Diploma PLC

Good morning, everyone. Welcome to Diploma's 2024 results update. Thank you very much for joining us. Thank you everyone online for joining us too. I'd like to start by saying a big thank you to the Diploma group team sat over there for all their hard work in preparing for today and also to my Diploma colleagues online for all their tremendous contribution to our success. I'm joined of course as usual by our CFO Chris Davis and today our agenda will be the following. I will give an overview for a few minutes then Chris will take us through the results as usual and I'll come back and do an update on our strategy and the businesses. There'll be questions and answers at the end. Okay let's get started. So it's been a great year for Diploma. We've 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. I'm pleased to see such good growth in a tougher environment. We've brought seven quality businesses into the group, spending £293 million, supporting future organic growth and great returns. And we've disposed of three small non-core entities as well. We continue to develop our value-add businesses to improve the customer proposition and drive our margins. And all of this we do with discipline. Despite challenging industrial markets, the outlook and our 2025 guidance are really positive. So we're in good shape. I'm particularly pleased with this year's performance in a tougher environment, as I said. Delivering our ambitious EPS growth together with the discipline of excellent returns in the good times and the bad is what defines, in my mind, quality compounding. Organic growth of 6% was volume-led and reported growth of 14% reflects a strong contribution from our acquisitions. Margins have risen again, up 120 basis points to 20.9%, now sustainably over 20%. The benefits of scale and performance combine with accretive acquisitions. As a result, maintaining our long-term track record, EPS grew by 15%. As I said, discipline is key to long-term compounding success. Cash conversion was 101%, the balance sheet's in good shape at 1.3 times, and importantly, return on capital has improved by 100 basis points to 19.1%, reflecting particularly the quality of the acquisitions we've made over the last five years or so. In line with our policy, we've declared a progressive dividend up by 5%. So overall, another strong performance. Looking briefly at the longer term picture, the group has compounded revenue and EPS growth at 15% and 16% respectively over many years. And we've done it at very strong returns on capital. We're confident we can sustain this over the long term through our differentiated business model, our powerful decentralised culture and our clear strategy. Our guidance for 25 and our updated financial model reflect that positive outlook. It's the people and culture that make this kind of track record happen. I'd like to thank again all of my brilliant diploma colleagues for their dedication to delivering great service to our customers. Our value-add business model lends itself to a decentralised management approach, an empowered culture of commerciality, accountability and continuous improvement. This is our secret sauce and preserving it as we scale is critical. So how do we scale it? Well, firstly, we keep it focused with portfolio discipline and simple strategic and performance frameworks. Next, we maintain lean structures with exceptional dynamic leaders. And while we review the business's progress regularly, as you would expect, we also actively manage the mood of the organisation to ensure agility, pace and great execution. And finally, while preserving our decentralised culture, we can also enjoy the benefits of a bigger group by creating networks and best practice sharing to become more than just the sum of our parts. I'll hand over to Chris.

