Acquisition and M&A Pipeline Update

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16 March 2023

 DIPLOMA PLC

ACQUISITION AND M&A PIPELINE UPDATE

Diploma PLC ("Diploma" or the "Company"), the international group distributing specialised products and services, is pleased to announce the acquisition of Tennessee Industrial Electronics, LLC ("TIE"), a market leading value-add distributor of aftermarket parts and repair services into the fast-growing US industrial automation end market, for ca. £76 million (the "Acquisition").

Diploma has a proven track record of accelerating organic growth through acquisitions. In order to fund high quality acquisition opportunities from an active near-term pipeline, while maintaining our disciplined approach to leverage, we are today launching a capital raise of approximately 7.5% of the current issued share capital of the Company (the "Capital Raise"). The net proceeds of the Capital Raise will be used to refinance the acquisition of TIE as well as provide us with greater flexibility to execute on our M&A pipeline to accelerate future organic growth. Full details on the Capital Raise are set out in a separate announcement issued by the Company today.

Strong trading performance

The Group has strong trading momentum. During the first quarter of FY 2023 Diploma delivered very strong organic growth of 10% with the Group's revenue diversification strategy driving continued robust volume growth. Reported growth for Q1 was 30%, with a strong contribution from high quality acquisitions, and operating margin remained consistently strong at FY 2022 and FY 2021 levels. This performance builds on very strong results for FY 2022, in which the Group delivered organic growth of 15%, reported growth of 29%, and adjusted operating margin of 18.9%.  

The outlook for FY 2023 is positive and we have confidence in delivering another year of strong growth for Diploma, consistent with our full year guidance.

Strategy: building high quality, scalable businesses for sustainable organic growth

Diploma's strategy has consistently delivered strong compounding value creation over the long term. Over the last 15 years Diploma has delivered double digit revenue growth, high margins, 15% adjusted EPS CAGR and strong returns on capital. Since 2019, the Group's refreshed strategy has accelerated strategic execution to deliver a three-year adjusted EPS CAGR closer to 20% (2019-22).

The Group has a strong organic revenue growth track record. Our strategy is to drive organic growth in three buckets: extending into structurally high growth end segments; geographic penetration of core developed markets; and extending product ranges to expand addressable markets. All of Diploma's businesses have significant opportunities to drive accelerated future organic growth with very substantial growth runway in all of our three Sectors.

The Group can accelerate this organic growth by acquiring high-quality, high-margin, value-add businesses that deliver sustainably high returns. We are disciplined and selective in our M&A strategy and will only consider opportunities that display the following core characteristics:

·      differentiated value-add customer proposition generating sustainable high gross margins;

·      strong organic growth and scale potential;

·      capable management teams we can back.

In recent years, the Company has accelerated opportunities to unlock value creative M&A whilst maintaining high returns. We have invested £820 million over last four years on 27 acquisitions delivering an average annual growth of 15%¹ since acquisition and FY 2023E average ROATCE² of 16% and growing.

The largest acquisition in this period was Windy City Wire, acquired in October 2020. In two years under Diploma ownership the business has doubled operating profit, significantly outperforming its acquisition case with returns in-line with the Group ROATCE and set to increase to more than 20% this year. We also drive on average 20%+ year one ROATCE from a now consistent level of small bolt-on acquisitions.

The Group is disciplined in our development of the portfolio, through acquisitions and occasional disposals, with Group ROATCE of 17.3% at 30 September 2022, in-line with our high-teens target.

Strengthened acquisition pipeline

While maintaining our disciplined focus, in recent years we have selectively invested in our corporate development capability to develop a more strategic and structured approach to enlarging our pipeline of opportunities. We take a rigorous approach to identifying and developing potential acquisitions, aligned to our organic growth strategy, and through this process we have mapped a growing pipeline that so far comprises more than 2,000 identified opportunities, of which around 700 are of interest today.

We are currently progressing a strong near-term active pipeline of approximately 50 opportunities of which 36 are small and mid-sized global opportunities across our three Sectors with a combined enterprise value of ca. £800 million. Of this near-term pipeline, those opportunities that proceed to a successful transaction will be funded in part through the proceeds of the Capital Raise (after the refinancing of TIE) alongside the Company's existing debt facilities and cash resources. Our acquisition approach is highly disciplined, and focused on ensuring we bring high-quality, value-add businesses into the Group that meet our strict financial and strategic criteria for investment.

