Diploma PLC (DPLM) Earnings Call Transcript & Summary

Hello, and welcome to the Diploma Q1 results. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Johnny to begin today's conference. Thank you.

Good morning, everyone. Thanks for joining. Happy New Year to you all. I'm here, as usual, with our CFO, Chris Davies. I'm going to say just a few words on the quarter 1 performance, and then we'll move on swiftly to Q&A. So we've made a strong start to the year. Organic revenue grew 7% in the quarter. We've seen consistent trends with last year across the three sectors. In Seals, industrial markets continue to be pretty tough, particularly so, I would say, at the end of last year, perhaps a reflection of elections, fiscal events, et cetera. Seals, therefore, declined a little in the quarter, but we remain equally very positive about the medium-term recovery and, of course, the long-term prospects for the sector, too. Life Sciences, consistently strong underlying performance broadly in line with the group average at the moment. And the Controls continues to be strong, strong structural end market tailwinds, market share gains. Some of our bigger businesses had very strong quarters, Peerless, Windy City, IS Group Clarendon, et cetera. So pleased with that. Reported revenue grew by 12%, a 7% contribution from acquisitions and a 2% FX headwind. We made one small bolt-on acquisition in International Controls in the quarter. Overall, the pipeline is still healthy. But of course, as ever, we continue to be very disciplined. So overall, we're pleased with the start to the year. There's no change to our full year guidance. We're expecting to deliver a performance ahead of our financial model. And we're feeling good about continuing to deliver on our long-term track record of quality compounding. That's it for me. I'll hand back for questions.

[Operator Instructions] We will take the first question from line David Brockton from Deutsche Numis.

Can I just pick up on that Seals business. I guess you flagged a sort of somewhat tougher end in terms of the quarter. Can you maybe just touch around sort of any forward indicators or any sort of signs that you're seeing from a forward perspective as to how that could progress through the year? I guess we were hoping that, that would improve as the year progressed. And I guess is that still your expectation, noting that Controls has obviously been a lot stronger?

Yes. Thanks, David. Thanks for the question. Yes, look, I mean, I think it's probably be a little tougher in the industrial and manufacturing segment than we might have expected, say, 6, 12 months ago. So there's no doubt about that. It's always difficult to predict, isn't it? But the sense that the last quarter of the last calendar year being a slightly tougher one, I don't think we're alone in that and perhaps a little bit of U.S. election, as I said, perhaps a little bit of U.K. budget in there as well. I'm very confident that we're doing all the right things. We're very, very focused on driving great growth in the sector. We've got some new general managers who are bedding in now and starting to make a difference. We have taken a little bit of cost out, as you would expect us to do. So the medium-term recovery, I'm very, very confident about. Exactly when that will start to materialize, I'm reluctant to give you a date on that, but I feel confident as we look out towards the rest of this year. And I'd also say the long-term prospects, I mean, it's really important for people to understand, we will have moments in time when each of our sectors are up or down. But the long-term prospects for Seals continue to be really, really exciting, whether it's the tailwinds from infrastructure investment, whether it's our own self-help on expanding product capability around Fluid Power. We've got lots to go for in the long term. And I suppose the last thing I would say about it is just that portfolio point. This is where the quality of the portfolio that we're building comes in, doesn't it? And I'm very, very happy that in tougher industrial markets, we're still able to post numbers, which are slightly above our financial model, and that goes to the quality of the portfolio and therefore, our ability to deliver compounding through the good times and the bad.

We will take the next question from the line of Henry Carver from Davy.

Just a quick one on FX, given the recent news. And if rates basically stay where they are now for the rest of the year, is that a tailwind? Or any thoughts on that would be helpful.

Henry, it's Chris. I mean it's a bit choppy, isn't it? I suppose net-net, if we froze everything as it is right now, it's a bit of a tailwind, but it's a mixed bag. Dollar is good for us right now. Euro is somewhere in the mix. And Canadian and U.S. -- sorry, Canadian and Australian are still pulling on us. So you got to remember, it's not all dollar, mild tailwind, but my crystal ball, they're better than yours.

We will take the next question from the line of Daniel Cowan from HSBC.