Thanks, Jonny. Morning everybody and I'm delighted to be here once again to present another strong set of results. As ever I'll take you through the numbers before handing back to Jonny to give a bit more colour on what's behind the numbers later. Our diversified growth portfolio or portfolio growth strategy drives strong sustainable revenue growth and this has been another great year. We've delivered 6% volume-led organic growth and revenue is 14% up overall after 10% from acquisitions and a little headwind from FX. Controls increased organically by 10%. In international, we benefited from market share gains in the growing aerospace, defence and energy markets. And in Windy City Wire, we benefited from share gains in the growing data centre market. Seals was up 1%, a resilient performance given customer destocking in the first half and ongoing market softness in the second half of the year. Life Sciences delivered 6% revenue growth, driven by particularly strong performances in our scaled Canadian and Australian businesses. And I'll now move to operating margin. On the back of an 80 basis point improvement in 2023, we've improved operating margin by a further 120 basis points in 24 to a very pleasing 20.9%. Our acquisitions contributed strongly to margin this year, but in addition, we had good underlying margin expansion across our controls and life sciences sectors, offsetting some contraction in seals. Overall, we grew adjusted profit by 20% of the year to £285 million. Now I said on the last slide that our revenue growth was volume driven, but the ability to pass on input cost increases through pricing is a key measure of our value-add model and the solutions we bring to our customers. Our businesses benefit from performance improvements and operational leverage as they grow. And we then selectively reinvest a proportion of this 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 to round off on the ambition side of sustainable quality compounding, I'll just turn to EPS growth. Net interest expense was up to £27 million. That's driven by the increase in average debt having self-funded the acquisitions in the year. So all in, our blended cost of debt has decreased a touch to 5.3%. Adjusted profit before tax, therefore, has increased 19% to £258 million. and earnings per share increased by 15% to 145.8 pence. This continues our long-term track record and would have been 19% growth at constant currency. So now let's turn to the discipline side of sustainable quality compounding, starting with cash conversion. Our capital light business model, coupled with our discipline, drives strong and consistent cash conversion. And this year we delivered 101% conversion ahead of our financial model, delivering free cash flow of nearly £200 million. Working capital increased by only £8.5 million as we continue to carefully manage inventory across the group. We spent £14 million of net capex on facilities and systems upgrades across a number of our businesses. And we invested £311 million on the acquisitions of Peerless, PAR and five smaller bolt-on acquisitions, as well as paying for deferred consideration for acquisitions in previous years. We paid £77 million in dividends, reflecting the 5% growth in line with our policy. So taking all of this together, net debt has increased to £420 million and leveraged to 1.3 times, well within our policy of 2 times and significantly below any covenant thresholds at 3.5 times. So a quick word on those 2024 acquisitions. Peerless was clearly the biggest acquisition in the year and we're really excited about it, both what it has achieved already and its longer-term prospects, and Jonny will speak about that shortly. PAR is strategically important for R&G in the UK, strengthening its seals and gaskets division through both product extension and end-market expansion. But those smaller acquisitions are just as important, and we've completed another five this year. The average price for bolt-ons is around £5 million, an average multiple of five times EBIT. That means 20% return on capital in year one. But we're just as disciplined about the effective recycling of capital as we are about its deployment. We do not often dispose of businesses and never for performance reasons. That's on us. But we view it as key to responsible stewardship of capital to find new homes for businesses that no longer align with our strategy or our business model. We passed on three to new owners after the year end. Kubo is a high quality sales business in Switzerland and Austria, and it was better suited to a more manufacturing focused owner who could open up markets in Germany. Pennine was part of R&G in the UK and was increasingly focused on one large supplier to whom we sold the business, enabling R&G to focus on its core fluid power businesses. Gremtech, as part of the ISG connectors business and controls, is located in France and supplies different end markets to the wider business. So let me say a little more about return on capital. Effective capital stewardship is perhaps the most important aspect of sustainable quality compounding, and we measure our performance through ROATSI. In fact, we're a little obsessive about it. Disciplined organic investment to scale our businesses, disciplined acquisitions and occasionally divestments. The discipline of a progressive dividend and balance sheet discipline to manage leverage. We target returns in the high teens, that's as much an art as it is a science. We believe that it hits the right balance between putting our capital to work and maintaining a prudent balance sheet. And over the last five years, we've delivered average returns of 18%, and that's testament to the quality of the acquisitions we've made. We're particularly pleased with our performance this year, adding 100 basis points to Roatsi to achieve 19.1%, about twice our cost of capital. And during the year, we took further steps to strengthen our balance sheet to provide capacity and flexibility to support sustained profitable growth. Building on the revolving credit facility we financed in 2023, we issued the group's first US private placement in the first half of the year, with a second issuance towards the end. So over the past 18 months, therefore, we've secured close to £900 million worth of facilities, termed out to 2036. In other words, we have ample capacity to invest in further growth with cash and undrawn facilities of £450 million and significant headroom to any covenant. Now, I'll close with some guidance for the year, but first wanted to outline an update to our medium-term financial model. As you know, our financial model sets out how we think about sustainable quality compounding, ambition with discipline. It gives an indication of what you should expect to see from Diploma over the medium term. And it all starts with organic growth. We've delivered an average of around 5% for the past couple of decades, and it's our most important driver of value. So the growth part of our model remains unchanged. Where we have updated our model is for a 300 basis points structurally stronger operating margin. The combination of operating leverage from growing our value-added businesses plus some accretive acquisitions means that we feel that we've transitioned from being a high teens to a 20 plus margin group. But ambition is nothing without discipline, and there are no changes to that side of the model. So to close on 2025 guidance, Diploma has an excellent track record of compounding growth and delivering strong financial returns through the cycle. Diversification, both within individual businesses and across our portfolio, drives revenue resilience. Our value add propositions drive margin resilience, and our asset light business model drives resilient cash generation. So, whilst we remain mindful of the uncertain economic backdrop, our outlook for 2025 remains broadly in line with our financial model, albeit with organic growth and operating margin slightly ahead at 6% and 21%. Or put another way, we will absorb the impact of those disposals I talked about with profit outperformance in the base business. And I'll now hand you back to Jonny to give a little more colour behind the numbers.