Acquisition of Tennessee Industrial Electronics LLC

The acquisition of TIE, which completed on 6 March 2023, exemplifies the high-quality acquisition opportunities in our pipeline. Based in Nashville, Tennessee, TIE is a market leading value-add distributor of aftermarket parts and repair services into the fast-growing US industrial automation end market, with a focus on robotics and computer numerical control (CNC) machines. TIE differentiates itself through its very strong aftermarket capability; value-add proposition based on deep technical expertise; speed to market and breadth of product offering which result in high levels of repeat business from a large and loyal customer base. TIE's strong and experienced management team will remain with the business.

Industrial automation is a strategic new vertical for our Controls Sector, with structural growth underpinned by semi-skilled labour shortages and rising manufacturing wages, the onshoring of US manufacturing and a growing and aging base of installed CNC machines and robots. Industrial automation meets our key criteria for future organic growth: an attractive, high growth end segment; enabling further geographic penetration of our core US market; and expanding our addressable market through product extension. We are confident in the opportunity for TIE to accelerate growth ahead of the market, winning market share with a differentiated proposition, increasing its geographic penetration in the US beyond the current customer base, and extending its end customer segments.

TIE has achieved long term organic revenue CAGR above Diploma's³, with an accretive EBIT margin in 2022 of 24%⁴. The purchase price of ca. £76 million represents a multiple of 9.8x EBIT and the Acquisition is expected to deliver revenue of ca. £31 million⁵. We see significant further opportunity to drive continued growth, enhanced margins and high returns and the business will be growth, margin and earnings enhancing in FY 2023.

Financing

The Capital Raise will enable the Group to execute the opportunities that progress through our active acquisition pipeline while retaining the financial discipline that underpins our growth: maintaining a focus on a strong balance sheet with leverage levels below 2x net debt / EBITDA. In prevailing market conditions we take a more prudent approach to leverage and the Group's net debt / EBITDA at the end of FY22 was 1.4x.

We are confident that the net proceeds of the Capital Raise can be deployed against strongly value-enhancing opportunities whilst maintaining rigorous discipline to capital allocation. Following the acquisition of TIE, the Capital Raise is expected to be earnings accretive in the first full year; this earnings accretion will be further enhanced as the proceeds are deployed.

Johnny Thomson, Diploma's Chief Executive Officer commented:

"Diploma has a long track record for delivering strong revenue growth at high margins, driving both  compounding double-digit adjusted EPS and attractive returns. Since we refreshed the strategy in 2019 we have made excellent strategic progress, accelerating our organic growth, bringing high quality businesses into the Group, and building scale in our key business lines. Today we are in a very strong position, with a differentiated customer focused business model and significant long-term growth opportunities.

"TIE is an excellent business in an exciting end market and has a track record of delivering strong growth at high margins. We welcome our new colleagues into the Group. TIE is a good example of the quality of opportunities that we have in our pipeline. Alongside our relentless focus on organic growth, we see significant potential to strengthen the Group further with disciplined acquisitions that accelerate future organic growth, while maintaining our strong financial position.

"We are encouraged by the momentum across the Group, we are excited about our growth potential and we are confident in continuing to deliver on our compounding track record."

Presentation

An audio webcast for analysts and investors will be held at 17:30 (GMT) today and can be accessed via https://brrmedia.news/diploma_plc_march. Participants wishing to ask a question should join via the conference call facility, details as follows:

Dial-in Number: +44 (0) 33 0551 0200 (UK / international) / +1 786 697 3501 (US)

Confirmation Code: Diploma

The audio webcast will be made available as a replay after the event at: https://www.diplomaplc.com/investors/financial-presentations/

For further information please contact:

Diploma                                                                                               +44 (0)20 7549 5700

Johnny Thomson

Chris Davies

Kellie McAvoy

Teneo                                                                                                  +44 (0)20 7353 4200

Martin Robinson          

Olivia Peters

The person responsible for releasing this announcement is John Morrison, Company Secretary.