A question for me. Just on TIE, is there anything you can tell us on how things are progressing there and how the changes you've made are impacting, please?

Yes, yes, yes. I mean I think we've mentioned in recent times, the work we're doing with TIE and DICSA. And I suppose, with both, we're feeling confident about the progress that we've made. I wouldn't say necessarily that we're in celebration mode. That's for sure. There's still lots for us to do. But we've made some good progress in both instances, and you asked specifically about TIE, so I'll address that. And we're making some management change, and it's still very, very early days in that. So there's still some work to be done. But I also feel quite confident about some of the work we've done recently to drive better sales outcomes, particularly. I think there's signs of life in terms of TIE over the last few months. We're not celebrating as I say, but I'm feeling good that TIE is going to come good. And remember also that this is a good business. This will have great tailwinds from the automation space, particularly in, I guess, in a Trump world with onshore manufacturing and tight labor pool, I think this business will have some great tailwinds. And there's no doubt that we are on the journey towards managing it better. So short to medium term, I think it's going to start to improve performance. Longer term, I think it's going to be a big contributor. I'll just say a word on DICSA, if I may, just to tease a little bit, and I'll use your question because I've mentioned DICSA as well. And that was a deal that obviously, we did last year. Again, great business, and we're very confident about it. The European markets, industrial markets, of course, have made it a little bit more challenging. But again, we're holding our own and actually improving a little bit there. We've had a new General Manager in for the last 3 or 4 months, a new CFO in for about 6 to 12 months. And I'm very pleased the quarter was actually a little bit better in DICSA, again, not celebration time, but a little bit better. And getting into positive space in what are effectively declining markets demonstrates that they're taking some share. So in both instances, I guess the answer is quietly confident, but not yet celebrating.

We will take the next question from line Annelies from Morgan Stanley.

I have 2 questions. So I appreciate we've discussed this in the past, but perhaps you could share your updated view on any potential either headwinds or tailwinds to the business from the incoming U.S. administration. You touched on tight labor and onshoring. But I was thinking particularly with regards to sourcing and your exposure to Canada, where there's also been quite a bit of noise in the press. And any sort of feedback you've had from your customers would be interesting as well, given that election uncertainty has been removed. That's the first one.

Okay. Should we do that first and then you can do the second one. I mean look, there's a lot of uncertainty. I don't need to say that really do. It's a moving target, as we know. But for us, it's just all about being prepared. Over the last years, in fact, pre-Mr. Trump’s first administration. And since then, we've been reducing exposure to China. So our China into U.S. exposure has -- it's not 0, but it's pretty minimal and manageable. I think for us, the more challenging bit will be the Canada bit, not insurmountable, but we've got a bit more cross-border from the U.S. to Canada in both directions. And that's the one that will need quite careful managing if indeed there is some form of tariff on Canada. It's not insurmountable, but it will just probably take a little bit more work, but we're ready. We've had a lot of conversations with our supply base and with our customers. So we're able to -- where we can move supply to different locations, et cetera. And to some degree, we've already been doing that. We're able to discuss proactively with our customers about what they would like to see and what they're willing to pay for. So we feel quite prepared for that. And that's one of the advantages, I suppose, of the kind of relationship-based value-add distribution that we do that our relationships with our customers and our supply partners are very, very strong and allow us, therefore, in this kind of environment to be pretty agile and pretty responsive and work together for the right outcome. Indeed, we did so last time around, and I'm confident in a tariff environment, we can do so again. I think the last thing I'd say on it is, I do feel there's a positive here. There's a competitive advantage for us. We saw that the last time around, particularly with Windy City on the supply chain side. So I would expect to see a little bit of competitive advantage flow through into some share gains as well. So net-net, feel prepared. We'll see what happens and hopefully some upside.

Very clear. And then I have a sort of short and slightly cheeky one, if that's all right. If I look over the last few years and the cadence of your larger acquisitions, it's been 8 months since we've had Peerless, could imply that it's about time for another large deal. Your leverage and cash position remains very solid. So is there anything larger in the pipeline in the coming months alongside ongoing bolt-ons?

