Diploma : Preliminary Results for the year ended 30 September 2024

About this update from Diploma Plc

DIPLOMA PLC 10-11 CHARTERHOUSE SQUARE, LONDON EC1M 6EE TELEPHONE: +44 (0)20 7549 5700 PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2024 Strong growth at great returns FY 24 FY 23 Change Revenue £1,363.4m £1,200.3m +14% Organic revenue growth 6% 8% Adjusted operating profit £285.0m £237.0m +20% Adjusted operating margin 20.9% 19.7% +120bps Statutory operating profit (1) £207.4m £183.3m +13% Free cash flow £197.9m £163.8m +21% Free cash flow conversion 101% 100% Adjusted earnings per share 145.8p 126.5p +15% Basic earnings per share (1) 96.5p 90.8p +6% Leverage 1.3x 0.9x Total dividend per share 59.3p 56.5p +5% ROATCE 19.1% 18.1% +100bps All alternative performance measures are defined in note 15 to the Condensed Consolidated Financial Statements. 1 Statutory operating profit and basic earnings per share in the prior year include an exceptional gain on the disposal of Hawco of £12.2m. Strong, volume-led organic revenue growth of 6%. Reported revenue growth of 14%: 10% from acquisitions, partially offset by FX. Adjusted operating margin up 120 basis points to 20.9% , reflecting our value-add proposition; operational leverage; disciplined cost management; and accretive acquisitions. Highly effective capital allocation: £293m invested in seven quality businesses at 6x EBIT. Disposal of three non-core business entities after the year end for £45m at 7x EBIT. Excellent return on capital across the Group with ROATCE up 100 basis points to 19.1%. Strong free cash flow conversion of 101% reflecting disciplined working capital management. Positive outlook for FY25. Commenting, Johnny Thomson, Diploma's Chief Executive said: "Thanks to my brilliant colleagues for another excellent year. Whilst some markets have been a little tougher this year, the quality of the team, our businesses, and the diversified portfolio, have driven a strong performance. "I am pleased with our organic growth, our margin progress, and the acquisitions we've made. Our discipline has been equally important: delivering great returns, cash flows, and selling some non- core businesses. "It's been another great year to add to our long-term compounding track record and, while it's a tougher environment, I'm feeling positive about the year ahead, and our long term prospects." 1 Revenue diversification driving organic growth and increasing resilience Controls +10% : Driven by market share gains and structural tailwinds. Seals +1% : Resilient performance in challenging markets. Life Sciences +6% : Outperformance in stabilised markets. Complementary acquisitions driving future organic growth at excellent returns Peerless acquired for £243m, performing very well. PAR Group acquired for £37m, adding scale to R&G's Seals & Gaskets division. Five additional bolt-ons acquisitions for a total of £13m. Highly effective allocation of capital, acquisitions together delivering 20% ROATCE in year one. Healthy M&A pipeline diversified by sector, size and geography. Strong cash flow and balance sheet provides capacity to self-fund disciplined acquisitive growth. Scaling effectively for sustainable growth Continued focus on management development initiatives to sustain growth. Three new state-of-the-art facilities opened to support future growth in the UK and Europe, making it 10 new facilities in the last five years. Continued improvements against our Delivering Value Responsibly targets. Further strengthened balance sheet: committed facilities of £880m with maturities up to 2036. FY25 guidance At constant currency, we expect: organic growth of ca. 6%; acquisitions announced to date (net of disposals) to add ca. 2% to reported revenue; and an operating margin of ca. 21%. Notes: Diploma PLC uses alternative performance measures as key financial indicators to assess the underlying performance of the Group. These include organic growth, adjusted operating profit/adjusted operating margin, adjusted earnings per share, free cash flow/free cash flow conversion, leverage and ROATCE. Definitions of these metrics is set out in note 15 to the Condensed Consolidated Financial Statements in this Announcement. Certain statements contained in this Announcement constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause the actual results, performance or achievements of Diploma PLC, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such statements. Such risks, uncertainties and other factors include, among others, exchange rates, general economic conditions and the business environment. 