Earnings Call: H2 2019

Nov 18, 2019

Okay. Well, good morning, everyone, and welcome to Diploma's results and strategy update. I'm delighted that you could Joining us today. I'm Johnny Thompson, Chief Executive. And of course, we have our esteemed CFO, Nigel Lingwood, wish me too. We're very, very pleased today to be able to present to you a strong financial performance for exciting diploma style acquisitions that we've done in the year. And a strategy that's very much, very much based on continuity. So just looking at the agenda briefly, I'll give you an overview of our performance in the year. Nigel will take you through the results in detail, and I'll come back to review our progress in the businesses and of course, present on the strategy. There'll be plenty of time for questions and answers at the end. So let's get started. It's been another very strong year for diploma. We're pleased to be reporting growth of 12% and that's 5% underlying 5% from acquisitions and a small currency tailwind. Encouragingly, all of our sectors grew. Our margins were excellent, up 30 basis points, As such, our earnings improved by 14% and we're recommending a dividend progressing by the same amount amount. And finally, we had a very strong finish on cash. During the year, we spent nearly 1,000,000 on the acquisitions of, Grentech in France and controls VSP in the U. S. And seals, DMR in sales in the UK and Sphero Surgical In Life Sciences in Australia, all of them strategically important. All of them with those traditional diploma value add characteristics and all of them with exciting growth prospects. So on that note, I'll hand over to Nigel. Great. Thank you, Julie. So good morning, ladies and gentlemen, for the last time. I will, add a bit of color. To the results today. Reported revenues up 12% at 1,000,000 helped by acquisitions and a small currency tailwind. And after adjusting for these effects, we achieved robust underlying growth of 5% this year. Adjusted operating profit increased by 14 percent to CHF97.2 million, reflecting an improvement in adjusted operating margins of 30 bps to 17.8 percent. Free cash flow remains strong at 56,500,000 a fraction below last year after making larger capital investment this year in new projects across the group. And of course, last year's free cash flow included 4,000,000 of proceeds on the sale of the small Bulldog business. As Johnny just said, we spent a record 78,000,000 on acquisitions last year, and we ended the year with a small amount of net debt of 15,100,000 and plenty of bank facilities available to continue with acquisitions this year. Finally, our return on adjusted trading capital employed at 22.9% remains well above our target threshold of 20%. Now turning to these results in a little bit more detail and starting with the revenue bridge. The impact on translation of overseas results from a second half weakening in UK sterling, particularly against the Canadian dollar and the U. S. Dollar provided a small 2% tailwind to reported revenues. Acquisitions contributed an additional 5 percent of reported revenues. That was 1,000,000 from the 4 acquisitions this year, and about a net million from last year's incremental acquisitions. So that provides underlying revenue growth of 5%, which by sector represents 7% in life sciences, 1% in seals and 9% in current controls, which Johnny will come back later to review the results by sector. Turning to the income statement Adjusting operating profit up 14 percent at 1,000,000, reflecting an adjusted operating margin up 30 bps at 17.8. This improvement of 30 bps was driven by a contribution, well, by a combination of slightly stronger gross margins from both robust price increases and in a determined focus to reduce other margin support costs, particularly in seals and controls businesses. In addition, tight control and operating costs provided some good operating leverage, particularly in the Life Sciences Businesses. After slightly high borrowing costs, We also achieved a 14% increase in adjusted profit before tax to 96,500,000 And with the effective tax rate remaining broadly unchanged at 24%, we reported a 14% increase in adjusted EPS to 64.3p. And on a statutory basis, largely after deduction of amortization of intangibles and acquisition costs, statutory profit before tax was up 15% to 83 point 5 with statutory EPS of 54.7 percent. Turning to the cash flow. Operating cash flow was 9% ahead of last year at 1,000,000, reflecting a strong cash flow in the second half of the year as businesses unwind most of their strategic stockholding accumulated in the first half of the year. Nevertheless, we still had a million increase in working capital compared with last year, primarily as a result of carrying more inventories in the U. S. Industrial OEM seals business to ensure that they met customer service levels after some difficulties they had at the beginning of the year with the ERP implementation process. The cash tax paid rate remain unchanged at 23%. And as I indicated in May, we have increased our rate of internal investment this year which led to an increase in capital expenditure to 1,000,000 from 1,000,000 last year. This rate of investment will also carry forward into the current financial year. The largest expenditure comprised 1,000,000 spent on developing a new distribution facility in Louisville, Kentucky. This is for the U. S. Aftermarket sales business. This is overall around about an 8,000,000 project which we hope will be completed in 2020 and go operationally live late 2020 or early 2021. And Johnny will come back and say a little bit more about that. We also spent over 2,000,000 on completing the expansion and refurbishment of the facility in Stuttgart for the ISAMA business and in purchasing a new facility in Wooten Bassett for our ever expanding cloud and specialty fasteners business. Both these facilities will be sold and leased back in the new financial year for around about 1,000,000 together. Finally, Life Sciences invested 3,000,000 new field equipment to be placed in hospitals to support their successful new products. That they introduced this year. So we ended the year with free cash flow of 56,500,000, a cash conversion rate of 78% reflecting the increased investment we've