 million supporting future organic growth and at great returns. We continue to develop our value-add businesses to improve the customer proposition and drive margins. Reflecting both good momentum in the business into the second half, as well as the impact of the acquisitions, we're upgrading our full-year guidance. Sustainable quality compounding requires consistent strong delivery across all metrics, which we continue to demonstrate. I'm particularly pleased with this half-year performance because of the tougher environment, with strong EPS growth and returns demonstrating the increasing quality and resilience of the group. Organic growth of 5% was volume-led. Reported growth of 10% reflects a strong contribution from last year's acquisitions, despite an FX headwind of 3%. There was further encouraging progress on our margins too, up 80 basis points to 19.6%, the benefits of scale and performance combined with accretive acquisitions. Maintaining our long-term double-digit track record, EPS grew by 10%, moderated somewhat by the impact of last year's placing. In line with our policy, we have declared a progressive dividend up 5%. Financial discipline is key to long-term compounding success. Cash conversion improved year on year. Our balance sheet is strong and importantly, return on capital has improved by 20 basis points to 18%, reflecting the quality of our acquisitions. Overall, a great performance. We're feeling positive about short and long-term prospects. Our brilliant people deliver the customer proposition and deliver these strong results. And I thank them again for their commitment and passion. Our powerful decentralized culture is a differentiator and critical to our success. It breeds commerciality, accountability, agility, rigor, humility. Preserving it as we scale is an important part of my job. As we talked about in our seminar last year, we do this by ensuring focus, by developing dynamic leaders in a lean structure, and by managing actively the mood. Our people and culture sustain our compounding for the long term. Now over to Chris.

Thanks, Johnny. I'm going to take you through the financial highlights before handing back to Johnny for a little more strategic colour. So I'll start with revenue. We've delivered another strong first half with organic revenue growth of 5% and revenue up 10% overall after acquisitions and FX. All of our sectors grew. And importantly, again, this was volume driven with around 4% volume growth. More than ever in these tougher markets, this demonstrates the resilience of our revenue diversification strategy. And Johnny will talk a little bit more about that later. Controls delivered strong organic growth of 7% with double digit growth in international controls. Sales delivered a resilient 1% organic growth against the backdrop of customer destocking. Normal ordering patterns are starting to resume and we expect a stronger second half. Life Sciences delivered 5% organic growth, with end-market dynamics now largely normalised. This strong organic growth was boosted a further 8% by acquisitions in their first year, but FX was a headwind in the period, depressing reported growth by 3%. Now, given we are now in May, I should note here that we've started the second half well. With April now behind us, smoothing the Easter timing effect, year-to-date organic revenue growth is 6%. I'll now move to operating profit. We delivered very strong operating profit growth of 14%. This was driven both by the strong revenue growth I just outlined and importantly by ongoing margin improvement. We improved operating margin by 80 basis points in the period to a first half record 19.6%. Margin growth was driven organically with 110 basis points of growth from the performance improvements and operational leverage that our businesses drive as they grow. We reinvested 70 basis points of that to continue to scale the businesses, building out management teams, enhancing systems and upgrading facilities to ensure that we can continue to deliver our value-add solutions at scale. So net of those investments, half the margin progression in the period was delivered organically. Acquisitions added a further 50 basis points of margin expansion in the first half, given the accretive nature of both DXA and TIE. It's worth noting here that as we move into the second half, DXA and TIE are baked into those comparators. But then we have peerless and PAR coming in, which are both margin accretive. And those effects broadly offset each other, such that the full year margin impact of acquisitions will be broadly similar to the first half. So I'll just round off the rest of the P&L. Net interest expense decreased to £10.2 million. That's largely driven by the structure and mix of our debt facilities. The all-in blended cost of our borrowing facilities decreased to 5.2% from 5.5% last year. Net of this adjusted profit before tax increased 17% to £115.2 million. Although growing at a strong 10% to 65.1 pence, earnings per share growth lagged profit growth a little following the equity placing in March 2023. Now, this impact will reduce over the full year. And this, coupled with strong organic margin growth and the impact of accretive acquisitions, will drive full year EPS growth to be around 15% at current FX rates. Finally, in line with our policy, we've declared a 5% increase in the interim dividend to 17.3 pence per share, continuing our long-term track record of progressive dividend growth. So let's turn to cash. I should remind you here that the group's cash delivery profile is always somewhat H2 weighted. So 76% cash conversion is a strong first half result, up versus last year and positioning as well for 90% full year conversion. So just a few points on this slide. The working capital increase of £17 million is reflective of the revenue growth I outlined earlier. Net capital expenditure was £5 million lower than the prior year, benefiting from the disposal of a couple of properties. In addition to the initial outlay on four Bolton acquisitions, that acquisition expenditure of £22 million includes £13 million of deferred payments, largely relating to the final payment in respect of Windy