Diploma PLC

Welcome to Diploma's 2025 results update. Thank you for being here. I'm joined by Wilson Ng. After various senior finance roles, Wilson joined Diploma about three years ago, and he's been an important member of our senior team since. He's doing a great job stepping up as our acting CFO, and I'm delighted that he's here today. He's going to take you through the numbers in a second. Before that, I'll give you a bit of an overview, and then I'll come back and do a strategy and business update at the end. We'll have Q&A as normal. It's been another great year for Diploma. We've delivered a very strong performance across all our key financial metrics and ahead of expectations, building on our long-term compounding track record. We continue to balance ambitious earnings growth with disciplined returns, key to sustainable success. The quality and diversity of our portfolio gives us exposure to attractive end markets, providing structural support for long-term organic growth. We accelerate organic growth with acquisitions that further compound our growth. We've got great momentum, having completed six since the start of quarter four. We've a strong pipeline and significant balance sheet capacity. The new year has started well, and we're confident in delivering another year of sustainable quality compounding. A moment now to reflect. Diploma has been delivering compounded double digit revenue and earnings growth for decades and a great return on capital too. Over the last seven years, we've developed the strategy, injected more ambition, improved our execution. The compounding has accelerated with a step up in both organic growth and acquisitions. But what's really exciting is that we're only just getting started. And so the group's future is promising. The foundations in the differentiated business model are robust. The growth potential is significant based on our exciting end market opportunities and our geographic and product white space. The quality and diversification of our portfolio makes our group growth more structural. To sustain that compounding, we combine our ambition with ruthless discipline. For us, that's about an intense returns mentality. Cash generation, effective capital allocation, modest balance sheets. It's about strategic performance and portfolio focus. And it's about great execution. Sustainable quality compounding. It's our people and our culture that deliver this every day. They make it sustainable. I'd like to thank all of my brilliant diploma colleagues. Their skill, energy, and passion every day is what drives our success. Building our capability is the most important part of my job. We invest in developing our people, our new graduate program being a great example. And we're currently investing in new resource into our end market development, into our financial controls, and into our general management capability. Our differentiated culture of commerciality, accountability, and continuous improvement is thriving across the business. And we complement that with a connectivity and a performance ownership mentality across the group. The mood feels energized. Now I'll hand over to Wilson to do the numbers.

Thank you, Jonny. Good morning. It's great to be here. So, turning to FY25. It's been another strong performance, ahead of expectations across all of our key metrics. We're ambitious about organic growth. It's our priority. So I'm really pleased to announce 11% growth. And total revenue was up 12%, including a 3% contribution from net acquisitions. We have again increased our operating margin this year by 160 basis points to 22.5%. As a result, EPS grew by 21%, continuing our long-term track record. Discipline is key to long-term compounding success. 105% cash conversion, significant balance sheet headroom with leverage at 0.8 times, and return on capital has increased by 180 basis points to 20.9%, reflecting particularly the quality of the acquisitions we've made over the last seven years, combined with the more modest investment in the year. In line with our policy, we have grown the dividend by 5%. So, summing it all up, I'm very pleased with this very strong performance. The quality and diversity of our portfolio allow the group to deliver structural and sustainable revenue growth. And this has been another great year. We have delivered 11% volume-led organic growth, boosted by the strong growth of Peerless. Excluding Peerless, the organic growth remains ahead of our financial model. And revenue is up 12% overall, after a 3% contribution from acquisitions, net of disposals we've announced previously, and some FX headwind. Controls increased organically by 20%. Windy City Wire delivered double-digit growth with strong execution and tailwinds in some markets, including data centres. Peerless's performance was exceptional with favourable aerospace market dynamics. Excluding Peerless, international controls performed strongly, driven by market share gains across growing aerospace, defence and energy markets. SEALS has been tough over the last few years, with industrial and OEM markets soft, but we've been pleased to see sequential improvement in H2, resulting in 2% growth in the year. LifeScience has delivered 6% growth, the third consecutive year of strong growth, driven