Diploma PLC LEI: 2138008OGI7VYG8FGR19 

About Diploma

Diploma PLC is an international group supplying specialised products and services to a wide range of end segments in our three Sectors of Life Sciences, Seals and Controls.

Diploma's businesses are focused on supplying essential products and services which are critical to customers' needs, providing recurring income and stable revenue growth.

Our businesses design their individual business models, with the support of the Group, to closely meet the requirements of their customers, offering a blend of high-quality customer service, deep technical support and value adding activities. By supplying essential solutions, not just products, we build strong long-term relationships with our customers and suppliers, which support attractive and sustainable margins. We encourage an entrepreneurial culture in our businesses through our decentralised management structure. We want our managers to have the freedom to run their own businesses, while being able to draw on the support and resources of a larger group. These essential values ensure that decisions are made close to the customer and that the businesses are agile and responsive to changes in the market and the competitive environment. The Group employs ca. 3,000 employees and its principal operating businesses are located in the UK, Northern Europe, North America and Australia.

Over the last fifteen years, the Group has grown adjusted earnings per share at an average of ca. 15% p.a. through a combination of organic growth and acquisitions. Diploma is a member of the FTSE 250 with a market capitalisation of ca. £3.2bn.

Further information on Diploma PLC can be found at www.diplomaplc.com

IMPORTANT INFORMATION

This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities, or the solicitation of any vote or approval in any jurisdiction, pursuant to this announcement or otherwise. Any offer, if made, will be made solely by certain offer documentation which will contain the full terms and conditions of any offer, including details of how it may be accepted.

The distribution of this announcement in jurisdictions other than the United Kingdom and the availability of any offer to shareholders of Diploma who are not resident in the United Kingdom may be affected by the laws of relevant jurisdictions. Therefore, any persons who are subject to the laws of any jurisdiction other than the United Kingdom or shareholders of Diploma who are not resident in the United Kingdom will need to inform themselves about, and observe, any applicable requirements.

This announcement does not contain or constitute an offer for sale or the solicitation of an offer to purchase securities in the United States. The securities referred to in this announcement have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act") or under any securities laws of any state or other jurisdiction of the United States and may not be offered, sold, pledged, taken up, exercised, resold, renounced, transferred or delivered, directly or indirectly, in or into the United States except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States or other jurisdiction. There will be no public offer of the securities referred to in this announcement in the United States.

Certain statements contained in this announcement constitute "forward-looking statements" with respect to the financial condition, results of operations and businesses and plans of the Company and its subsidiaries (the "Group"). Words such as "believes", "anticipates", "estimates", "expects", "intends", "plans", "aims", "potential", "will", "would", "could", "considered", "likely", "estimate" and variations of these words and similar future or conditional expressions, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon future circumstances that have not occurred. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. As a result, the Group's actual financial condition, results of operations and business and plans may differ materially from the plans, goals and expectations expressed or implied by these forward-looking statements. No representation or warranty is made as to the achievement or reasonableness of, and no reliance should be placed on, such forward-looking statements. No statement in this announcement is intended to be, nor may it be construed as, a profit forecast or be relied upon as a guide to future performance. The forward-looking statements contained in this announcement speak only as of the date of this announcement. The Company, its directors, affiliates and any person acting on its or their behalf each expressly disclaim any obligation or undertaking to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable law or regulation, the Listing Rules, the UK version of Regulation (EU) 2017/1129 as it forms part of UK law by virtue of the European Union (Withdrawal) Act 2018, the Disclosure Guidance and Transparency Rules, the rules of the London Stock Exchange or the Financial Conduct Authority.

1.   Average growth from acquisition to FY 2023E

2.   Return on adjusted trading capital employed (ROATCE) is defined as the pro forma adjusted operating profit, divided by adjusted trading capital employed, where pro forma adjusted operating profit is adjusted operating profit adjusted for the full year effect of acquisitions and disposals.

3.   Under its previous ownership, 2014-2022

4.   TIE Adjusted Revenue and adjusted EBIT increased from $22.8 million and $4.5 million respectively for the year ended 31 December 2020 to $33.6 million and $8.2 million for the year ended 31 December 2022. Adjusted Revenue and adjusted earnings before interest and tax ("EBIT") adjusted to reflect the underlying trading performance of TIE.

5.   Revenue and EBIT figures represent FY2023 estimate