Capital Markets Seminar

27 June 2023

Diploma PLC - CAPITAL MARKETS SEMINAR

Building high quality, scalable businesses for organic growth

Diploma PLC, the value-add distribution group, is today hosting a seminar setting out its strategy for building high quality, scalable business for sustainable organic growth. The event will give investors an opportunity to hear from members of the senior management team who will provide practical insights into the differentiated value-add business model; the exciting organic growth potential; and the sustainability of the Group's long-term, quality compounding performance delivery. 

Quality compounding track record

Diploma has a long track record of delivering sustainable, compounding financial performance:

·     Consistent, strong organic revenue growth: 5% on average for the last 15 years, accelerating to 7% over the last three.

·     Accelerated by targeted acquisitions: driving total revenue growth to 14% CAGR over the last 15 years, accelerating to 23% over the last three.

·     Value-add customer propositions driving sustainably high margins: EBIT margin averaging 18% over the last 15 years, increasing to 19% over the last three.

·     Strong, compounding EPS growth: 15% over the last 15 years, accelerating to 19% over the last 3.

·     Consistent, strong cash conversion: 90% free cash conversion driving prudent balance sheet leverage.

·     Sustainable, high returns: ROATCE consistently in the high teens.

Differentiated value-add businesses

Value-add distribution is at the core of every Diploma business. We distribute specialised products that are mission critical in our customers' value chains; low component cost relative to their budget; usually in their operating rather than capital budgets; and with a 'service wrapper' of technical expertise, convenience or customer productivity. The differentiated value-add proposition at the heart of each of our businesses drives what we call the 'rule of six': loyalty, and therefore share of wallet; a strong reputation, and therefore growing market share; pricing power, and therefore attractive margins.

Powerful, decentralised culture

Our decentralised culture is critical to successful delivery. Our customers and value propositions, as well as our management and performance, are all local. We believe in ownership at the front of the organisation. We have commercial, accountable and empowered management teams, and we support their development with leadership programmes to equip them to manage bigger businesses. We have excellent colleague engagement - a competitive advantage - and we actively manage this with local initiatives to promote safe, inclusive, and engaging environments.

Significant growth potential

Organic growth is our priority. Diploma is made up of 15 small business units, each with significant growth potential in three 'buckets':

1.      Structurally growing end-markets: our products and services serve structurally growing end-markets, and we are increasingly positioning towards these to provide a greater growth tailwind.

2.      Penetrating core geographies: we are underpenetrated in our core geographies of the US, Europe and the UK. We do not need to enter tougher, risker countries to grow.

3.      Extending our product capability: we do this incrementally, and we do it more strategically too at a portfolio level to open up new product verticals and grow our addressable market.

This strategy drives organic growth, scale and resilience. In fragmented markets, we can accelerate organic growth with complementary acquisitions. We have a strong track record over the last four years, investing around £840m in 31 acquisitions which are growing organically at an average of 15% and driving returns of more than twice our cost of capital. We have an exciting pipeline of around 50 near-term, active opportunities worth around £1bn. Importantly, we are extremely disciplined and focus on businesses with the right:

·    Core characteristics: value-add with high gross margin; organic growth potential in one or more of our 'buckets'; and capable management teams we can back.

·    Strategic fit: within our tightly managed portfolio.

·    Financial criteria: 20% ROATCE potential, year one for bolt-ons.

Resilience

Diploma has demonstrated resilience through systemic shocks such as the global financial crisis and the pandemic, and this resilience is increasing:

·    diversification in the three buckets drives revenue resilience;

·    the value-add nature of our products and services drives margin resilience; and

·    our low capital intensity drives resilient cash flows.

Scaling our decentralised Group

As we grow, we naturally need to do things differently, whilst always preserving our value-add customer proposition and our decentralised culture. Building effective scale is therefore key to sustaining long-term delivery. We develop our businesses' operating models: investing incrementally in talent, technology and facilities to deliver their customer propositions at scale. To manage a growing decentralised Group, we ensure that we have a focused portfolio, governed by simple strategic and financial frameworks. We have lean structures and dynamic leaders, and we complement the local culture with the power of the Group - the 'Diploma identity': leadership; networks; commercial collaboration; and best practice sharing.

Sustainable quality compounding

We believe that sustainable, quality compounding comes from a balance of ambition with discipline, and we have encapsulated this as our "financial model". The financial model is not a forecast, it is there to set a level of expectations for sustainable delivery.

We are ambitious.

·    Organic revenue growth is our first priority: model 5%.

·    Total revenue growth is accelerated by quality acquisitions: model 10%.

·    Value-add drives strong operating margins: model 17%.

·    All of this drives double digit compounding EPS growth

We are disciplined.

·    Capital-light business model drives strong cash conversion: model 90%.

·    Capital stewardship focused on strong ROATCE: model high teens.

·    Balance sheet discipline maintains prudent leverage: model < 2.0x.

·    We are committed to a progressive dividend. We have done so for over 30 years, and we intend to grow it by 5% every year.

We have a differentiated value-add service distribution model. It is delivered every day by brilliant people in a powerful decentralised culture. Our strategy is clear, unchanged and working. We have exciting growth prospects and we expect to continue delivering sustainable quality compounding.

The event takes place today at 2:00 at the Numis Auditorium, 45 Gresham Street, London EC2V 7BF.  The presentation will be streamed live. Please register via the following link: register here

Any investors who wish to attend the event in person but have yet to register please contact [email protected]. Copies of the presentation and a replay of the webcast will be available on the Diploma Investor Relations website following the event.

NOTE TO EDITORS:

Diploma PLC is a decentralised, value-add distribution Group. Our businesses deliver practical and innovative solutions that keep key industries moving - from energy and infrastructure to healthcare.

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 c.3,000 colleagues across our three Sectors of Controls, Seals and Life Sciences. Our 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 (EPS) at an average of c.15% p.a. through a combination of organic growth and acquisitions. Diploma is a member of the FTSE 250 with a market capitalisation of c.£3.9bn.

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