made this year in projects and working capital, and which will provide additional returns over the next couple of years. And we expect Over that free cash flow, we spent $77,200,000 on acquiring new businesses, of which more to follow on the next slide. And some million in dividends to shareholders. The acquisitions this year were partly funded by a new 2 year term loan for around 1,000,000 which is repayable in July 21. We still have our GBP 60,000,000 revolver facility to fund further acquisitions of which GBP 54,000,000 was undrawn at the end of this the year, 30 September. We therefore ended the year with net debt of 1,000,000, comprising cash balances of 27 and debt of 1,000,000. Just looking a little closer at the acquisitions we completed this year, as I said, we spent $78,300,000 on new businesses, including $1,100,000 deferred consideration. In July this year, we purchased VSP Technologies, a ceiling products business based in Virginia in the U. S. For around 1,000,000. With potentially a further GBP 5,000,000 of consideration deferred and payable based on their performance for the next 12 months or 12 months through to 30th June next year. VSP Technologies will sit as a stand alone business within our North American seal sector, but with bags of opportunity to cross sell with our existing seals businesses. GremTech, a small interconnect business based in France, was purchased in October last year for 6,900,000, And just before the end of this year, in September, we completed the acquisition of 2 small bolt on companies. Fierce sphere surgical, the medical device business based in Australia, which will provide critical mass to our existing big green surgical business, and DMR seals, a seals and gasket business based up in Sheffield, which will provide breadth to our existing FPE sales business. All four businesses meet perfectly our strategy of broadening the products and broadening the services that we supply to our customers. We look forward to adding more new businesses in the coming year. The pipeline is healthy. But as ever, the sale process is competitive, but we will remain disciplined in our valuation criteria. And finally turning to the balance sheet. Trading capital employed of 1,000,000 was up 1,000,000 on last year. Most of that reflecting the impact of additional goodwill and acquisition intangibles from the acquisitions we completed. The ROLACI is at 22.9 and remain well above our 20% threshold. Again, I'll remind you that the RACI is a fully loaded employed. So all gross intangibles, goodwill, including historic goodwill. So effectively a measure of return on total investment. The working capital metric of 16.5 percent remained in line with our longer term average of 16 to 70, albeit a little bit up on last year. The closed defined benefit pension schemes in the UK and Switzerland have a net deficit of 1,000,000 sharply up on last year, but in line with the falling bond prices this year, which is of course used to value the liabilities. The UK deficit continues to be funded at around about 500,000 cash a year. And acquisition liabilities of 3,000,000 include deferred consideration of 7,000,000 payable in connection with the acquisitions completed this year, most of which will be paid during the coming year. And some 4,000,000 payable to buy out the remaining minorities in Kendesk and MCLs. And again, those options have put options have matured, I expect those to be bought out later this year. So with net debt of 1,000,000, we are left with closing total shareholder equity of 1,000,000 at 30 September 2019. So now I will hand you back to Johnny to talk through the operational results by sector. Good. Thank you, Nigel. So now a review of our progress in the businesses in the year. The group continues to be well diversified by geography and segments and product. And of course, this provides us with good access to growth, but it also supports resilience in the model. With the acquisition of VSP, both our North American representation and our sales representation will increase now to around 45% in the coming year, All of our sectors are growing and all of them have healthy and sustainable margins. In our steel sector, the North American aftermarket business was 30% of the sector and supplies into the repair market for mobile machinery. Our U. S. Industrial OEM segment was 27% of the sector and supplies custom designed parts for manufactured equipment. With the acquisition of VSP, we broadened into gaskets serving the MRO segment, and this will clearly be a bigger contributor to the steel in 2020. Our international markets, 39% of the sector, are the UK Nordics, Switzerland and Australia, and they said are predominantly that we segment. Industrial markets remain robust but we have seen some softening initially in the U S and more laterally in Europe. Despite that, our sales sector reported encouraging growth of 6% and that's 1% on an underlying basis. International grew by 4%. We're pleased to have acquired DMR in September, and as Nigel says, that adds some further firepower to our UK seals businesses. The slower market, combined with some management and systems challenges at the beginning of the year affected our U. S. Industrial OEM business. We've now made some management changes and we're starting to see some improvement. In contrast, the aftermarket performance has been really encouraging as we started to benefit from the increased investment in new machinery in 20172018 now flowing out of warranty and into our repair market. We're excited about our new facility in Louisville, Kentucky, which will be fully operational by the end of 2020. It provides us with a second platform in aftermarket in a central location to access more competitively all regions of the U S, as well as, of course, more advanced automation to help with our operational effectiveness. There will be a 1 off cost of around 1,000,000 in setup in 2020, which will impact the aftermarket margin but will be offset by margin progression elsewhere in the group. We're delighted to welcome VSP It's an excellent strategic fit being both in the U S and in the adjacent product line gaskets. There's a strong management team with an impressive customer service proposition, and VSP contributed well in