Thank you, Chris. Well done. Right. Before moving into the businesses themselves, I'm just going to give you a quick reminder first of our strategy. And our strategy 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 our addressable market. Small, concentrated businesses stepping out of their niche and 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, as you've heard, that drive future organic growth and at great returns. And to keep the portfolio focused, we occasionally divest of businesses that are not our model or are not ours to scale. You've heard about a few of those from Chris. Our value-add model and our powerful decentralised culture are our key differentiators. And as we go from small to large, we naturally have to do things a bit differently while always preserving these differentiators. So building effective scale is key to the strategy, developing our businesses and our group to become better, not just bigger, and as such, to sustain long-term delivery. Delivering value responsibly is central to our commercial and operational strategy and is embedded in our culture. Through it we can make a meaningful difference. So looking at our three growth buckets now, one of the really exciting opportunities is to access structural end market investment trends. A few, not all, but a few are on this slide. Our products and services face really well into these and we're working to further develop our exposures. In the year, for example, we've extended our presence in IVD, in data centres, in renewables, to name a few. And through acquisitions, we've also increased exposure in aerospace, infrastructure and medical. The group today is significantly more diversified than five years ago, and the strategy will continue to drive growth and increase our resilience. Now let's look at the significant white space opportunity in the other two buckets, geographical penetration and product extension. Geographically, we are focused on the core developed economies. As you can see, penetration is still very small today in our product verticals across the US, Europe and the UK. We don't need to go to higher risk developing markets for our growth. Over the course of this year, we've added a little more exposure to our US and European fasteners through the acquisition of Peerless. We can also add new product verticals, but we don't want to go crazy with that. Portfolio focus is important to us, but we'll selectively ensure it suits our business model and we have the right to scale it. There is still plenty of white space for us to go after. Our businesses, of course, have to execute on this growth strategy. And I've said many times that we are on a journey towards great sales execution at scale. The businesses have done really well at key account management, technical capability, agile response. We want more business development capability too, a more strategic and structured approach to market development and great B2B sales processes. So we're providing the network, the workshops and best practices, the investments to develop more of this. It's exciting that we can still get better at sales execution. We use our capital to accelerate organic growth with bolt-on acquisitions and we've got a strong track record of delivering that at great returns. We can expect it to continue. Long term we have fragmented markets, a well-developed approach and a compelling proposition to sellers as the home of choice. We keep our discipline and the journey won't be linear but the pipeline is encouraging, is well diversified with a growing hopper of opportunities. A few words now on the sectors. Progress in controls has been excellent. Organic growth was 10%. 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 and defence. Our aerospace fasteners businesses Clarendon and Peerless have done excellently and I'll talk about the latter in a minute. Our interconnect business, ISG, has had a very good year, particularly in UK motorsport. We disposed of their small non-core entity, Gramtech, in October. We have more work to do to improve our 2023 acquisition, TIE. The automation segment has been tough and we're making some changes to improve our execution. Windy City grew very well at 7%, a combination of mix and volume. The business is well positioned in the data centre world and we're investing in digital for future growth too. Excellent margin progression, up 200 basis points, was driven by product mix, leverage and accretion from acquisitions. Controls has great momentum into the new year. We welcomed Peerless into the group in May, and it's been a fantastic start for them. A family-owned specialty fasteners business based out of New York State, predominantly serving aerospace markets. The excellent leadership team have been running it for 30 years and are staying with the business. Peerless has clear value-add, evidenced by its strong margins, supplying high-quality, high-demand fasteners with