by market share gains in medtech and diagnostics markets in Canada and Australia. I'll now move on to operating profit. We have improved operating margin by 160 basis points to 22.5%, very pleasing ahead of expectations. Our volume growth has, as usual, contributed more than pricing to margin expansion. Our ability to pass on input cost increases through price is a key measure of our value-add model and the solutions we bring to our customers. Our businesses expand their margins through operating leverage as they grow, and we selectively reinvest to develop and improve the businesses. During the year, we have invested in building out management teams, enhancing systems, and upgrading facilities, all to ensure that we can continue to deliver our value-add solutions at scale. And going into FY26, we have plans to invest strategically in business development resources to accelerate our ambitions in high growth and markets, talent and succession to drive that ambition, and governance and assurance to support that ambition. Overall, we grew operating profit by 20% in the year to £343 million. Now, to round off on the rest of the ambition side of sustainable quality compounding, I will turn to EPS growth. Net interest expense was flat, reflecting the more modest investment in acquisitions during the year. Our all-in blended cost of debt has remained consistent at 5.3%. Our effective tax rate was 25%, a little higher than last year, reflecting a greater proportion of profits arising from the Group's US businesses. Earnings per share increased by 21% to 176 pence, continuing our long track record of strong double-digit growth. Now let's turn to capital allocation. Disciplined capital stewardship is key to sustainable quality compounding, and we measure our performance principally through return on capital. We have clear capital allocation priorities. Selective organic investment to scale our businesses, capex of around 2% of revenue. Targeted acquisitions to accelerate growth and occasionally disposals. Progressive 5% dividend growth and balance sheet discipline to manage leverage around two times EBITDA. This is a key recipe in driving high teens returns. Now onto cash conversion. Our capital light business model and disciplined execution allows us to drive strong and consistent cash conversion, and this year is no exception. We achieved 105% cash conversion ahead of our financial model, delivering free cash flow of nearly £250 million, and maintained our discipline with careful networking capital investments of £4.6 million, principally to fund inventory for growth. M&A outflow was £30 million, principally driven by five acquisitions in the financial year, net of small disposals. we paid 81 million pounds in dividends, continuing our long track record of progressive dividend growth whilst conserving a larger proportion of the EPS growth for reinvestment. Taking all this together, net debt has reduced to just under 300 million pounds and leverage down to 0.8 times, well within our policy of two times and significantly below three and a half times covenant thresholds. I will now move on to what this means in terms of our capacity to fund future growth. Over the past 18 months, we have secured close to £900 million of funding, termed in tranches out to 2036. This included the group's first US private placement, As we end the year with 0.8 times leverage, we have ample capacity to invest in further growth with cash and undrawn facilities of circa £600 million. To ensure that we have sufficient financial firepower to fund our future growth ambitions, we intend to raise further finance in FY26, ensuring we have the capacity to leverage towards our two times policy if required. I'd now like to talk to you about how we've been putting our balance sheet to use in recent months. Having completed a small adhesives acquisition in H1, we are now seeing a great pickup in momentum. Since the start of Q4, we have completed a further six acquisitions for 92 million pounds. Hargensen, a Danish business adding great gasket capability and more scale in the Nordics, Alpha Labs, which is our first IVD platform in the UK, ElectroMed, adding to our MedTech footprint in Ireland, Astro Industries, a US wire and cable specialist into aerospace and defence, and two more in the new year, Spring Solutions, specialty fasteners, mainly into aerospace and defence, and WDS, supplying machine accessories and parts globally. We have also made some small disposals during the year. We don't often dispose of businesses, but we view it as a key to responsible stewardship of capital and portfolio discipline to find new homes for businesses that no longer align with our strategy or business model. The net impact of these acquisitions and disposals on FY26 will be 2% revenue growth and £8 million of incremental operating profits. Now, on to returns. Delivering disciplined returns is critical to strong compounding results. Just as a reminder, our returns metric, ROATSI, is a fully loaded return on invested capital that removes any accounting distortions and keeps us honest to generate returns on the total cash originally invested. And we are particularly pleased with our performance this year, adding 180 basis points to Ruwazi to achieve 20.9%, more