the final quarter of the year, and I'm really positive about their prospects in 2020. Margins and sales were healthy and stable at 17.3% as investments in resolving the OEM business were offset by excellent progress in gross margins and some operational leverage. The prospects for sales are positive in 2020, despite some broader market uncertainty with continued strength, particularly in the aftermarket and in VSP. Our control sector is 33% of the group and comprises interconnect, specialty fasteners and fluid controls. Also in the last few weeks, we've combined cablecrafts and FS cables into 1 business unit, cables and cabling accessories, or CCA, representing 17% of the sector. We're excited about the opportunity this develops. This generates for us to develop that business more into the future. The sector is predominantly UK and uncertainty around Brexit impacts the sector, of course, although this is somewhat mitigated by our diverse range of end markets. Again, this is demonstrated by the strong performance in the year with reported growth of 25% and underlying of 9%. Clarington has had another fantastic year of double digit growth, principally on the back of further penetration into the robust Civil Aerospace market. Our interconnect business is expanding well into Continental Europe. We've seen particularly strong progress in summer in Germany on the back of new contract wins, and we're excited to now be in France with the acquisition of GraemeTech. CCA undoubtedly provides a strong platform for growth in the future, but weakness in UK Construction has held the business back fractionally this year. Margins were up by 10 basis points of controls on the back of leverage and tight cost control, offsetting the mix effect of moderately lower, albeit improving margins in the acquired businesses. We have seen some slowing recently in the industrial segments of interconnect and CCA. In As I said, these are smaller parts of the sector. So overall, we expect continued positive performance from Clarington and the other interconnects markets to drive robust growth in controls in 2020. And now our Life Science sector is 27% of the group, and comprises 85% healthcare and 15% environmental. We work closely with healthcare systems in the niche higher growth segments of clinical diagnostics, specialty surgical and endoscopy. And our businesses represent small and medium sized manufacture is predominantly in Canada and Australia. The sector clearly provides the group with some resilience through broader economic cycles. The sector performed very excellently in the year with reported growth of 8% and underlying 7%. In Canada, we've had great results from an extended cancer diagnostic program in somagen, as well as market share gains with upgraded technology in an endoscopy product line in Vantage. In Australia, Abacus has again performed very well, and we're delighted with the acquisition of Sphere adding bariatrics in the high growth obesity segments to our big green product portfolio. In environmental, we grew 9% with a strong contribution from Sam's installations and servicing in our A1C business Our margins in Life Sciences has improved by an impressive 120 basis points on the back of tight cost control and operational leverage. The prospects for Life Sciences continue to be positive with encouraging momentum across the sector into 2020. I saw now turning to the outlook for the year. The group has again delivered an excellent set of results. We've made 4 diploma style acquisitions in line with our strategy and with exciting growth prospects, And as Nigel said, the pipeline still remains positive. Of course, industrial markets are a little softer and the political and economic environment is uncertain, as we all know, but we have a strong and resilient business model, and I feel confident about making good progress again in 2020. We do expect consistently strong growth, perhaps this year moderately lower on organic but compensated for by higher contribution from acquisitions, very much in line with our model. And we expect stable and high margins with the exciting investment in Louisville compensated by progression elsewhere across the group. So we're very positive about diplomacy prospects for 2020. Before I move on to strategy, I thought it would be interesting to show you a short video about diploma as some context about who we are and what we do, and I'll then come back and talk about strategy. We are diploma PLC, an international group supplying specialized products and services to a wide range of end segments in our 3 sectors of life sciences, seals and controls. Our purpose is to consistently deliver value empowering our people to service our customers and reward our stakeholders every day through essential products and essential solutions supported by our essential values. Our business is based on a high service value add distribution model. By offering products and solutions, we build strong long term customer relationships. Supply chain management keeps us competitive to our customers, while operational excellence allows us to be agile and responsive. Value add is at the heart of our business. It secures customer loyalty and differentiates us in our markets. We have a strategic disciplined route to market approach, and we safeguard our margins through strong commercial discipline. All of this is supported by the continuous developments of our people, our technology, and our facilities. Our life sciences sector includes the health care and environmental industries from hospital operating rooms and pathology clinics to technicians. Our highly qualified experts work medical technicians and surgeons to understand, define, and source the next generation of medical products, and with highly skilled engineers in sharing a safe working environment, providing significant value to both the life sciences industries and niche device manufacturers. Then there's the seal sector, which supplies gaskets, filters, cylinder components, and seals to a broad range of industries and manufacturers. We offer next day delivery of our own brand products to repair expensive, heavy mobile machinery, and we also offer design and support services to specialized manufacturers that need bespoke products. Our