Diploma PLC (DPLM) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to our trading update. Thanks for joining. I'm here, as usual, with Chris. I'll say a few words of summary, and then we'll move swiftly on to Q&A. First, a few words on our performance. It's been a strong performance in quarter 3, adding to our long-term track record of sustainable quality compounding. For the full year, we're upgrading our organic growth from 8% to 10%. And year-to-date, our organic growth grew by 10%. In Controls, we continue to have great end market support, aerospace, defense, energy, et cetera, and we're making good progress with market share, too. Windy City is doing very well in data centers. Peerless continues to do very well in aerospace. In Life Sciences, we continue to deliver well, consistent with the first half. And importantly, we're now seeing sequential improvement in Seals as the second half progresses. Reported revenue for the year-to-date was 12%, 4% from acquisitions, partly offset by FX. And operating margins are still strong, in line with our full year guidance of 22%. Now a few words on acquisitions. We welcomed 2 new exciting businesses to the group, spending nearly GBP 40 million at a blended 8x multiple. Haagensen, we acquired last month for GBP 11 million as a quality sealing solutions business, which will combine well with our existing M Seals business in Denmark. In Life Sciences, we acquired Alfa Laboratories for GBP 28 million. It's an important platform getting us into high-growth IVD end markets in the U.K. It specializes in screening for bowel cancer and disease. And importantly, it allows us to bring our extensive IVD experience from elsewhere into the U.K. market. These businesses will contribute well to our future organic growth and at great returns. Overall, the acquisition pipeline is in very good shape. So we're pleased with the performance. We're confident it's going to be a great year for us, and we're feeling good about delivering sustainable quality compounding for the long term, too. And we'll hand over for questions.

[Operator Instructions] Our first question today comes from Annelies Vermeulen from Morgan Stanley.

Two, hopefully, brief questions from me. So firstly, the acquisitions that you've made, can you comment at all on what kind of growth those businesses are doing today? And what is the upside opportunity? You've talked about the combination with M Seals, the Danish business, for example, but are there revenue synergies, cross-selling, et cetera? Is that the usual Diploma playbook you expect to execute on those deals? And then secondly, just on DICSA, when we spoke in May, you were talking about seeing an improvement through the first half. How has that trended through Q3? And has that continued to improve as well as alongside your improving U.S. Steel business?

Yes. Thanks, Annelies. Taking them in order. I mean the growth rates for these businesses, we expect to be high single digits for both of them actually. So there'll be good contributors to our organic growth for the future. They -- you asked about kind of synergistic value to us, and both of them will have, but for quite different reasons. We have recently upgraded our facility in our existing M Seals business near Copenhagen, and that facility serves the Nordics and into Germany as well. And the acquisition of this business will allow us to lift and shift the facility for Haagensen into that new state-of-the-art facility. So as well as providing broader opportunities for growth, it also provides some kind of cost synergy for us as well. So overall, we're very pleased with that. The Alpha Laboratories, we're pleased with the first health care acquisition actually we've done for a while. So we're very pleased. And we're also pleased to get into the U.K. in a meaningful way. The most important thing is we continue to invest behind the exciting IVD market, and we've got some real specialism in that space, Canada, Ireland, the Nordics and Australia. So it gets us into that space with a platform in the U.K. And what I'm excited about is it will allow us on top of its existing business, it will allow us to push some of our expertise from elsewhere through that business over the long term and into the U.K. market. Those kind of things don't happen overnight in the health care space, but over the long term, it gives us a platform entry for all of that expertise. So it should be exciting for growth for the life sciences sector. You asked about DICSA. We're very pleased with DICSA. When we bought it a few years ago, we did say we did know that it was going to be slow for a while with the European markets. But the last 2 or 3 quarters have really picked up. We've transitioned in the process of most of the way through transitioning from family run to a professional management team, very happy with that management team. They're doing a great job. And the growth rates have been steadily picking up into kind of mid-single-digit range over the last few quarters. So we're really, really excited about the prospects ahead for DICSA.

Our next question now comes from William Blunt from Redburn.

The first question I have is about a comment you made at the interims where you noted that some improvements -- you've seen some improvements in the trading environment in industrial end markets in the U.S. Have these trends continued? And would you call out any other sort of more industrial end markets that are performing well? And then the second question I have is you previously said that the number of active negotiations you're in for M&A deals have been -- was higher than ever before. Obviously, you've completed 2 deals in this quarter. Would you say this is indicative of some broader changes you've seen from sellers generally?

I'll take the last one first. Actually, what we said at the interims wasn't that the short-term active pipeline was as high as ever. What we said was the long-term pipeline was as high as it's ever been. The overall market, I think, for acquisitions has been a little slow, I would say, over the last 6 months. The obvious uncertainties in the market mean that sellers of good businesses are -- just hold back for a while. So it's been a fraction slow. Having said that, the long-term pipeline continues to go up. And I would say maybe -- I don't know, it's probably a bit early to call a trend here, but it feels like the last kind of weeks, month or 2, we've just seen a bit of movement, particularly in the U.S. getting a little better on the deal flow. So let's see if that's a trend that will continue. We continue to be disciplined. But at the same time, for the long term, we continue to be very positive about it. We have fragmented markets, good long-term pipeline. We've got good acquisition processes, and we continue to have competitive advantage as a buyer of choice. So I'm not worried about it. And I think for the long term, we're in good shape on the acquisition front. Chris, do you want to say anything about industrial markets?