City Wire. Tax and interest payments were up £10 million versus last year, driven by the increase in the UK tax rate and the addition of DIXA driving new Spanish tax payments. As a consequence of all of that, net debt is broadly flat over the period at £259 million, with leverage remaining at 0.9 times. With the completion of Peerless and PAR in recent weeks, we expect year-end leverage to be around 1.3 times before any further acquisitions. Now I now want to say a few words on the refinancing we completed during the period. The discipline of maintaining a strong balance sheet is a key underpin of sustainable quality compounding, and we've made some big improvements in the period. We've recently completed the refinancing of the group, extending and diversifying our funding position and setting us up for continued profitable growth. In July 2023, we entered into a 555 million pound multi-currency RCF. This runs until July 2028 with an option to extend two further years. In March 24, we issued our debut 250 million euro USPP with maturities of 7, 10 and 12 years at a blended coupon of 4.3%. With these enhanced facilities, strong free cash flow and ongoing discipline, we have strong liquidity with undrawn committed facilities and cash of a little over half a billion pounds at the period end. In addition, we further improved the balance sheet by de-risking our pension liability. We completed a full buy-in of the remaining liabilities in the UK scheme. So that means no further cash contributions will be required. Let's move now to how we put that capital to work. During the period, we completed four quality bolt-on acquisitions for a total consideration of £10 million, and with an EBIT multiple of around four times, and year one ROATSE therefore exceeds 20%. In March, we announced the acquisition of US-based Peerless Aerospace for £236 million, and this formally closed on May 1st. Acquired at a multiple of 7 times 2024 EBIT, it will deliver 15% ROATSE and 8% EPS accretion in its first full year. On 30 April, we acquired a UK-based PAR group for £13.8 million. Acquired at 7 times 2024 EBIT, it will deliver 14% ROATSE and 1% EPS accretion in its first full year. These add to our long track record of successful acquisitions driving accelerated organic growth. To recall, since 2019, we've now invested around £1.3 billion in acquisitions to build geographic scale, access new end markets, and increase our product offering. They've performed strongly under our ownership and are already averaging ROATSI of 16%, and this continues to grow every year. Looking forward, we have a strong M&A pipeline with diverse high-quality opportunities. So finally, to guidance for the year. The momentum in our underlying business combined with the contribution from recent acquisitions drives an upgrade to our previous guidance. So we now expect Constant currency revenue growth of around 16%. This is made up of 6% organic growth, boosted by growth from acquisitions of around 10%. So that's an upgrade of 5 percentage points of growth versus previous guidance. Strong operating margin of around 20.5%. Now that's an upgrade of 80 basis points of margin versus previous guidance, with around half of that coming from the strong underlying performance and half from the recent acquisitions. So if FX rates stay where they are today, that will flow through to full year EPS growth of around 15%. We continue to expect free cash flow conversion of around 90%. And before any further acquisitions, we'd expect year end leverage of around 1.3 times. So in summary, we've delivered another strong first half and we are increasing our guidance for the year. With that, I'll hand back to Johnny.

Okay, thank you, Chris. Now on to our businesses. First, a quick reminder of the strategy, which is to build high-quality, scalable businesses for sustainable organic growth. We drive organic growth in what I call our three buckets, positioning behind structurally growing end markets, penetrating further in core developed geographies, and extending our product range to expand addressable markets. Small concentrated businesses stepping out of their niche, taking their specialised proposition to new places. They all have fantastic opportunities to grow. This strategy drives exciting sustainable organic growth scale and increased resilience. This is complemented by selective high quality acquisitions that drive future organic growth and at great returns. To keep the portfolio focused, we occasionally divest of businesses that are not our model or are not ours to scale. Our value-add model and decentralized culture are differentiators. Scaling our businesses and group effectively is therefore key to sustainable delivery. And finally, delivering value responsibly is central to our commercial and operational strategy and embedded in our culture. Through it, we can make a meaningful difference. A few words now on the sectors. Controls continues to perform very well. Organic growth was 7%. Our international controls businesses have continued to see market share gains on top of the tailwinds from structurally growing end markets such as aerospace, energy, defence. I'll talk about our peerless acquisition in a minute. Windy City Wire has grown well, broadly in line with the group average. driven by good volumes. The business is well positioned, particularly in data centers with significant potential there for growth. Excellent margin progression up 120 basis points was driven by product mix, leverage, and the benefit of last year's accretive acquisitions. Controls has great momentum into the second half. We're excited to welcome Peerless to Diploma, a family owned specialty fasteners business based out of New York State predominantly serving aerospace markets. It's been run by Bill Way and Dan Russo for 30 years. We've known them for some time. They do a brilliant job, and I'm delighted that they'll be staying on to lead the business into the future. Peerless has clear value-add, evidenced by its 30% margins, supplying high-quality, high-demand fasteners with technical service, breadth of inventory, and speed to market. all in critical fuselage applications in