controls businesses supply control devices, firing, cabling, harnessing, and fasteners used in technically demanding and harsh environments. This includes everything from Aerospace to Formula 1 cars, electricity distribution for satellites. All this leads to a strong and sustainable track record of financial performance. We've achieved long term organic growth with significant potential for future growth and complemented by a disciplined value enhancing acquisition strategy. And for more than a decade, we've achieved double digit earnings growth with robust margins and consistently strong cash flow. This is diploma Plc, a strong and resilient business with a broad geographic spread and an impressive record, consistently delivering value. Good. Well, I hope that helps provide some context on who we are and what we do. So now, a few minutes on our strategy. This is very much a strategy of continuity. It's about building on the strong foundations in our business model and focusing the group for success at scale. And we'll do that by focusing on optimizing our organizational capability and by focusing our we can So a reminder of those strong foundations, while our talented management teams and colleagues have created a proven and successful business model, It's based on distributing specialized products, providing technical solutions and value add services to a diverse range of end segments. The specialist nature of our products and services allows us to differentiate ourselves in the supply chain and to add real value to our customers. Our strong positions in attractive markets allow us greater access to growth. And due to the diversity of end segment, as well as the fact we serve into operating rather than capital budgets, our model is generally resilient. And finally, the track record for disciplined bolt on acquisitions has been critical in building the group's success. All of these factors together have driven excellent shareholder returns. And I'll take this opportunity to embarrass Nigel by congratulating him on 20 years of fantastic contribution to making this business so successful. I'll do Nigel. So it's easy to see why our strategy looks to retain and build on these strong foundations. So there are two things that make me excited about our future The first is the significant growth one way we have. So what does that look like? Well, we have attractive structural growth trends across each of our sectors. We're underpenetrated in the biggest economies in the world. We've got plenty of product adjacencies to explore, and our markets are still relatively fragmented, giving rise to more acquisition opportunities. So I believe we can continue to deliver double digit revenue and earnings growth in the future. The second thing that excites me is the power distribution model. So on the left of this slide, we distribute essential products, which are generally of lesser cost in our customers' overall spend, but which are absolutely critical to their needs. On the right, our essential value is basically how we run the group revolve around empowering our management teams to run their own businesses. We want to be close to our customers. And finally, essential solutions are at the heart of our model This powerful service component differentiates us, protects us from disruption and drives our performance. It's difficult sometimes to visualize exactly what that value component really means in practice. So I thought I'd pause and just give you a few examples. In our sales sector, it's about responsive customer service. So an old 1990 caterpillar machine is broken. Costing the user tens of 1000 of dollars a day out of service. With a repair shop that doesn't really know what the model is, certainly not what the parts that go into it. So he calls our sales team, identified the machine, the parts, we packaged them up into a format, which he can easily understand and use and fit them. And we get it to him by the next day. So the machine is then back in use 24 hours later, tremendous value to our customer at a low component cost. In Healthcare, of course, it's slightly different. We've qualified technical experts who work with surgeons and technicians to understand, define and source the next generation of medical products. As of significant value to both the medical profession and to the device manufacturers that we represent. And finally, out of controls, we procure cabling that we cut to length, connect, crimp identify and fit into a harness ready for a construction engineer to simply fit it into his building. He said, value added service that if we, the distributor didn't do, he would have to send elsewhere So it's huge value to that engineer. These essentials then deliver customer loyalty, new business opportunities, resilience and critically sustainably high margins. So the fundamentals are strong and we have exciting prospects, but of course, we can't rest on our laurels. We can't be complacent. Not least because the markets around us continue to evolve, competition and disruption are always a threat. With a strong value add business model, we must focus on consistently strengthening our core competencies that underpin that model and that differentiators and protect us from disruption. Talent technology and automation increasingly serve as competitive advantage, and we must focus on developing our organizational capability in these areas to execute at scale. And finally, political and economic volatility, of course, tricky to navigate But as we remain still under penetrated in our core developed markets, we can focus our growth and build scale in those markets large attractive markets without having to be distracted in riskier places. So our response to evolving markets will be focused focus on 1, our core competencies 2, our organizational capability and 3, our exciting growth in core markets and products Another reason not to be complacent, with greater scale, the business, of course, has more complexity, increased competition or demanding performance expectations, and this applies to the group, but actually, more importantly, it applies to the individual businesses within the group. Is very different running a 1,000,000 business from running a 1,000,000 business. So our response to