Hello, and welcome to the Diploma Q1 trading update call. My name is Saskia, and I will be your coordinator for today's event. Please note that this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call, and this can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Johnny Thomson, Chief Executive Officer, and Chris Davies, Chief Financial Officer, to begin today's conference. Thank you.
Thank you. Good morning, everyone. Happy New Year. Thanks for joining us today. I hope you're all well. I'm here with Chris. Sorry to have missed you in November at the full year update, but I'm now fully recovered and back on it. A few words this morning on our quarter one performance, and then we'll move fairly swiftly into Q&A. So I think the first quarter performance hopefully is fairly self-explanatory from the RNS.
Following the excellent results in 2023, we're carrying good momentum, and we're reporting a strong start to 2024. Organic revenue grew by 6%, which was fairly broad based and volume led. Controls and life sciences have delivered strong growth, continuing the trends from the last quarter of last year, and Seals has performed robustly, with modest growth seeing off the destocking, the continued destocking in the OEM world.
Our reported revenue growth was 10%, with an 8% contribution from acquisitions. We carry on doing the rewarding small bolt-ons, three more this quarter, which we feel support our high returns on capital. The pipeline remains very healthy. Finally, we're really encouraged by the way we started with our margins as well in the new year. Overall, we're very pleased with the start to the year. A few words on the outlook.
We've got a long, successful track record of sustainable quality compounding. I'd say the market is a bit tougher, but the business model is resilient. And as we've talked about before, our execution of the strategy makes us more resilient. So we believe the current performance is really underlining that, underscoring that, and demonstrating that, and we're feeling good about delivering another year of great results in 2024. I'll hand that back to questions.
Thank you. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please signal by pressing star one on your telephone keypad. That is star one for your questions today. Our first question today comes from Annelise Vermeulen from Morgan Stanley. Please go ahead.
Hi. Good morning, Johnny. Good to have you back. Two questions, please. So firstly, you know, you've talked a lot about the resilience of the portfolio, and the diversified nature of it. You know, meaning you've delivered another good quarter. Can you give us any comments on what continues to be sort of the underperforming bits of the portfolio? I know obviously at the full year results, we talked about Seals, and some of the areas there, and you're saying you're still seeing destocking there, in the broader market. But I'm just wondering, specifically in your business, is there anything that's changed, you know, materially for the better or worse, or any trends that you're seeing, you know, relative to the end of September?
And then secondly, again, you've commented on margins, having, as you know, started the year strongly. I'm just thinking about your full year guide. From memory, you know, typically your margins are a little bit lower in the first half relative to the second half, very marginally. So would we expect to see that typical split for the first half, second half of this year? Or how should we think about margins as we move through the year? Thank you.
Well, thank you very much, Annelise. Chris will answer the question on margins in a second. I mean, just to your point on, I suppose, underperforming areas, I mean, look, we're feeling, we're feeling, as I said before, pretty good about the strategy and how it continues to diversify the business. I think what we've seen, and this is just through my optics, what we've seen probably is, you know, geographically, the U.S., probably moderated about, you know, nine to 12 months ago. Europe and the U.K., probably a little harder over the last six months or so. And as we've said a few times, the destocking in, particularly the, our big OEM industrial type of customer set, has continued. And that really affects, more than anything, the Seals business, as we've said before.
However, I mean, I would just say, you know, there's plenty of reasons for us to continue to be very optimistic about what we're seeing in our revenue numbers. I mean, I would point to the fact, first of all, that, you know, 6% in a tougher environment and with the numbers we're lapping, we feel is a very, very good outcome for this quarter, so we're pleased with that. There's plenty of diversification from an end market perspective, really gives us both, you know, structural protection and tailwinds, and that could be anything from the recovery of diagnostics world, automation, you know, telecoms, electrification. Those kinds of things are still giving us nice tailwinds.
And I think the final point I'd make, and a few people have asked me about this recently, you know, we continue to see market share gains as well. You know, and this goes to the power of our, you know, value add distribution model, where we have customer loyalty and share of wallets. But we also have, you know, the market share gains that come from that reputation. So all in all, we feel that the 6% is a very good outcome. And of course, if it does turn out to be a tougher year, delivering something in line with or even slightly better than our financial model would be a great outcome.
Yeah, and at least on margins, yes, you're right, we do typically kick off H1- H2. Some of that is a bit of seasonality, obviously, with Christmas in H1, but also the growing business gives you, you know, operating leverage as we go through the year. We would expect the same this year. And, you know, we're encouraged with what we've seen in Q1, putting us on track for the guidance for the full year.
That's great. Thank you very much.
Thank you. Our next question comes from Daniel Cowan from HSBC. Please go ahead.
