Financial Highlights

For the year ended 30 september 2019

Strong double-digit growth in revenues and earnings

Revenue
£544.7m
2018: £485.1m +12%
Statutory operating profit1
£84.1m
2018: £73.2m +15%
Statutory profit before tax
£83.5m
2018: £72.7m +15%
Adjusted operating profit1
£97.2m
2018: £84.9m +14%
Adjusted operating margin
17.8%
2018: 17.5% +30bps
Adjusted profit before tax1,2
£96.5m
2018: £84.8m +14%
Free cash flow3
£56.5m
2018: £60.5m
Acquisition spend
£78.3m
2018: £20.4m
ROATCE
22.9%
2018: 24.5%
  1. Before acquisition related charges and Chief Executive Officer transition costs in 2018.
  2. Before fair value remeasurements.
  3. Before cash payments on acquisitions and dividends.
Financial highlights (PDF, 3.73MB)

Group at a Glance

Well diversified by geography and business area

North American revenue(by destination) by Sector

Group revenue
Locations

European revenue(by destination) by Sector

Group revenue
Locations

Rest of World revenue(by destination) by Sector

Group revenue
Locations
Life Sciences Seals Controls

Primary growth drivers

  • Public and private healthcare spending
  • Ageing population and increasing life expectancy
  • Health & Safety and Environmental regulation

The Life Sciences Sector businesses supply a range of consumables, instrumentation and related services to the healthcare and environmental industries.

Healthcare (85% of revenue): clinical diagnostic instrumentation, consumables and services supplied to hospital pathology and life sciences laboratories for the testing of blood tissue and other samples. Surgical medical devices, consumables and services supplied to hospital operating rooms, GI/Endoscopy suites and clinics.

Environmental (15% of revenue): environmental analysers, containment enclosures and continuous emissions monitoring systems.

Primary growth drivers

  • Public and private healthcare spending
  • Ageing population and increasing life expectancy
  • Health & Safety and Environmental regulation
  • Group revenue 27%
  • Employees 437

Primary growth drivers

  • General economic growth
  • Activity and spending levels in Heavy Construction and Infrastructure
  • Growth in industrial production
  • Capital expansion projects at major customers

The Seals Sector businesses supply a range of seals, gaskets, filters, cylinders, components and kits used in heavy mobile machinery and specialised industrial equipment.

North American Seals (61% of revenue):

Aftermarket: next-day delivery of seals, sealing product sand cylinder components for the repair of heavy mobile machinery.

Industrial OEM:

sealing products, custom-moulded and machined parts supplied to manufacturers of specialised industrial equipment.

MRO:

high-quality gaskets and fluid sealing products supplied to end users with critical services in high-cost failure applications.

International Seals (39% of revenue): sealing products and filters supplied outside North America to Aftermarket and Industrial OEM customers as well as to Maintenance, Repair and Overhaul (“MRO”) operations.

Primary growth drivers

  • General economic growth
  • Activity and spending levels in Heavy Construction and Infrastructure
  • Growth in industrial production
  • Capital expansion projects at major customers
  • Group revenue 40%
  • Employees 1,007

Primary growth drivers

  • General growth in the industrial economy
  • Activity and spending levels in Aerospace, Defence, Motorsport, Energy, Medical and Rail
  • Equipment installation and maintenance in Food & Beverage and Catering

The Controls Sector businesses supply specialised wiring, cable, connectors, fasteners and control devices used in a range of technically demanding applications.

Interconnect (63% of revenue): wiring, cable, harness components and cable accessories used in specialised technical applications in Aerospace, Defence, Motorsport, Energy, Medical, Rail and Industrial.

Specialty Fasteners (21% of revenue): specialty aerospace-quality fasteners supplied to Civil Aerospace, Motorsport, Industrial and Defence markets.

Fluid Controls (16% of revenue): temperature, pressure and fluid control products used in Food & Beverage and Catering industries.

Primary growth drivers

  • General growth in the industrial economy
  • Activity and spending levels in Aerospace, Defence, Motorsport, Energy, Medical and Rail
  • Equipment installation and maintenance in Food & Beverage and Catering
  • Group revenue 33 %
  • Employees 601
Group at a glance (PDF, 0.6MB)

Chairman's Statement

Consistent and sustainable shareholder value creation

The Group has delivered strong double-digit growth in revenues and earnings” John Nicholas Chairman
Adjusted EPS growth (pence) +16% p.a.1
1Ten-year compound.
TSR growth (TSR Index 2009 = 100) +29% p.a.1
Dividend growth (pence) +14% p.a.1
  1. Ten-year compound.
Chairman's Statement (PDF, 3.73MB)

Chief Executive's Review

Another year of strong performance” Johnny Thomson Chief Executive Officer

2019 has been another year of strong performance. The Group’s reported revenues increased by 12%, with currency movements adding 2% and acquisitions contributing a further 5% to the revenue growth.