a bigger and more complex group will be again to focus On 1, our core competencies, on 2, our organizational capability and 3, our growth in core markets and products. Whether in response to the markets or in response to internal evolution, we must focus on developing these areas to develop the same success at scale in the future. So looking at them in turn, starting with our core competencies, while they're consistent across all diploma businesses, and they drive that value added business model that I've been talking about, As our businesses scale up, it's vital that we continue to improve and become more sophisticated in our execution of these competencies. So end to end in our model, let me quickly take you through them. Supply Chain Management in our world is of course a critical skill in accessing products at the right cost. Driving operational excellence in our distribution facilities is key to customer service as we scale up. Value add services, well, as I said, they define and differentiate us, so continuously improving and innovating is vital. As we scale, we need to be more strategic and less tactical in our route to market approach, And finally, commercial discipline will be key to value our services appropriately as we work with an increasing number of customers. In order to continuously improve the execution of these core competencies at scale, we must develop our organizational capability, our talent, technology and facilities. So a few words on that capability, starting with talent. We have great people As a group, we need to prioritize giving them support, development, and opportunity to allow them to continue to be successful. And where appropriate, of course, we can complement that with expertise from outside. Our model lends itself well to technology. We can use it selectively and effectively as a channel for sales in supporting our distribution operations as we scale and in improving our back office services. And finally, our facilities. With scale, we have greater scope to deploy more machines and automation to streamline our operational processes, we can also utilize our network of facilities more intelligently across the group. Our approach to developing these competencies and our capability will be consistent with our decentralized model. It will be led by the businesses themselves. The group and the sectors will support with investments and providing access to the network of knowledge that we have across diploma. The development will be incremental, pragmatic as businesses scale and as they require any investment, of course, will drive performance improvements, thus sustaining our margins. Now finally, number 3, I'm really excited about our focused approach and prospects for growth. Firstly, there are structural trends which will support our growth in the sectors in the future. We also have significant market share potential in core developed larger markets, so we don't need to chase it in riskier places. As we continue to build scale in those focused markets, we can pragmatically and carefully leverage that scale to invest in growth and without affecting the customer proposition And as these focused markets are still largely fragmented, as I said, we will continue to pursue bolt on acquisition opportunities. We can push current products further across our business and we have many adjacent product ranges still to explore. So with these significant opportunities for the group, we will target double digit growth through the cycle. The sector mix is healthy. With each of the 3 offering not only consistently high returns, but also equally exciting growth prospects. Here's what it looks like in practice. I'm very excited about the growth potential for sales Structural market factors will support our growth through the cycle. For example, infrastructure investment requirements in the U. S. In addition, we have plenty of geographical market potential to explore. Our new facility in Louisville will access a broader US market for us by 2021, and the North American aftermarket business can continue to earn market share gains through service and scale benefits. Internationally, we have huge scope for development with little continental European presence, for example. Product adjacencies open new markets and growth opportunities. We're delighted with the acquisition of VSP as it accesses the significant potential of gaskets and adjacent product to seals. And finally, we have opportunities to pragmatically use our scale without compromising our customer relationships and servicing. For example, we will develop a hub and spoke approach in our US OEM group And I can see that working in other geographies in time too. So there's plenty of runway for sales growth in the longer term. Controls has developed extremely well over recent years and has encouraging growth potential. We've been very successful developing in the UK, and we're just getting started now in Continental Europe. With low market shares there, I see this as being an important development for the group. For the sector, I should say. Interconnect has a foothold in France and Germany, but we can now accelerate both organically and inorganically For example, having established our presence with summer in Germany, our reputation is now earning as market share, and we were very pleased to win a large new energy contract in the year. In time, spend into Europe too. The U. S, of course, does have potential for our control sector, but I see that in much more into the longer term. This is probably the sector with the most new product extension opportunities with our complementary accessories or indeed distinct product groups. It's important that we continue to develop new product opportunities as a source of growth, particularly I'd say in the UK. And finally, there are scaling opportunities to support our growth, the creation of CCA being a good example. So there's very good reason to be excited again about controls growth into the future. And on life sciences, I feel very confident about the growth prospects for life sciences. Of course, we benefit from the structural potential of an aging population. On top of that, the team have done a wonderful job to focus on healthcare segments with the highest budgetary