Diploma PLC (DPLM) Earnings Call Transcript

Good morning, everyone. Thanks for joining us. I'm here, as usual, with our CFO, Wilson Ng. I'll say a few words on quarter 3, and then we'll move as usual to Q&A. It's been another great quarter for us, 15% organic growth, continuing the momentum from the first half of the year. The sector trends are broadly the same as they were in the first half. Controls, very strong broad-based growth, IS Group, Clarendon, Peerless, Windy still growing double digits, taking good market share in fast-growing end markets. Life Sciences, conversely, markets are tougher. We're going through a little bit of product cycle -- product life cycle refresh. I'm really, really pleased with what we're doing in Life Sciences, what the team are doing, but we will expect low single-digit growth for the year. Seals, we've seen some acceleration in quarter 3, and we're expecting a good quarter 4, too, not celebrating. International is a bit better, but patchy and North American Seals is still doing very well. So look, overall, we're really happy with the quality, with the performance of the portfolio. Peerless continues to perform fantastically, taking share in really good market conditions. Growth is moderating in the second half as we expected against very big comps. And that will continue to moderate into next year until we return to the track record of high single-digit, 10-ish percent growth. And we're managing margin down modestly, and we'll continue to see good profit growth going forward. Very, very pleased with the rest of the portfolio. Organic growth now up at 10% for the year, excluding Peerless. We spoke in May about CDM, an acquisition we’ve now completed, $170 million deal, $80-odd million of revenue. It’s a great interconnect business for us, platform for them in the U.S., an attractive exposure to the U.S. defense markets. It’s got a great team. They’re settling in well. We did five deals actually in quarter three, although they were all announced at the half year in May. That makes 15 new businesses in the last 12 months, a record number actually for us. Deals, of course, won’t always be linear. But our pipeline is strong, diversified and we’ve got plenty of balance sheet capacity. Just a few words on the full year outlook. We’re increasing guidance, as you can see, a further 7% upgrade. Organic growth guidance increased to 14%. No change to acquisition guidance at 6%. Margins up to 26.5%. Altogether, that represents 7% upgrade to profit growth for the year of a little over 40%. So Overall, we’re in very good shape. The momentum is encouraging. Loads of opportunity ahead. The mood is buzzing. We’re feeling good about continuing our successful long-term track record of sustainable quality compounding and with that, I’ll hand back for questions.

Thank you very much Mr. Thomson. [Operator Instructions] Our very first question this morning is coming from Annelies Vermeulen, calling from Morgan Stanley. Please go ahead.

I have two questions, please. Firstly, you’ve upgraded guidance yet again for full year '26, but could you comment a little bit on what this means for full year '27 as we start to approach the year end? And then secondly, related, given where you’re running at now in terms of growth and margins, could we possibly expect an update to your medium-term financial model when you report in November? Thank you.

Great, Annelies, thank you for that. I mean I'll try to take all of those in one go, if I can. I suppose you're asking about a change in the financial model. You made a comment about upgrades and looking forward into next year. So I'll try and take them all together, if I can. First of all, on the financial model, look, as I said before, if we can deliver our financial model forever, it will drive incredible shareholder returns over the long term. Of course, we've got the ambition to beat it. But I think it's healthy for us to stay grounded, not get too greedy, and I see absolutely no reason, therefore, to upgrade our financial model. On the upgrades, I think we've had too many this year, if I'm honest. Part of that is because it's been a much, much bigger year way, way, way beyond what we -- our track record. Secondly, a bit because the circumstances earlier in the year with a war kicking off in the Middle East, et cetera, we were just a bit cautious about the journey through our upgrading. So I would say that I wouldn't get used to please this level of upgrading as we go forward. And the last point that you asked about was guidance for next year. We don't normally guide at this point. We'll obviously be a bit more specific when we get to November. But as I was saying, just a few words on it, this is not a normal year for us. We're not going to be delivering 45% EPS growth, that kind of mid-20% return on capital every single year, are we, obviously? And we won't be doing 15% organic growth every year either, particularly, as I said, as Peerless just moderates a fraction over the months ahead. Having said all that, we've got many decades of great compounding. We're feeling really good about our prospects. We're confident in our ability to keep compounding from this base. So practically speaking, as usual, you should expect that we'll revert back towards our financial model for next year, which is broadly where market consensus is right now.

Yeah, too many upgrades, at least that’s a quality problem in this market.

Our next question will be coming from David Brockton of Deutsche Numis. Please go ahead. Your line is open.