Yes, it's not cheeky at all, at least it's a perfectly sensible question. The pipeline is good. The longer-term hopper, as we've talked about in November, I think, remains as big as it's ever been, but also as diversified as it's ever been geographically and sectorially. So the long-term hopper is good. The short-term hopper, I would just say, is probably at this moment, a little bit more U.S. skewed just given the way markets are in Europe and the U.K. But nevertheless, fairly active short-term hopper. We said no to quite a lot. And this is something I'll say again now. While we -- while I talked about having a healthy cadence to acquisitions, that in no way means that we will do the same thing, the same quantum in the same way every single year because, of course, as we know, the key to this is discipline, is doing good deals, not just any deals. And therefore, the cadence won't always be linear. And there'll be periods when we do a bit less and there'll be periods when we do a bit more. And I think that's absolutely fine as long as we're doing good deals. Big picture, we've got fragmented end markets. We've got a good structure, strategy, process around M&A, and we've got a competitive advantage as buyer of choice. So I remain very confident that we'll continue to do deals over the long term. I just won't necessarily commit to exactly what they will be in any given period.

[Operator Instructions] We will take the next question from line Karin So from JPMorgan.

I have 2, please. One is on Peerless. If you could elaborate on some of the trends that we're seeing on the business because I think last year, we were mentioning that there was some one-off impact from competitors. And then the second is following up on Annelies question on M&A, actually. So what are some of the trends that you're seeing in terms of the competition for these assets as well in the pipeline given the changes in rates? So curious on those 2.

Yes. I mean I'll take them in reverse order, if that's okay. Just to finish off the point on M&A. I mean I mentioned in Annelies' question about the pipeline being just the short term. I mean, the immediate-term pipeline being a little more U.S. skewed. And the reality of the situation is, of course, with European markets and more recently U.K. markets being a bit more difficult for us, we've seen a pickup in processing in the U.S., basically, I suppose, a reflection of confidence. But with that, and we've always said this, with that, more confidence, more processes tends to come slightly more elevated valuations as well. And that you would understand why with a lot of private equity money floating around. So we have seen, I don't think anything irrational, but we've probably seen a fraction, a modest uptick in the valuations in the U.S. over the last 6 months. And as a result of that to the question I was just answering of Annelies, we have -- we retain our discipline, and we've walked away from quite a few things that we didn't feel were quite right on valuation. So that's the way what we're seeing at the moment. However, again, back to my point a minute ago, that doesn't in any way mean we're not going to do deals because we've done lots of deals in this kind of environment before. And our competitive advantage around being the buyer of choice tends to put us in a good position irrespective of valuations at any given moment. So as I said before, I feel pretty confident that we can still do deals in this kind of environment. Your question on Peerless, I mean, not -- when we really spoke to you in November, so it's only some weeks later, isn't it? So not a lot has really changed. I guess the big positive here is that Peerless continues to perform really, really well. The characteristics of the market they operate in haven't really changed. Big pipe and long backlog of new builds, healthy repair environment, complex constrained supply chain dynamics, all of which puts Peerless in an exceptionally good place. And so the performance through the first quarter has carried on very, very strong. It will normalize as the year goes on, particularly with tougher comparators, et cetera. So you should expect to see that. But for the moment, it continues to trade very well. And regardless of this quarter or that quarter, this is a great business in a great market. So for the long term, we feel very good about Peerless.

We will take the next question from the line of Himanshu Agarwal from Bank of America.

Himanshu from Bank of America. I wanted to ask about the price/mix contribution in Q1 and if you are seeing any deflationary pressures as you exit Q1? And the second one I have is on Windy City Wire, which you highlighted as a competitive advantage in terms of the tariffs under new administration. Are you seeing already any new customers joining or any prebuy effect in Q1 and yes, those are my 2 questions.

I'll let Chris do the one on pricing. Chris?