allocations and in niche solutions beyond the mass market. This will continue to generate an encouraging and sustainable base level of growth for the sector. We can also open new markets, distributor model markets, alongside Australia and Canada, particularly, I believe in Northern Europe. Complementary product ranges in our core markets will be key to growth, and the recent acquisition of Sphere is a perfect example of that. And finally, product life cycle management is critical to success. We're working hard to develop supplier relationships and a pipeline of new and innovative products as older tech fades. So overall, the sector brings resilience to the group, but I also feel very optimistic about Life Sciences' growth in the coming years. The group has developed very successfully with disciplined bolt on acquisitions, and we will continue 3 objectives in our acquisition strategy will only buy businesses that have the key attributes of our model, capable management teams value add servicing component and organic growth runway. We'll stick to the focused markets and product strategy that I've just been outlining Of course, we'll remain financially disciplined, as Nigel said earlier, it's been key to our success. As we get bigger, we do have the capacity and the capability to deliver slightly bigger deals than in the past, and I think that's absolutely normal. But we will only acquire where we can be sure to deliver on our return criteria of maintaining at least 20% return on capital. In order to meet these objectives, we do now need to be a little more strategic and proactive in how we build our pipeline. We must have full visibility of all assets to ensure we are agile, and we must have the right resource in place to do that. We started on that journey. Of course, all of this depends on availability. We can't force people to sell. So inorganic growth will not always be linear Having said that, as we've seen in the last few months, there are plenty of potential assets to sustain our inorganic growth in the long term. A few words now on ESG. There are many good things happening in our businesses. It's a important to me that we now do more on this as a group. So we've chosen to focus our activity in the short term on two areas immediately relevant to our business. And these will be health and safety, firstly. Our people have what drives our success and their welfare is of paramount importance. And second, supply chain sustainability, both environmental and in employment practices, as a distributor, I feel this is vital. I'll update you on progress in due course. So the outputs of this strategy, our financial model is largely unchanged as we seek to deliver consistent performance at greater scale. Organic growth is the key indicator of our success. The focused approach will support continued organic growth of around about 5% on average over time. We'll continue to invest in bolt on acquisitions, as I've been saying, which again, we expect to deliver around about 5% growth on average although I repeat not necessarily in a linear fashion. The business model improvements will generate margin that will that we will reinvest incrementally in the organization's capability for sustainable, long term growth We will maintain margins above 17%, but always aim to nudge them forward. And we'll continue to use our cash to both reward shareholders with a progressive dividend and to invest in disciplined acquisitions. We're conservative on debt although clearly, the business has some capacity up to a maximum of, say, around 2 times. And finally, maintaining high return on capital is key to our model and in summary. We've had another very good year, and I feel really positive about our prospects for 2020. We have a very strong business model and I will focus our exciting growth prospects in core markets and products. And I will focus on developing This will generate consistent compounding shareholder value in the future. Thank you very much and we'll take your questions. If you wouldn't mind just saying your name and institution before you ask your question, that would be very helpful. No questions. Good morning. It's David Brockton from Numis. 2, please. The first one on strategy and then the second one on the results. Firstly on strategy, I appreciate the decentralized model is a key successful attribute of the group. But as you've been around the businesses, have you seen any further opportunity to integrate elements at the back end of the businesses or indeed as you pursue growth in adjacencies to accelerate cross sell within the business? That's the first one. I'll do the second one there. Yes. I mean, I think first of all, it's really important to emphasize the power of that decentralized model. I mean, we are customer centric frontend agile business, and retaining accountability at local level is absolutely critical to that. And we can't do anything that will in any way compromise that Having said that, as I was saying, there are ways that we can gradually take advantage of PLC diploma group. And I think the first thing we can do in a very informal way is just simply sharing best practices around the group, which we can do much, much more of. And indeed, we're having a management meeting in January to do exactly that. The second thing is we can cross sell our products And the acquisition of VSP gives us that opportunity, and we're already starting to sell our seals, our rings, from our North American sales business through VSP into their customers. The third point is where you start to put pieces of the back end, the back servicing end of the back together, as you've mentioned, to take advantage of scale. And I think there's opportunities for us to do that, a fraction, a little bit where perhaps our businesses are subscale, but we've been very careful to do it, and we'll take our time to do it without affecting the strength of our management teams and without affecting the customer proposition. Question related to the recent results and specifically Clarington, you've achieved quite substantial growth in that business over the past 2 years. I just wonder if you can touch on where you see the opportunity going forwards, I appreciate you've now got a stand alone facility there, but I'm wondering