Yes. I mean, I guess the closest we've got as a barometer is our North American aftermarket Seals business. And as Johnny said earlier, that has ticked up sequentially over the last probably 2 or 3 quarters quite nicely now. So where we are operating, we are seeing positive trends.

From Deutsche Numis, we now have David Brockton with our next question.

I was just wondering if you can give a bit more insight into how the Controls business is performing. I guess I'm mostly interested in Windy City Wire that seem to show an improvement as you work your way through the year. Has that continued?

Yes. Windy City is doing very well, very pleased with it. It's continued the trends from the first half of the year in a fairly consistent way. We're doing very well in data centers, which gets a lot of the headlines, but they're also doing well in other fast-growing markets like digital antenna systems as an example. So very pleased with how they're going. And across the rest of the Controls sector, obviously, Peerless is doing well and -- but alongside that, Clarendon, our other aerospace fasteners business doing very, very well. Two, our IS Group, which has aerospace and defense exposure going very, very well. We've still got more work to do on TIE, our acquisition from a few years ago into the automation space, making progress from a management perspective, but more to do to get that into decent growth. But overall, as I said at the top of the show, the Controls sector has got very good end market support, but also executing very well on this opportunity. So we're pleased with how that's progressing.

And we're now moving on to a question from Sam Dindol from Stifel.

A couple of questions from me, please. Firstly, on the M&A, are you able to give sort of the revenue pre-deal just so we can sort of get that in our models and get a sense of the base there? And then secondly, I think you kindly -- at the H1 gave the organic growth ex-Peerless. So I don't know if you'd be able to give a similar number for that this time, that would be very helpful.

Sam, look, broadly speaking, the 2 deals together are kind of GBP 30-ish million of revenue and GBP 5 million or GBP 6 million of profit, that kind of area. In terms of what we said -- ex Peerless, what we said before was the rest of the portfolio is trending in line with the financial model, and that continues. Obviously, we've hinted -- not hinted, we told you Seals is a bit stronger. So we're slightly better than any of the model. That's as much as I'm going to give you this morning, Sam.

[Operator Instructions] Next, we move to a question from Ryan Flight from Jefferies.

Ryan Flight from Jefferies here. And 3 for me, if I may. First of all, I wondered if you could give us any more color on the Seals improving trajectory, if there's any kind of end markets or anything in particular you'd point out? And if there has been any kind of deviation there as a result of the divestments that were in that -- the first half? Second question, Peerless is obviously still performing very well from a revenue growth perspective, but I wondered if you could also comment, is the margin still very strong there? And then the third and final question, just if you could comment on copper prices. Clearly, there's quite a lot of volatility there. Is that just a straight pass-through cost for Windy City Wire? Is there anything else you'd note?

I'll let Chris do copper in a second. Just taking your other 2 questions. I mean, look, Seals, as we said a couple of times now, sequentially, we're just seeing some improvements. I think it's too early for us to raise the flag and celebrate at this stage. There's still lots of work for us to do. We've made quite a few changes in the U.S., and we're really seeing the fruits of that now. Chris hinted maybe the market there is a little bit better than it was some months ago. But certainly, we're also getting a bit better, too. So the North American Seals sector is leading the charge, if you like, in terms of the recovery. Europe, I guess we're seeing some recovery in PMIs in Europe, maybe a little bit more stability for us to operate in there. And as I said before, we're also doing better with our DICSA management and execution. The U.K. is still tough for Seals. I think that's just a broad comment on the U.K. market industrially right now is pretty tough. So we've still got a lot of work to do to get our R&G business in the U.K. into the shape that we want. But overall, we're seeing quarter-by-quarter some improvement. And I'm hoping, therefore, for some pretty good momentum as we break into the new year. You asked about Peerless. Look, we're in great shape with Peerless. They continue to do well. It's been a great acquisition for us. The market is still very good. The aerospace market, if you're in the right space, the proposition is excellent and winning them share, and our team are doing a great job. So overall, it's been a great acquisition for us. Markets are still strong, as I said. But inevitably, things will start to slow and it will return to some kind of normality, which is what we bought it off, but still very good performance, probably something like 10% growth at mid-30s margin. The margin, to your question, is a little bit higher still at the moment. But our working assumption is by the time we get into the early part of next year, it will have normalized.

Yes. And copper, look, you're right, copper is very, very noisy at the moment. There's still a little unclarity over or lack of clarity on exactly what the latest tariff announcement means, i.e., does it apply at all to wire or to cathode or to ore is still unclear. And notwithstanding that, the U.S. copper price, of course, reacted on the back of the tariffs now. Windy City basically just build that into their pricing model. So the working assumption is it is a straight pass-through.

[Operator Instructions] There currently appears to be no further questions at this time. So I'd like to hand the call back over to you, Mr. Thomson, for any additional or closing remarks.

No more remarks to make. Thank you, everyone, for joining, and we'll see you again in November.