the highly regulated market of aerospace. Peerless also has a long-term track record of high single-digit growth and huge potential for the future. And that's based on, firstly, market tailwinds. Aerospace is a market we know well and has significant structural drivers, including the backlog of new aircraft manufacture and a healthy MRO environment. Secondly, the business is well diversified with 80 plus customers covering all the major OEMs. Having a reputation for quality can only position us positively in this value chain. And finally, strategically, it complements our current geographic reach well with further penetration in the US and Europe. It's also a nice product extension, complementing our existing interior fasteners with fuselage fasteners. We therefore also have cross-selling opportunities to go for. As we talked about at our seminar last year, while we are not always the highest price, we have competitive advantage as the home of choice for family-owned businesses. It's a win-win. I'm excited that Peerless has joined the group. I welcome our new colleagues and I look forward to the contribution the business will make to the group. Seals has been our most resilient sector in recent years and I'm really positive about the future for the sector. Modest organic growth of 1% reflects a tougher period of destocking in the last 12 months or so. Reported growth of 22% includes principally the acquisition of Dixa in the second half of last year. As we've talked about before, both the European and US OEM businesses have been affected by the destocking cycle in the industrial markets. We're now starting to see more positive customer ordering patterns return. The second half for these businesses therefore looks much better. We've seen very strong performances in the UK from R&G and in Australia. Dixa has been broadly flat, as we expected when we acquired it, reflecting the downward market pressures in Europe, offset by encouraging share gains. We expect Dixa's growth to improve in the second half. In North America, our US MRO business, VSP, has performed very well. Their unique quality and safety proposition positions the business very well. Margins were up 40 basis points in the sector, supported by both improvements in R&G and by the accretion from the Dixit acquisition last year. So I'm really positive about the period ahead for Seals, with good market tailwinds from infrastructure and renewable investment particularly, the recovery in the stocking cycle and significant potential within each of our businesses. I wanted to pause for a second and update you on our progress with R&G, our UK SEALs aftermarket business, which we acquired in April 2022. Richard Davis, our GM and the R&G management team have made a fantastic start to life in diploma, growing organically at around 10% CAGR, bolting on nine acquisitions and growing margins to an expected 18% this year from 13% two years ago. The organic growth is driven by extending local market penetration, entering new end markets and by cross-selling new products around their group. The nine acquisitions done in the last two years, including three since the turn of this year, contribute significantly to organic growth performance. At an average multiple of four and a half, they deliver excellent year one returns too. PAR Group, a gasket specialist in Northwest England, is the latest and biggest business to join and will support greater scale in our seals and gaskets division with a powerful value-add model and great margins. We've been investing in scaling R&G for sustainable delivery, as we do everywhere. We've now organized into four divisions, significantly upgraded the management capability. We've invested in systems and we've implemented two new state-of-the-art facilities with another on the way. The strong margin progression reflects leverage and the value of these scaling investments. Overall, it's a great example of how our acquisitions can flourish within Diploma's ownership. I'm very happy with the progress we're making in life sciences. It's been a tough period for all healthcare businesses post-pandemic, but our hard work is paying off and the 5% organic growth in the first half is encouraging. The diagnostic businesses have been strong as increased investment continues. This was particularly the case in Australia, where we also had some excellent market share wins too. In Medtech, surgical procedures have normalised to pre-pandemic levels, which is positive. and the benefits of the unwinding backlog will benefit us in the medium term. We've broadened our product range, reflecting new technology in key growth diagnostic spaces, such as genetic preconception screening, allergy and autoimmunity testing. I'm pleased with our progress on business development, and the sector is benefiting from knowledge and opportunity sharing to leverage existing success across businesses. We've invested significantly in the sector in the last few years too, We have great management talent and we've invested in consolidating the Australian and Canadian businesses into single business units to leverage operational capability. The Australian project is complete and the Canadian one is due to complete by the end of this year. Margins have come down a fraction over the last few years as a result of this investment, but will build back up. The market tailwinds in diagnostics and surgical medtech are very positive. We're driving better business development execution and we're improving the infrastructure and really positive about life sciences prospects. So in summary, we've had another strong performance in the first half and made good progress with strategic execution too. We're excited about the massive potential for organic growth ahead. Some fantastic new businesses have joined the group and we have the pipeline to continue to bolt on quality businesses over the long term. We're focused on scaling the businesses and the group for sustainable success. The outlook for half two is positive, and we're upgrading our guidance, and we remain confident in delivering sustainable quality compounding over the long term. With that, I'll hand you back for questions.