Can I ask a question on Peerless, please? You described how the business is lapping tougher comps and you’re managing the margin down modestly. Can you give an update on the demand trends you’re still seeing in that business today? And is that sort of margin moderation deliberate price action on your part, and what volume trends you’re seeing? And then as you look to sort of next year and beyond, how your broader growth initiatives are developing for that business. Thank you.

Yes. Look, I mean, I don't want the fact that we're talking about moderation to get in the way of the fact that it continues to do fantastically well. I mean it's been knocked out over the last few years as we know, and it continues to deliver well above the group averages and well above their own track record as well. So it continues to be fantastic. We're just trying to obviously be transparent about the fact that the tough comps will mean that the top line will moderate a little bit. And we're deliberately just easing off the margin, not aggressively, but just easing off the margin a little bit, taking a little bit of the heat out of some of the spot pricing and driving a little bit more volume as well. And as I said a minute ago, you'll still see very good profit growth going forward. To answer specifically your question, market demand is unchanged. Market circumstances in general are unchanged. We still see, of course, a healthy backlog of new builds. We still see a healthy refurbishment environment and spot market and the characteristics of the supply chain constraints remain as they were as we expected they would be. So nothing is really new, David, from the market perspective. What is important, I think, to point out to your question is that we are driving, of course, our own initiatives. And that involves a little bit of, as I said, moderating spot prices to drive a bit more spot volume. We're putting more business development resource into both the U.S. and Europe to drive the kind of base level of contract volume. We're broadening a little bit our product capability. And we're investing a little bit more in inventory to do these things. And you'll see that, I think, play out when we get to the full year and beyond into next year as well. So look, all of these are initiatives which are going to support sustaining great performance at their kind of level -- track record level for the long term. So growth will moderate a little bit back towards that 10%-ish. Margins will ease down a fraction. They're probably going to remain structurally above what we bought at, but a bit below where we're at today. But overall, as I say, you should expect good profit growth going forward. So all in all, fantastic performance, and we're just managing now the kind of exit into a sustainable delivery.

[Operator Instructions] we’ll now go to Virginia Montorsi of Bank of America. Please go ahead.

I know everyone always talks about Peerless, but I think what you guys are doing in defense is equally as interesting. Can you talk a little bit more about potentially first, could you tell us how much is defense right now as a percentage of group revenues, broadly speaking? Where do you see, given the current deals you’ve done this year, defense as an opportunity expanding? Are you thinking about doing maybe a bit more in the U.S.? Are you thinking about land versus air? Is there anything about the conflict that has made you maybe identify some opportunities? Yeah, just how are you thinking about it medium term?

Yes. Look, we're quite good in defense actually. If you include CDM on kind of, I guess, a pro forma basis, it's now about 6% or 7% of our revenues. So -- and we've got quite a lot of activity going around to drive great growth from it. And certainly, when you look at the performances of IS Group, particularly, but also a bit of Clarendon and Peerless as well, there's a bit of that defense growth in there. So we're pretty pleased with that. Traditionally, we have been very European-based. And traditionally, we have been very air defense based because it morphed out of our aerospace capability. What we've been looking to do, of course, is to double down on those two areas, but also expand. So by doubling down, I mean we've put some new facility resource and inventory into Eastern Europe, for example, in -- to address that kind of East of Europe into the Nordics defense market. We bought a small business earlier this year called Spring Solutions, which is a U.K.-based defense business. And Clarendon have been doing a lot on air defense in Europe as well. So we've been kind of doubling down on that European and air piece. But then what we've also been doing, of course, is expanding our capability and firstly, going into the U.S. and hence, the CDM acquisition, which we're very pleased about, and that's our first major piece of business for defense in the U.S. But secondly, we're starting to move from air into land defense as well. A bit of that is coming through the work that we're doing out of Eastern Europe and with new product capability. And a bit of that is also coming out of CDM's expertise as well because they are a bit more land than air. So overall, we're pushing and getting a broader range, both geographically and in terms of the market as well. There's loads for us to go for still. So I think it's going to be a good market for us going forward. Last thing I'd say on it is we are putting in a bit more investment behind these kind of things. We talked about it, I think, in November, and we talked about it again in May, not just defense, but end market exposures and the kind of end markets that we want to be in, we are putting just a fraction more investment into these kind of things, particularly resource, but also a bit of inventory. And hopefully, also occasionally the odd acquisition as well. And that will be prevalent in our numbers as we go forward.

We’ll now go to Daniel Cowan of BNP Paribas. Please go ahead.

Just one question for me, please. On Windy City Wire, -- apologies if you've already spoken about this i joined a bit late. But can you just give us an idea of how that went in the quarter? Is growth accelerating there? Or was it about the same as it was in H1, please?