than twice our cost of capital. This strong result was driven by the combination of strong performance, especially in peerless, and lower investment in acquisitions than in recent years. We believe our optimal returns range is high teens whilst deploying capital with discipline. At times, this may be a little higher if we deploy less capital like this year. But generally, and as shown by our track record, we expect to land in the high teens range. Now, onto our guidance for the year ahead. It's been a strong start to the year. We expect organic growth of 6%, slightly ahead of our financial model. Important to note that this will be significantly first half weighted with a particularly strong Q1 as we're lapping some very strong comps in H2. The exceptional growth delivered by peerless is expected to normalize throughout the year. Acquisitions net of disposals will contribute 2% to acquisitions growth in FY26. Of course, if we buy more businesses throughout the year, this number will increase. We are maintaining operating margin at 22.5%, reflecting my earlier comments around planned strategic investments. So, summing it all up, we're looking forward to another great year. Our prospects for the long term are exciting too. Before I hand back to Johnny, I want to take a moment to remind you of the principles behind our financial compounding model. We drive ambitious earning growth through strong organic growth, quality acquisitions, and high margins. we're obsessed about returns delivered with discipline. This is through strong cash conversion and prudent leverage. And we underpin our commitment to shareholders with a progressive dividend. Diploma has an excellent record of compounding growth at strong returns. The combination of ambitious growth and disciplined returns delivers long-term, sustainable quality compounding. I'll now hand back to Jonny.

Okay, strategy and business update. Let's start with a quick reminder of our strategy. It's about building high quality, scalable businesses for sustainable organic growth. We drive our organic growth in what I call our three buckets. Positioning behind structurally growing end markets, expanding 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 therefore increased resilience. This is complemented by selective, high quality acquisitions that drive future organic growth and at great returns. Our acquisitions add to the quality and diversification of the portfolio, which in turn have made the group's organic growth more structural. Our value-add model and our powerful decentralized culture are our key differentiators. And as we go from small to large, we naturally have to do things a little differently while always preserving these differentiators. So building effective scale is key to the strategy, developing our businesses and group to become better, not just bigger, and as such, to sustain long-term delivery. The financial outcome of this strategy is sustainable quality compounding, ambitious earnings growth combined with disciplined returns in the good times and the bad. Taking the first of our three growth buckets, over the last few years, we've considerably increased our exposure to attractive end markets. Our products and services face really well into these. Some examples on the slide. In markets where we already have an established presence, aerospace, defence, infrastructure, IVD, for example, we're progressing opportunities to extend the footprint. Markets in earlier stages of development, like data centres, automation, clean energy, scientific, we're building to make these a bit more meaningful. And some exploratory markets too, water, energy storage, for example. These present us with really exciting opportunities to expand where we have little or no footprint today. These markets provide structural support for our long-term growth, and there's a lot to go for, so I'm excited about it. Now let's look at the significant white space opportunity in the other two buckets, geographic penetration and product extension. Geographically, we're 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. We can also add new product verticals. 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. there is plenty of white space for us to go after. As we know, acquisitions are important to the strategy too. They accelerate our organic growth and together with selective disposals, they build the quality and diversification of the portfolio. We've accelerated capital deployments into acquisitions with nearly 1.5 billion spent on 48 in the last seven years, significantly above our financial model. But it can't be just any business at any price. Discipline is critical to sustaining our compounding represented by our 20% returns. Our discipline means that our progress with acquisitions won't always be linear and that's okay. Over the long term, the fundamentals do support a healthy deal flow. It's a fragmented market and our pipeline is stronger than ever. Our processes work. and we continue to be the buyer of choice. The short-term pipeline is looking encouraging and I'm feeling optimistic about it. We talk a lot about being the buyer of choice. There isn't anyone better to hear that from than the people who have sold their businesses to us. Here are a few of them.