2 A presentation for analysts and investors will be held at 09:00 GMT. This will be streamed live via webcast and audio conference call. Register your attendance for the webcast at: https://brrmedia.news/DPLM_FY_24 Conference call dial in details: Dial in: UK-Wide: +44 (0) 33 0551 0200 / UK Toll Free: 0808 109 0700 Password: Diploma Full Year A recording of the presentation will be available after the event on our website: https://www.diplomaplc.com/investors/financial-presentations/ For further information please contact: Diploma PLC - +44 (0)20 7549 5700 Johnny Thomson, Chief Executive Officer Chris Davies, Chief Financial Officer Holly Gillis, Head of Investor Relations Teneo - +44 (0)20 7353 4200 Martin Robinson Camilla Cunningham NOTE TO EDITORS: Diploma PLC is a value-add distribution Group. Our businesses deliver practical and innovative solutions that keep key industries moving. We are a distribution group with a difference. Our businesses have the technical expertise, specialist knowledge, and long-term relationships required to deliver value-add products and services that make our customers' lives easier. These value-add solutions drive customer loyalty, market share growth and strong margins. Our decentralised model means our specialist businesses are agile and empowered to deliver the right solutions for their customers, in their own way. As part of Diploma, our businesses can also leverage the additional resources, opportunities and expertise of a large, international and diversified Group to benefit their customers, colleagues, suppliers and communities. We employ ca. 3,600 colleagues across our three Sectors of Controls, Seals and Life Sciences. Our principal operating businesses are located in North America, the UK, Europe, and Australia. Diploma aims to deliver sustainable quality compounding - ambition with discipline, and over the last fifteen years, the Group has grown adjusted earnings per share (EPS) at an average of ca. 16% p.a. through a combination of organic growth and acquisitions. Diploma is a member of the FTSE 100. Further information on Diploma PLC can be found at www.diplomaplc.com The person responsible for releasing this Announcement is John Morrison, Company Secretary. LEI: 2138008OGI7VYG8FGR19 3 CEO's Review Strong financial performance and strategic progress Our strategy is delivering. We have driven strong organic growth through end-market expansion, geographical penetration and product extension. We have continued to accelerate this organic growth through complementary acquisitions at great returns on capital. And, we are scaling our businesses and the Group to support sustainable quality compounding for the long term. We have delivered another strong year, and I would like to thank all my brilliant colleagues. These results reflect the strength of our value-add distribution model and diversified portfolio, but they are delivered by 3,600 accountable, customer-centric people, thriving in our decentralised culture. In tougher markets, we delivered 6% organic revenue growth. We added a further seven high- quality acquisitions, contributing 10% to reported revenue growth. We have improved the Group operating margin by 120 basis points to 20.9%. We grew adjusted earnings per share by 15%. Importantly, we have delivered this with discipline, improving ROATCE by 100 basis points to 19.1%, free cashflow conversion remained very strong at 101%, fuelling future growth, and we disposed of three non-core businesses shortly after the year end. Overall, it's been another strong year for the Group. Revenue diversification driving organic growth and increasing resilience The Group's strategy is to build high-quality, scalable businesses for sustainable organic growth. We drive organic growth in three ways: expanding into structurally growing end markets; penetrating further into core developed geographies; and extending our product range to expand addressable markets. This strategy drives both sustainable organic growth and increased resilience. Execution of this strategy across our businesses drove organic growth of 6% in FY24. Double- digit growth in Controls, driven by market tailwinds and share gains, and a strong performance in Life Sciences, led by share gains in Canada and Australia, provided balance to the Seals Sector, which delivered a resilient performance with modest growth despite facing challenging conditions across some of its end markets. Revenue £m Growth FY 24 FY 23 Reported Organic Controls 652.4 568.4 +15% +10% Seals 489.1 419.0 +17% +1% Life Sciences 221.9 212.9 +4% +6% Group 1,363.4 1,200.3 +14% +6% 4 Positioning behind structurally growing end markets Throughout the year we have continued to drive expansion in structurally growing end markets, delivering both improved growth and increased resilience. Most notably in FY24, our specialty fasteners businesses operating in aerospace, Clarendon, and our recent acquisition, Peerless, have delivered outstanding growth as they have navigated the complexities of these markets to win share and solve their customers' complex problems. Whilst we expect some normalisation of growth and margins in this market, the underlying growth drivers are expected to endure for