On an underlying basis, after adjusting for acquisitions and for currency effects on translation, Group revenues increased by 5%. Encouragingly, there was good growth in all three Sectors. Group adjusted operating margins improved by an excellent 30bps to 17.8%. As a result, the Group’s adjusted earnings grew by 14% in the year. Strong cash flow generation provided funds to allow us to report a record year for acquisition spend, as well as a 15% proposed increase in the final dividend.

Business Model – value add distributions

Stable and resilient revenue growth is achieved through our focus on Essential Products and Services funded by customers’ operating model rather than capital budgets and supplied across a range of specialised industry segments.

By supplying Essential Solutions, not just products, we build strong, long-term relationships with our customers and suppliers, which support sustainable and attractive margins. Finally, we encourage an entrepreneurial culture in our businesses through our decentralised management structure.

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.

What we put in

Essential Products

Most of the Group’s revenues are generated from consumable products. Often, the products are used in repair and maintenance applications and refurbishment and upgrade programmes, rather than supplied to original equipment manufacturers.

  • Critical to customers’ needs
  • Opex budgets
  • Range of end markets
What we get out

Growth and resilience

What we put in

Essential Solutions

Our businesses design their individual business models to provide solutions that closely meet the requirements of their customers.

  • Responsive customer service
  • Deep technical support
  • Added value services
What we get out

Sustainable high margins

What we put in

Essential Values

Within our businesses we have strong, self-standing management teams who are committed to, and rewarded according to, the success their businesses.

  • Decentralised model
  • Customer orientated
  • Accountable for performance execution
What we get out

Empowered management teams

Strategy

The Group has a proven and successful value-add distribution model. We hold strong positions in key niche markets with a clear route to market that provides organic growth potential and exciting acquisition opportunities in largely fragmented market environments.

Our consistent strategy will continue to evolve as the Group gets larger and more complex. However as we grow we will continue to maintain our strong foundations and to invest and develop in our Core Competencies and Organisational Capabilities.

It is a strategy based on continuity that builds on the foundations that underpin Diploma’s success.

The Group has been built on these strong foundations and our strategy will continue to build on this.

Resilient value-add distribution model

We supply Essential Products to a range of end markets. Our Essential Solutions give sustainable high margins through added-value services and customer loyalty. Our empowered management teams embody our Essential Values.

Passionate, accountable, customer-centric people

We have a decentralised structure that encourages an entrepreneurial culture across our businesses and allows our managers the freedom to run their own businesses with the support of the Group.

Strong positions in attractive markets

We hold strong positions in key local markets with potential for greater penetration in the larger developed economies and across our product portfolio.

Successful M&A history

We carefully select value-enhancing acquisitions that accelerate the underlying growth and take us into related strategic markets and adjacent product opportunities.

Strong cash flow and robust balance sheet

We generate strong free cash flow and have a robust balance sheet that helps fund a disciplined acquisition strategy and provides healthy returns to shareholders.

Our Core Competencies help us to operationalise our proposition of Essential Products, Essential Solutions and Essential Values. As Diploma grows and becomes a broader and more complex business, we must continue to focus on and develop our Core Competencies. It is these competencies in our business model that differentiate us, protect us from disruption and deliver outstanding performance.

Supply chain management

We are a value-add distributor and our suppliers are integral to our success. Improving our demand planning and taking advantage of our increasing scale within and across our businesses will make us more competitive to our customers.

Operational excellence

Our distribution operations will become larger and more complex and we will ensure that we have the correct processes and systems in our distribution facilities that will allow us to continue to be agile and responsive to our customers’ needs.

Value-add

We will continue to provide excellent service and solutions by developing our talent, our processes and our information systems that help us deliver that service and those solutions.

Route to market

We will use our scale to be more strategic in evaluating our addressable market and how we best take advantage of it. We will identify the more relevant markets, develop those markets through the right channels, invest where necessary and execute well-defined business to business sales.

Commercial discipline

Our businesses provide excellent customer service every day. Our financial model must fit our customers’ financial requirements and at the same time reward our businesses fairly. Pricing remains critical to ensuring that we are always competitive to our customers and sustain our margins. This is a win-win for Diploma and our customers.

We drive our Core Competencies by investing in and developing the Organisational Capability that provides the competitive advantage across our Sectors and facilitates the improvements in our business.