technical service, breadth of inventory, and speed to market, all into critical fuselage applications in the highly regulated aerospace market. The prospects for growth are very exciting, a backlog of new aircraft manufacture and a healthy MRO market. They have a strong reputation for quality and access to product in a complex supply chain and cross-selling potential too with our existing Clarendon Fasteners business. With over 80 key customers, the business has a well-diversified customer base. The performance has been exceptional. Strong double-digit growth at accretive margins will drive over 20% return on capital in the first year. But performance will, of course, normalise towards its long-term track record, but we continue to be really excited about Peerless's future prospects. Seals has been our most resilient sector in recent years. Organic growth of 1% reflects systemic de-stocking and a tougher manufacturing and industrial backdrop. I'm really pleased that a more diversified sector kept its head above water in this environment. Markets have affected mainly our US OEM business and our US, UK and European aftermarket businesses. Elsewhere though, good diversification into renewables and water treatment particularly have supported some balance in the year. VSP, our US MRO gasket business, had a great year too. And we started on the journey of cross-selling DIXA products into the UK and the US, albeit still very early days. We're taking the opportunity during tougher times to invest in talent, technology and facilities, effectively accelerating our scaling strategy to prepare ourselves for the positive prospects ahead. We've already done this with success in life sciences and I'll say a few more words on that in a minute. Margins this year in seals are therefore just a fraction down. We acquired four businesses into R&G in the year, the largest being Power Group, which has started very well. We've also disposed of two small non-core entities to keep the portfolio tight. We expect the sector to improve as the year progresses, and the medium-term prospects for the sector are really exciting. Infrastructure investment, renewables, water treatment, all good tailwinds. We're still early on our fluid power journey too, taking a broader product capability to more markets. I'm really pleased with life science's progress. Markets have stabilised following a few tough years of disruption post-pandemic. We've made significant improvements to management and the business, and performance this year has been really encouraging. We've performed particularly well in Canada and Australia, taking market share in medtech and diagnostics markets. We've broadened our product range, reflecting new technology and key growth diagnostic spaces such as genetic screening and autoimmunity testing. In Europe, we've refocused our portfolio during the year, exiting low value products and directing our resources at our exciting business development pipeline. We've invested significantly in scaling our businesses in the sector in the last few years. I'll speak about that in a moment. It's good to see margin progression on the back of it. The long-term prospects for the sector are exciting, increasing diagnostics investment and the backlog in surgical procedures provide a market tailwind. And we're improving our management, our business development and our infrastructure to execute on the growth opportunities. We've used the more challenging healthcare environment in the last few years to invest in and improve the businesses. It's a good example of the scaling strategy in action. And as much like the journey I mentioned, we've just started in seals too. Over the course of the last few years, we've upgraded life sciences sector management, as well as in the regions. And I'm really pleased with the quality of the team. We continue to invest in the commercial talent around the sector too. Scale advantages in life sciences distribution are extra important because you become the single route to market and therefore suppliers seek us out. It also, of course, improves service and efficiency. So we now have state of the art homes having consolidated our Australian and Canadian businesses into one facility each. The platform in life sciences is ready for future growth. So to summarise, We've delivered another strong performance and made good strategic progress too. We're excited about the long runway of organic growth ahead. Some fantastic new businesses have joined the group and the pipeline looks encouraging. Discipline is key with a balance sheet in good shape, cash flow strong and returns excellent. And despite tough industrial markets, our outlook for next year is really positive. We're confident in delivering sustainable quality compounding over the long term. So we'll take questions and answers now. If you wouldn't mind just giving us your name and your institution, that would be very helpful.