a number of years. Datacentres are becoming increasingly important to us with Windy City Wire delivering accelerated organic growth as their superior products and services are valued in these critical applications. As these centres evolve for the increased demands of supporting AI, a number of other Controls and Seals businesses are developing solutions, for example, to support liquid cooling. In clinical diagnostics, our Life Sciences businesses benefitted from growing public and private investment in testing across a wide range of applications from allergy and autoimmune testing, to preconception and cancer screening. Electrification provides a wide range of growth opportunities across our businesses and a number of them are developing related offers, from solar installation kits to smart building solutions. This is an example of our businesses collaborating to create unique propositions. Industrial automation is expected to continue to benefit from the reshoring of manufacturing and ageing installed bases of CNC machines and robots that are fuelling growth. Renewables has been an area of success for a number of our businesses and we expect this to continue to build. Water management has fuelled growth in a number of our Seals businesses particularly in Australia where our dewatering products and services are critical to safely extracting the minerals required for batteries for energy storage. Whilst the infrastructure segment has been subdued this year, long term investment in infrastructure in the US, the UK and Europe will be a tailwind, particularly to our Seals Sector. Penetrating further into core developed economies There is significant scope for geographic expansion across our existing developed markets. With the acquisition of Peerless during the year, around half of the Group's revenue is now generated in the US. It has also extended our capabilities in specialty fasteners beyond our previous presence on the West Coast of the US, to national coverage, as well as increasing exposure to the aerospace market in Europe. 5 The FY23 acquisition of DICSA established a platform for the Group in Spain and extended our footprint across Europe. We are in the early stages of collaboration between DICSA and R&G in the UK, and Hercules Aftermarket in the US, supporting the gradual expansion across these geographies. Following on from the integration of our Australian Life Sciences businesses last year to create a scaled business with country-wide reach, we have recently completed a similar project in Canada. This enhances geographical coverage across the Canadian healthcare market providing our supply partners with unparalleled access across both medtech and diagnostics customers from the West to the East. Product range extension Sourcing and developing new products are key to sustainable organic growth for all of our businesses, as we continually enhance our customer proposition for existing and new customers. In Life Sciences, it is critical that our expert teams remain at the forefront of product innovation to support their customers in delivering better healthcare outcomes. For example, the introduction of an AI-enabled endoscope to our Canadian portfolio is delivering materially higher success rates than a traditional scope in the identification of abnormalities. We are increasingly looking to leverage across our businesses, to bring successful products from one geography to another. Acquisitions continue to play an important role in accelerating product extension. In our Seals Sector, we have extended our fluid power capabilities further through acquisitions into R&G, to grow our addressable markets. In Controls, Peerless specialises in airframe specialty fasteners, which complements Clarendon's specialism in aircraft cabins. Over the coming years we will seek opportunities to cross-sell Peerless and Clarendon products. In a similar fashion, the acquisition of DICSA has enabled product expansion in R&G and Hercules Aftermarket, and the acquisition of PAR, which bolted on to R&G, drove an expanded seals & gaskets portfolio into the UK. Complementary acquisitions to accelerate growth Diploma has a strong track record of accelerating organic growth through disciplined acquisitions with £1.3bn invested in over 40 businesses with Return on Adjusted Trading Capital Employed (ROATCE) of 17% in the last five years. In FY24, we acquired seven high-quality businesses for a total of £293m at an average EBIT multiple of 6x: Peerless, PAR and five bolt- ons. In May, we completed the acquisition of US-based Peerless for £243m. This extended our established position in the aerospace specialty fasteners market and is highly complementary to Clarendon, our existing specialty fasteners business, both in product offering and geographic footprint. Peerless has delivered an exceptional performance in the period since acquisition as positive tailwinds and share gains in the aerospace market have driven organic growth and margin expansion ahead of our expectations. It is expected to exceed 20% ROATCE in its first year in the Group. 