Diploma Q1 Earnings Call Highlights

Diploma (LON:DPLM) reported a strong start to its financial year in a first-quarter trading update, with CEO Johnny Thomson highlighting “double-digit organic growth” and continued momentum on acquisitions. Speaking alongside newly promoted CFO Wilson, management said group organic growth for the quarter was 14%, describing it as “volume-led” and similar in shape to trading seen toward the end of last year.

Q1 trading: volume-led growth across several businesses

Thomson said the group’s performance was broad-based, pointing to strength in several operating units and end markets. He noted that Peerless remains strong, while the Controls division delivered a solid quarter with exposure to “aerospace, defense, and energy.” Windy City was described as performing well, “particularly with data centers and digital antenna systems.”

Within Seals, Thomson said performance was “fairly consistent” with the end of last year. He flagged that North American Seals was doing well, with “good progress” in Europe and international seals, while the U.K. remained “quite tough.”

In life sciences and healthcare, Thomson emphasized that end markets remain challenging, characterizing it as “hard yards” and “a scrap out there.” However, he said the group was “very happy” that life sciences is delivering “at or around about our financial model,” and reiterated that margins in the area were good and aligned with expectations.

Acquisitions: four deals in the quarter, pipeline described as strong

Diploma completed four acquisitions in the quarter, spending around £75 million at what management described as “roughly a seven times multiple.” Thomson said that brings the total to eight acquisitions over the last two quarters, representing about £130 million of investment, which he expects will generate annualized profit of around £20 million.

Management reiterated its preference for smaller bolt-on acquisitions. Thomson said the group’s “average size of a deal” tends to be around £20 million to £25 million, and that deals in that range “tends to not really follow the kind of more macro M&A cycle.” He added that while Diploma will “very, very occasionally” do a larger transaction, it does not “search for that” and does not “need to do that.”

On the near-term outlook for M&A, Thomson said the pipeline “looks very good” and “in good shape,” while emphasizing that the company will maintain discipline and focus on returns, noting that deal flow should not be expected to be linear.

Recent deal rationale: aerospace, defense, and geographic expansion

In Q&A, Wilson provided examples of what the company expects from some of the newly acquired businesses. He said acquired companies had only been in the group “for a relatively short period of time,” but are already “tracking to plan.”

• Swift: Wilson said Swift is a bolt-on to Clarendon and expands Diploma’s footprint in “European aerospace.” He added that this is expected to strategically benefit Peerless in the medium term, helping Peerless enter Europe.
• Spring: Wilson said Spring expands aerospace exposure “into the defense market,” including large customers such as “BAE and Thales.”
• Hydraulic Seals Australia (HSA): Wilson described HSA as a “strategic geographical expansion,” giving the group expansion into Australia’s East Coast and adding product exposure to “aftermarket seals” for Diploma’s Australian seals business.

Thomson also addressed how Swift fits with the group’s aerospace strategy. He said Peerless posted another “really, really strong” quarter, though “perhaps not quite at the exceptional growth rates” seen in the second half. He added that market dynamics have not changed and said the company continues to expect Peerless to “land towards a steady, good growth, good margin” performance over time.

On Swift specifically, Thomson said it is “a good business in its own right” and a company Diploma had been pursuing “for quite a few years.” He said Swift’s base in Toulouse creates an opportunity to accelerate access to the Airbus supply chain, and added that the acquisition could also support Clarendon’s European opportunities through Swift’s relationship network.

Outlook: guidance unchanged, first half expected to be stronger

Thomson said full-year guidance remains unchanged, with the company still expecting 6% organic growth and a group margin of 22.5%. As previously indicated, management expects the year to be “first-half weighted.” Thomson said revenue from acquisitions is “up a little” given recent activity and could increase further if additional deals are completed.

Asked about the phasing implied by a 14% Q1 and a 6% full-year organic guide, management declined to provide quarterly guidance. Wilson said Diploma will begin to lap tougher prior-year comparisons, including double-digit growth in the prior-year second quarter and 14% growth in the second half. Thomson added that the company is “running a business” in a “crazy, volatile world,” emphasizing it was “one quarter” and that management would assess trading as the year progresses.

On margins, Wilson said trading is “in line with expectations” and “very strong across the group,” but reiterated that Diploma plans to keep investing in end-market growth, people and organizational structure, and in strengthening its assurance platform, supporting the decision to keep the margin guide at 22.5% for now.

FX and defense: hedging in place and investment in Eastern Europe

Wilson provided color on foreign exchange, stating that translation effects reduced revenue by 2% in the quarter, offsetting 2% acquisition growth. He added that on a transactional basis, the group has a hedging program in place and that there was “nothing material” from FX to the group in the quarter.

On defense opportunities, Thomson said the macro backdrop is supportive and that Diploma has “well-established expertise” across the U.K. and continental Europe. He highlighted organic investment in a new facility in the Czech Republic, intended to help penetrate Eastern European supply chains that feed into European defense markets. Thomson also pointed to the Spring acquisition as a way to add defense expertise and support growth in defense revenues over time, noting the group has historically been more exposed to air defense but would hope to expand further, including into land defense.

Closing the call, Thomson said the group was “feeling good about the year,” pointing to a strong first quarter and continued confidence in Diploma’s long-term approach to “sustainable quality compounding.”

About Diploma (LON:DPLM)

Diploma PLC, together with its subsidiaries, supplies specialized technical products and services in the United Kingdom, Continental Europe, North America, and internationally. It operates through three business sectors: Life Sciences, Seals, and Controls. The Life Sciences sector supplies technology-enabled products used in surgical procedures in operating theatres and endoscopy; testing equipment and services for clinical laboratories; and bio-pharma, food safety and testing, and other research-oriented products.