Talent

We have great people and as our Group grows, we need to give our colleagues the right support, development and opportunity to grow too.

Technology

We continue to invest well in technology that will support us in delivering our Core Competencies, which is key to unlocking the operational potential in our businesses.

Facility

We are strategic about our facilities in order to improve our efficiency, quality, agility and distribution footprint.

Diploma holds strong positions in key markets and products across each of our three Sectors. Structural market trends in our existing end markets help to sustain healthy levels of growth over the long term.

To complement this growth, encouragingly, the Group still has very low market share in its core markets and products. Those markets are also relatively fragmented. This means that we can grow by focusing on core developed markets and products, both organically and by acquisition, without being distracted elsewhere at higher risk.

The Group’s increasing scale can be used selectively to support long term growth without affecting the proximity and closeness of customer relationships and services.

Small to medium sized bolt-on acquisitions continue to play an important part in the development of our Group. In a fragmented market, there are many high-quality operators, and the Group has a healthy balance sheet to reinvest. This year has been a record year with four new businesses joining the Group. We will continue to pursue similar businesses that have the right strategic fit and meet our criteria.

Diploma has delivered excellent shareholder returns over many years and the Group’s businesses have significant potential to continue this track record.

The key performance indicators (“KPIs”) we use to measure the success of the business model relate to recurring income and stable underlying revenue growth, sustainable and attractive margins and organisational health. This year, underlying revenue growth, after adjusting for currency movements and acquisitions, has been a robust 5%, with the growth rate softening in the second half of the year. Reported growth has been 12% in the current year and on a five-year CAGR basis.

The agility and responsiveness of the organisation is more difficult to measure directly, but non-financial KPIs can give an indication of the organisational health. The number of working days lost to sickness has consistently been only ca. 1.4% a year and over the last five years, the average length of service for all employees has been ca. 6.7 years (ca. 10 years for the senior management cadre).

Acquisitions are not made just to add revenue and profit, but rather to bring into the Group successful businesses that add value to the Group from their growth potential, capable management and a good track record of profitable growth and cash generation. As part of our strategy to focus the business for strong growth, we invest in the businesses post-acquisition to build a firm foundation to allow them to move to a new level of growth and improve operating margins. These acquisitions form a critical part of our Sector growth strategies and are designed to generate a pre-tax return on investment of at least 20% and hence support our Group objectives for return on total investment.

Again we measure the success of the growth of the business with KPIs, the first of which is acquisition spend. As part of the Group’s objective of strong double-digit growth we have an acquisition capacity of up to two times net debt/EBITDA, though year-on-year spend will vary with the acquisition environment. This year, the Group invested ca. £78m in acquisitions, bringing the total over five years to ca. £190m. The acquisitions completed over the last five years have contributed ca. 25% of 2019 revenues.

The Group’s return on total investment measure is the pre-tax return on adjusted trading capital employed, excluding net cash, but including all goodwill and acquired intangible assets (“ROATCE”). This is used to measure the overall performance of the Group and very importantly, our success in creating value for shareholders through our acquisition programme. Over the last five years, ROATCE has exceeded the 20% target and this year was 23%.

As the Group continues to grow it will continue to pursue these metrics in its financial model.

Sector review

Complementing our existing product range

  • Sector revenue growth of 8%; underlying growth of 7% after adjusting for currency effects and a small surgical acquisition in Australia completed late in the year
  • In Canada, DHG underlying revenues increased by 10% with strong consumable and capital revenues from its market-leading new technology products, extending its cancer diagnostics programme in Somagen and endoscopy product lines in Vantage
  • In Australia and New Zealand, underlying revenues increased by 8%. Abacus dx reported strong growth across its portfolio of products. Diploma acquired Sphere Surgical in September, adding bariatrics to the product portfolio of the BGS surgical products business
  • TPD underlying revenues declined 7% in Ireland as the business rebuilds its product portfolio and restructures its commercial divisions
  • The Environmental businesses reported 9% underlying revenue growth with strong revenue growth in the a1-CBISS business, following a good recovery in the second half for CEMS installations and associated services
2019 2018
Revenue £145.8m £134.7m +8%
Adjusted operating profit £27.5m £23.9m +15%
Adjusted operating margin 18.9% 17.7% +120bps
Free cash flow £23.2m £17.3m +34%
ROATCE 22.0% 19.1% +290bps
Revenue
2018 2017
£134.7m £125.9m +7%
Adjusted operating profit
2018 2017
£23.9m £23.3m +3%
Adjusted operating margin
2018 2017
17.7% 18.5% -80bps
Free cash flow
2018 2017
£17.3m £17.0m +2%
ROATCE
2018 2017
19.1% 19.7% -60bps
  • Increase share of specialised segments of Healthcare markets in Canada, Australia and UK/Ireland
  • Leverage DHG product portfolio across existing businesses and extend into other medical disciplines
  • Pursue further Healthcare acquisition opportunities in Northern Europe, particularly Nordics
  • Build scale through pursuing further Healthcare acquisition opportunities in Ireland/UK
  • Continue to develop product portfolio and geographic reach of Environmental businesses
  • Optimisation of IT infrastructure across Canada and Australasia businesses to improve operational efficiency