6 Also in May, we acquired PAR for £37m into R&G, adding scale to its seals & gasket division in the UK. Importantly, we continue to execute smaller bolt-on acquisitions, completing five bolt-ons for £13m, with average EBIT multiples of 4x and expected to exceed 20% ROATCE in year one. The acquisitions made this year demonstrate the compelling proposition Diploma offers to owners selling their businesses: preserving legacies, promoting autonomy and accountability, and supporting growth through investment and expertise. Our acquisition pipeline remains strong with active opportunities in all three Sectors across fragmented markets in our core geographies. We have robust processes in place to maximise opportunities and we remain a buyer of choice for the kind of business we look for. Portfolio discipline is a critical component of sustainable quality compounding, and if a business no longer fits our strategy, we look to recycle capital. Having made four disposals in recent years, we made a further three shortly after the year end for ca. £45m at a 7x multiple. In the Controls Sector, we sold Gremtek, located in France, which was part of our international interconnect solutions business. In Seals, we disposed of Kubo, an OEM-focused seals business in Switzerland, and Pennine, a UK pneumatics business, that was part of R&G. Scaling the Businesses and the Group To deliver sustainable quality compounding, we must develop our businesses to deliver great customer propositions at scale. This can be through investment in talent, technology, and facilities - building capability and capacity to sustain growth in our businesses. It also means developing our Group to sustain execution as we grow. This is a people business. Our businesses support their customer's growth and help them achieve their ambitions. We think this works best in a decentralised culture where our colleagues are empowered to innovate and create tailored solutions. Investing in talent development is therefore critical: developing a cadre of great Managing Directors; building sales, supply chain and other functional leadership capabilities; and evolving teams and structures to scale our businesses. Ensuring we have diverse teams is important and whilst we have much more to do, I'm pleased that around half of our senior hires this year were women. Ultimately, if our people are engaged, they will deliver the best results for our customers, so I'm delighted with another year of consistently high engagement. To reflect the importance of maintaining high engagement levels, this metric will be introduced into my remuneration and the incentive schemes of senior leaders in FY25. We have developed 10 new facilities across our businesses in the last five years. In FY24, significant investment has been made in our UK wire and cable business, Shoal. Three previously standalone businesses have been combined, moving into a new state-of-the-art shared facility with integrated technology and systems. 7 We have invested in a number of our Seals businesses whilst market conditions have been slower to position us for stronger growth as conditions improve. This included investment in talent and technology as well as the culmination of facilities projects in the UK and Europe. Our Life Sciences business in Canada has completed a significant scaling project, including a new facility in a more strategic location in the East, rationalising existing sites and forming two distinct East and West hubs. This will enhance collaboration across our diagnostics and medtech business, reduce shipment times, deliver operational improvements and efficiencies, and increase access to specialist talent. As well as investing in facilities and technology, we have also invested in talent and have attracted experienced leaders to a number of our businesses this year. Our Leadership at Scale programme, now in its second year, continues to develop leaders from across our businesses. Developing sales excellence is a Group-wide focus. Our businesses have grown well due to their agility, responsive customer service and technical capabilities. We want to add to that with more business development capability, a more strategic and structured approach to market development and great B2B sales processes. We're providing the network, workshops, best practices and investments to help make this happen. Delivering Value Responsibly Across our businesses we make positive impacts on society and our environment through the delivery of life-saving healthcare solutions, and supporting renewable energy generation, water treatment and activities supporting the circular economy. As part of Diploma, our businesses place appropriate focus on sustainability at a level they would