if you could touch on what the inventory replenishment system is doing there and the outlook going forward. Thank you. Yes, sure. And then, as we've been very successful, I think for the 3rd year running now with, growth in the 20%. And it's achieving that really by focusing on its, core markets of Civil Aerospace, which itself is growing fast. It is supplying fasteners into different both different, customer groups, manufacturers of the inside of the Civil Aerospace but also penetrating further within these existing customers. And that's what's really driving growth. So this year, they acquired a couple of new large customers, 1 Belfast, another one down in Asia, which is driving that growth. They also have fair unique supply, model called Claring And Air that sits alongside the production line and drops the gaskets through as they're required and replenishes them. And that's very successful and has been very welcomed by customers. And the service levels are high. Service levels are absolutely critical to keeping these guys, these customers keen and coming back to us for more. So I think they've got a good base. There's more possibility. You know, earlier last year, we bought a small U. S. Faster business. That's made reasonable progress this year, but importantly, it gives us an opportunity to get into new aerospace customers but also to look for new suppliers at the same time over there. So I think there's still a lot more potential for that business to go, whether we'll have another 20% plus year. I'm not sure, but it'll be a good growth year and that's really underpinned the control sector performance issue. Morning. It's Sam Brown from JP Morgan. Two questions, please. First one, you've kept that above 20% or actually target. Is that for the group as a whole or on new incremental act positions. And I guess basically, obviously, that's pretty attractive returns target. Are you confident that as you go forwards and maybe actually it's becoming a little bit larger, you can still acquire that kind of turns criteria. And the second one was on, as I mentioned, some of the new markets, you've got low market shares in some of these adjacent markets would you see the typical entry into those being through M And A or a bit more of an organic entry where possible? Shall I take the second one? Can you just just on The second, I think the answer is we can do it through both, to be honest. When I talk about penetrating further into markets, Of course, acquisitions such as DMR in the UK allow us to do it when we talk about going into new markets, acquisitions such as GraemeTech, of course, allow us to do that. But also if you look at the, inorganic ways of doing it, developing a facility like we are doing in Louisville, accesses us much, much more broadly across all of the U. S, and will return fantastically for us. So I think there's 2 ways New markets, I would say, are probably more towards acquisition than organic. Good. And on the right. So, yes, clearly, Mirati is a group measure of the success in building the group, but equally, we are making acquisitions where we expect to get to that 20% within 3 to 5 years. So not initially, but as we get more cross selling, these are growing businesses, we can move the top line, we can strengthen margins, we can slim the balance sheet down. That's what we've been doing for the past 15 years or so. I think we can continue that even as we get larger and I think VSP a larger acquisition compared to the past will demonstrate that in the next couple of 3 years that we'll be back above 20% return on that as well. James Barry from Barclays. Two questions, please. The first one, just on the Industrial OEM business, the issues that you had last year, where you have those issues, does it take a while for those customers to return to you? And is that business gone for a while and then it takes couple of years to recover or do they return to you because they can't get that service elsewhere? And then secondly, just on the strategy, taking the sales market as an example, we've sized it at 1,000,000,000 opportunity. That sort of number feels like it implies some sort of more commoditize area of the market. So I'm just trying to understand sorry, understand on the maintaining margins comment. Is it around getting operational leverage that gets you the margin that's offset by moving to those more commoditized areas? Or is the maintaining margins by still operating in the niche areas that you've always operated in? Okay. I'll just take the second one and take the first one. Yes. So in terms of maintaining the margin, I think there are a number of ways we can do. If you think about the core competencies that I set out, commercial discipline is key to that. And therefore appropriately pricing our services, I think, is a really important part of what we do need to be valued for that service. But I think there's more that we can do on that. Operational effectiveness, increased automation, for example, is an important part of what we'll do in the future. Supply Chain Management, a core competency too. So I think there's a number of different both pricing and cost elements that we can work on to improve as we go forward that can help us with our margin. And then the second one was on the industrial OEM. I have? So, I mean, clearly a bit of an own goal with our ERP implementation problems at the beginning of the year. The important thing is that we have resolved them. There were process issues. Management issues. By the end of May, we had resolved them. But where we have quite a bit of spot business, undoubtedly some of those customers have moved away You know, they're looking for service delivery and at times earlier in the year, we couldn't guarantee that. But we've got a new leadership team. The ERP system is now working well. And next year is about the opportunity to rebuild and bounce back. And I've got every confidence we'll be able to do that. On the positive side, there's some real upsides from managing that successfully over the next 6 months? I think we've turned the corner. I'd be down and visited a few of our biggest customers in that business. And, all of them recognizing what can happen sometimes with systems implementations, but with new management