Extending our market sector reach

  • Sector revenue growth of 6%, reflecting contribution from acquisition of VSP Technologies; underlying growth of 1% after adjusting for currency and acquisitions
  • NA Aftermarket underlying revenues increased by 2%, driven by improved trading conditions in the second half of the year as large mobile machinery continued to move out of warranty period; HKX revenues declined marginally reflecting a reduced supply of new equipment
  • US Industrial OEM revenues significantly impacted this year by combination of softening US Industrial markets and operational issues arising on implementation of new ERP; underlying revenues decreased by 6% on prior year. ERP issues now resolved and new leadership team appointed at end of year
  • VSP Technologies acquired in July has made solid contribution in line with expectations
  • International Seals reported an increase in underlying revenues of 4%; weaker second half reflecting softer European industrial markets
2019 2018
Revenue £220.6m £208.0m +6%
Adjusted operating profit £38.1m £36.0m +6%
Adjusted operating margin 17.3% 17.3% -
Free cash flow £17.7m £25.9m (32%)
ROATCE 19.3% 25.3% (600bps)
Revenue
2018 2017
£208.0m £195.3m +7%
Adjusted operating profit
2018 2017
£36.0m £31.9m +13%
Adjusted operating margin
2018 2017
17.3% 16.3% +100bps
Free cash flow
2018 2017
£25.9m £24.9m +4%
ROATCE
2018 2017
25.3% 22.8% +250bps
  • Successful go-live of second distribution facility for US Aftermarket will provide significant opportunities to grow business by accessing expanded US territories
  • Stabilise and rebuild the Industrial OEM business and broaden geography and products through acquisition
  • Substantial opportunities to grow VSP Technologies through new product development expanded activities outside South-East US and through bolt-on acquisitions
  • Broaden US Industrial OEM distribution activities using new business development resources to accelerate
  • Build larger and broader businesses in International Seals through acquisition and increase cross-selling in existing businesses

Building a broader based business

  • Sector revenue growth of 25%; underlying growth of 9% after adjusting for currency and acquisitions completed both this year and last year
  • Interconnect delivered underlying growth of 7% with strong growth in the IS-Group businesses more than offsetting weaker revenues in the CCA Group (Cablecraft and FS Cables)
  • The Gremtek acquisition completed in October 2018 adds to the Interconnect business a range of own-branded protective sleeving and cable identification products and expands the business into France
  • Clarendon increased underlying revenues by 21%, with growth driven by strong demand from both existing and new Civil Aerospace customers
  • Fluid Controls revenues increased by 1% with solid growth in the refrigeration market, held back by a challenging UK industrial market
2019 2018
Revenue £178.3m £142.4m +25%
Adjusted operating profit £31.6m £25.0m +26%
Adjusted operating margin 17.7% 17.6% +10bps
Free cash flow £24.7m £19.8m +25%
ROATCE 31.0% 29.8% +120bps
Revenue
2018 2017
£142.4m £130.7m +9%
Adjusted operating profit
2018 2017
£25.0m £23.0m +9%
Adjusted operating margin
2018 2017
17.6% 17.6% -
Free cash flow
2018 2017
£19.8m £18.6m +6%
ROATCE
2018 2017
29.8% 32.2% -240bps
  • Grow the Interconnect business geographically within Europe and broaden the product offer to include more own branded solutions
  • Accelerate cross-selling opportunities in CCA Group and maximise sales and marketing channels
  • Specialty Fasteners will build on strong positions in Civil Aerospace and Motorsport and focus expansion within Europe and the US
  • Target growth from new refrigeration product in Fluid Controls and drive export business into North America
Full sector review (PDF, 3.73MB)

Finance Review

Maintaining financial discipline

The Group delivered another year of strong double-digit growth in revenues and adjusted operating profit” Nigel Lingwood Group Finance Director
ROATCE 22.9%.
Free cash flow £56.5m
Adjusted Operating margin 17.8%
Finance Review (PDF, 0.14MB)