be unlikely to do otherwise. As a result, they benefit from accelerated progress compared to their peers, which brings both commercial advantage and positive impact. Our Delivering Value Responsibly (DVR) framework focuses on six metrics through which we can have a meaningful, positive impact on our businesses, our people and our environment. I am pleased with the progress we have made this year, but there is more to be done. Highlighting a few examples from across the Group in the year: We launched a Group-wide health and safety programme - Stand Up for Safety - to provide a consistent culture, approach and framework. It has been very well received and has driven a notable change in behaviours by our businesses. During the year, our target to reach net zero by 2045 was validated by the Science Based Targets initiative (SBTi). In the year we reduced our emissions intensity (Scope 1&2) to 5.7, down from 7.6 in FY23. Sustaining our success is dependent on our people. Maintaining high levels of colleague engagement is critical. It is a competitive advantage. We are once again delighted by excellent levels of engagement throughout the Group, at 79%. Having a workforce rich in diverse perspectives will support stronger execution over time. I'm pleased with the progress we have made as we work towards gender balance across our Senior Management Team - now 30% female, up from 28% in FY23 and 20% in FY19 - but there is still work to do. 8 Outlook Whilst we remain mindful of the challenging economic backdrop, the execution of our strategy gives us confidence in our ability to continue to deliver strong results. Our revenue is resilient: ongoing diversification means we are exposed to structurally growing end segments. Our margins are resilient: our focus on value-add solutions that are critical to customer needs supports pricing power. Our cash flow is resilient: our low capital-intensity model is highly cash-generative, underpinning a strong balance sheet. We remain focused on executing our strategy of building high-quality, scalable businesses for organic growth. By continuing to effectively balance ambition and discipline we are confident in continuing to deliver sustainable quality compounding over the long term. 9 CFO's Review Further commentary relating to the FY24 financial results can be found in the Financial Review. Sustainable Quality Compounding Sustainable Quality Compounding combines ambition with discipline. Our business model and strategy are designed to support the delivery of ambitious organic growth, at high margins and with great capital returns. As a result, we have a long track record of delivering compounding earnings growth. Our financial model lays out how we will continue to deliver this in a set of medium-term financial outcomes. This has consistently delivered superior shareholder returns for more than 25 years. We have updated our financial model to reflect structurally higher operating margins of 20%+, up from 17%+. Ambition FY24 Model Organic growth is our first priority 6% 5% Total revenue growth accelerated by quality acquisitions 14% 10% Value-add drives strong adjusted operating margins 20.9% 20%+ Compounding adjusted EPS growth 15% Double-digit With discipline FY24 Model Capital-light business model drives strong cash conversion 101% 90% Capital stewardship focused on strong ROATCE 19.1% High teens Balance sheet discipline maintains prudent leverage 1.3x <2.0x Return to shareholders with a progressive dividend 5% 5% Diversified portfolio drives strong, resilient growth Organic growth is our first priority and each of our value-add businesses drives this through end-market expansion, geographic penetration and product extension. Our diverse portfolio of businesses means that this growth is both strong and resilient, with the Group delivering around 5% organic growth consistently over the long term. Delivering 6% organic growth in FY24 against the backdrop of tougher markets is therefore particularly pleasing. In fragmented markets, we can accelerate this organic growth through carefully selected, disciplined acquisitions. We do not set specific annual targets for acquisitions, but our financial model demonstrates that we can deliver double-digit revenue growth within our leverage policy outlined below. Reported revenue growth this year of 14% is in line with our 15-year track record of 15% growth. Structurally higher operating margin Diploma has achieved structurally higher operating margins, this year reaching 20.9%. This improvement has been driven by two factors: operational leverage from the growth of our value-add businesses, and recent acquisitions with accretive margins. Our diversified portfolio delivers a range of operating margins, from the teens to the thirties. Typically, our lower margin 10 Attention : This is an excerpt of the original content. 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