Yes. I mean, no, I don't think we're seeing any sort of systemic inflationary pressures. The nature of our business is a value-add distributor means we're not -- the product cost per se is not a huge chunk of what we're selling. The service wrapper means that if there's a small movement in input cost is -- we don't necessarily have to go and run one way or the other. What we are doing on price, and again, what I said in November is kind of very surgically, very carefully right across by product, by customer, by channel across our businesses, making sure that we're covering inflation where it's there, making sure that we are getting a price commensurate with the value we add. And therefore, if you sort of look under the cover, you'll see some places where price is up, some places where price is down. The net of all of that, as it has been consistently for the last sort of 8 or so quarters is -- this is volume-led revenue growth. There's a bit of price in there, and there always will be as piece of our model. I'm not going to give you the exact numbers. I don't know the exact numbers for the quarter. It wouldn't be that meaningful for you, but it's volume-led revenue growth.

Just on your question on Windy City, we're very pleased we've had a fantastic start to the year. You mentioned supply chain advantage. I mean last time through, I guess, we didn't really have -- we didn't have Windy City Wire when Trump's last administration, but we did have Windy City Wire through the period of supply chain pressures post COVID. So to whatever degree that's an analogy, then, of course, we saw at that point, significant competitive advantage because Windy's supply chain and operational base is pretty local, whereas many of their competitors are bulk shipping from China. So certainly through the COVID period, one of the reasons for Windy City's fantastic performance post acquisition was exactly that supply chain advantage. I mean I'm not predicting anything here, but we're hopeful that we can see some of that benefit again, whatever happens in a Trump administration coming up. But I don't think today, we can necessarily point to any material change. I think it's too early. And I think really the mood in the U.S. is let's wait and see at this point. You can understand why no one really knows exactly what's going to play out here. But overall, Windy is in a very good place. It drives competitive advantage with the quality of the business model, and there may be some supply chain advantage coming to.

Can I just build on Johnny's answer just one little bit because I think it's important to understand a lot of companies in the post-COVID supply chain crunch saw some benefit that then went away as supply chains rationalized. Windy City is all about trial. It's got a fundamentally better product that saves labor costs at the front end. They've got 99% customer retention. So when they get a benefit through a supply chain such as after COVID, it tends to boost up and then stick at a new plateau from which they grow again. I think that's quite an important point here.

We will take the next question from James Rose from Barclays.

I've got 1 on Life Sciences, please. If we look broadly across commentary from some of the U.S. diagnostic peers, that sector is still struggling, has been for quite a while now. How is your business growing versus how it was in the second half? And how are you outperforming those broader market trends as well?

Yes. I mean, look, I'm very, very pleased with the way Life Sciences is performing. I mean I certainly don't seek to comment on what others are doing, but we're -- we've been in the kind of, I guess, 5, 6, 7 bracket now probably for about a year. Is that fair? About a year. And this -- the way that the business has started this year is consistent with that. I think we probably are doing a little bit better than the broader market. And there are some reasons for that, I believe, and this is particularly relevant. We talked about this in November. This is particularly relevant when you think about Seals as well. During the tougher times for the health care world, I guess, post-COVID, we really wanted to make sure that we took advantage of those times to build better quality businesses so that when we came out of that period, we were in a great position to take advantage of better markets. And as a result of that, we made some management change in Life Sciences over the last 2 or 3 years. We've done quite a bit of operational restructuring to kind of consolidate our position in our core markets. And we've done a hell of a lot of work to build out our business development capability, and I'm really, really excited about the way that's working, particularly how we are now starting to cross-pollinate opportunities between different countries and different supplier relationships, et cetera. So there's a lot of great work going on in life sciences. And I have no doubt that that's playing out into the way that we're performing at the moment. I'm not, by any stretch, trying to say that is easy, it certainly isn't. But I think we're pretty pleased with the way they're performing. And just my last point on this would be, it is a reflection, as we said in November into how we're thinking about Seals at the moment, of course, very different markets, et cetera, et cetera. But the attitude of improving your business during the tough times is one that we've taken on board from Life Sciences, and we're doing the same in Seals. And that gives me a lot of confidence that we're going to come out firing on all cylinders in Seals as well.

There appears no further questions at this time. I'll hand it back over to your host for closing remarks.

Nothing much to say, really strong quarter. We're pretty pleased. Full year guidance remains intact, slightly ahead of our financial model. We're feeling positive about delivering that and positive about the long-term delivery of quality compounding too. Thanks for joining, and I guess we'll see you in May.

Thank you for joining today's call, you may now disconnect.