in place, strong management in place. I think we've seen them now lock in and secure with us. I think we've got some more work to do still to regain our name with a couple of distributors, etcetera, but I think we're returning the corner on that and I feel positive. Thanks. It's Will Kirkness from, Jefferies. I've got three questions, please. Firstly, just on the tech, I wondered if you could perhaps talk about what you've got and what you think might be interesting, particularly from a sales perspective. With some easy wins there? And secondly, on the growth rate, the organic growth rate, how GDP agnostic? Is that is there enough to go for organic? Organic, yes. Such that if markets are a bit softer, you can absorb that. And then lastly, just on controls, you mentioned the U. S. Is a sort of medium term story. I wondered why that was or how you're prioritizing the rollout into new territories. Okay. I'll try to take them in reverse order. You might have to remind me as we go controls. Why am I saying that U. S. Is longer out bandwidth we have, I think you heard in my presentation, so many exciting opportunities to go for. That one of the things we have to caution ourselves on is just prioritizing appropriately and delivering effectively for sustainable long term growth. So of course, if something came up tomorrow, that was absolutely wonderful, would we turn it back? Of course not. But at the same time, we're making good strides into Continental Europe, and I would like that to be our number one focus. So that controls on organic growth, is there enough to go for. I think I gave you quite a long list and I feel more excited about the organic growth opportunity than I do probably about anything else. Is some of it cyclical? I'm not sure if that's your question. Some of it will be a little. And as I intimated in the new year 2020, probably you'll see just moderately less organic growth, but I'm talking 3 to 4 as opposed to 5. Because we still got some resilience in there. And if we do a job well, we still have great opportunities to be able to explore despite, broader market conditions. So I feel very good about the organic growth story. And then finally on, I think you asked about, e commerce and sales Yes, I mean, we have to be selective about this. It's not something which is going to apply to every single one of our businesses, but I'd say to the aftermarket business, particularly, there's opportunity for us to use the online channel effectively. We do so already in our North American sales business and we're looking to deploy some of that know how to other aftermarket businesses like in the UK, etcetera. And even in some instances, not just in Seagulls, but also to controls aftermarket. So yes, there's opportunities. I think we have to be careful on 2 fronts. We have to make sure that still, in some way, encompasses a value add service components to it. And there's ways of designing the interface such that you can, you can do that and having the brainpower behind it to be able to not just sell on a commoditized basis, I think that's one thing. I think the second thing is I wouldn't want to ever see it as being 90% of the aftermarket sales. I mean, I think I think we have to just be careful about, about how we position it within our overall sales channels. Hi, it's James Beard from Numis. 1, I guess, sort of following up from a couple of different questions that you've had. In terms of, the sort of the investments that you're looking to make organically in the business over the sort of medium term you've mentioned things like increased levels of automation. And we've sort of spoken about the in the OEM sales, ERP implementation last year, are there any similar ERP type implementations that you need, that you think the business needs across other business units over the medium term. And in terms of that sort of automation requirement, what sort of level of sort of sustained medium term investment would you be looking at there and how do you deliver your sort of 90% cash conversion if you are sort of increasing those organic investments? In there, isn't it? Okay, let's start at the beginning, which is sort of emphasized the fact that this is pragmatic. It's incremental. Not doing this big bang across the group. This is going to be as the businesses grow up and as they start to require some additional investment, then we'll start to do it. And so maybe the best I can give you an example. What we're doing in Louisville, for example, will service into a business effect of our North American aftermarket business, and we'll add more automation into that. Now that's helpful why we don't roll it out tomorrow across all of the group. But what we do do is as some of our other businesses get to sufficient scale, then of course, we can learn from that experience and take pockets of it or indeed all of it if appropriate into future businesses over time. I think technology is something similar. I mean, aside from what happened last year and OEM, putting in some kind of ERP system into that business is the right thing to do. And we'll continue to do that in our businesses selectively as we go. In some instances, there might be single unit ERPs or there's other instances that might be able to use an ERP across a couple of businesses. And again, we'll just look at that pragmatically as we grow up. Have I answered all parts of that question? Can I just add a couple of things? Yes, go ahead. Yes, there are other ERP implementations, and we've got some that are commencing or will be executed next year, where the businesses need them in international sales. But I would also remind those of you that followed us a few years. We did this sort of uptick in investment back in 12, 13 or something. And we haven't done, if you look back over the last 3 or 4 years, our investment in CapEx has been reasonably low. And it's now that we need to invest again as the businesses get larger. So every 4 or 5 years this cycle does come around and we'll see some reasonable investment next year not dissimilar to this year. But there will be good returns on it and we'll see our cash conversion come back into the 90% pretty quickly after that. Anymore? No? Okay. Well, thank you very much for coming, Ron. Appreciate it.