Morning, guys, and Happy New Year. First question, please, can we talk exit rates, please? I think you said the exit rate in H2 last year was about 70%. How did organic growth develop over the last quarter, please? And the second question is, can you give us an idea of the period-end net debt?
Yeah, okay. I'll ask Chris to answer net debt in a second, just in terms of exit rates. I mean, if I'm honest with you, I wouldn't get too caught up. I mean, we're slightly caught up in detail here. I mean, I think from memory, we did roughly 5% quarter three, 7%, quarter four, and we're posting 6% now. So I think, you know, overall what we see is that we're fairly steady in the 5%-7% kind of range. And, you know, you shouldn't really necessarily, for a business like ours, measure us just by quarters. But that's where we think we're trading at, at the moment, in that kind of 5%-7% kind of range.
You know, to the question earlier, you know, the market is a little tougher than it was, say, 12 months ago. But we're feeling, you know, pretty confident and pretty optimistic about the diversification, the resilience, and therefore, you know, for us to continue to deliver that kind of range over the course of, over the course of the year. Chris, do you want to do net there?
Yeah. I mean, it gets down a touch. Obviously, we've had, you know, we've had a quarter of cash flow, and as you've seen in the statement, we've spent a little under, actually, we put the numbers there for M&A, but we're down a touch, and in line with what we guided for the full year.
Great. Thanks. Thanks a lot.
Thanks, Dan.
Up next, we have David Brockton from Deutsche Numis. Please go ahead.
Good morning. Can I ask two questions, please? Just firstly, focusing on that destocking trend. It's clearly within Seals OEM. It's clearly been there for a while now, and I just wondered whether you've got any signs as to sort of how that's faring sequentially. Are there any signs that we could be nearing an end there? That's the first question. And then the second question, given the context you gave there, Johnny, of sort of Europe being sort of marginally tougher, I just wondered if you can just give an update on the DICSA integration and how that's going. Thanks.
Yeah. I'll say a few words about DICSA. Maybe, Chris, you want to do the destocking point? Yeah, DICSA, we're very happy with. You know, clearly, as I said earlier, Europe, I think, as we all know, has been a little tougher over the last, however, however long. So they're operating in a slightly tougher environment. However, we were expecting that when we bought this, and we were certainly expecting for a more modest growth in the, in the early period. More importantly, we settled in very well. We're very, very happy with the team we've got over there. We're very, very happy with what we've found as we've got under the bonnets in terms of the ability to keep driving the great organic growth.
And they do have fantastic opportunities, both in terms of geography, particularly, I'd say, Germany, Eastern Europe, the U.K. and even the U.S. They also have great opportunity from a product perspective. And I think the final point I'd say on it is, even though it's very early days, we're starting to link together some of our fluid power teams from different geographies, with the potential to drive, you know, synergistic revenue over the medium to long term, and that might be with our R&G team, and it's also with the Hercules aftermarket team in the U.S. as well. So I think we feel very happy with what we've got, and we feel very optimistic about the medium to long term.
On destocking, which it's early, it's only a couple of months, I guess, since we last updated you. We have... I mean, pleasingly, we've seen, we've seen a few, larger OEM customers returning to slightly more normalized, order patterns. But, you know, it, it's early, and I don't want to call a change in trend on what we've seen. I think we said, you know, it could be one or two or three quarters just to flush through. We're through one of them, and I think that's still how we feel. There could be one or two quarters left before this fully flushes through.
Thanks for your useful context.
I think what I'd just add to that also is just to underscore how pleased we are with the resilience of the Seals sector. You know, traditionally, in kind of old Diploma, Seals was clearly our most cyclical with its kind of U.S. construction orientation. But the work that's gone on, not just in the last five years, but beyond that, ten years, I would say, to diversify Seals end markets, geography, products as well, has really improved the resilience. And if it continue to see off such a trend as it is doing at the moment, then it will be very pleasing indeed.
Thanks very much.
Thank you. We're now moving on to a question from James Rose from Barclays. Please go ahead.
Hi there, morning. Glad you're well, Johnny. Two from me, please. Could you give us an idea of trading within Windy City Wire versus the second half of last year, please? And then secondly, I think Mr. Galgano was in the U.K. not too long ago, talking about the future of Windy City Wire and the next steps there. Could you give us some insight into those conversations, please?
Yes. Yes, yes. Well, Rich and I spend a lot of time together, both stateside and, more recently, in London and Paris, on, on our tour of the world, Windy City Wire tour of the world. How's it going with Windy City? It's going very good. Look, you know, as I've said a thousand times, the first 2-ish years of 20%-50% growth was, that was never going to be the long-term trend, was it? And we would be very happy with returning to what Windy City has done over, you know, a 10, 20-year period. And, and, and that's where we are at the moment. You know, the, the, the profit growth, in the, in the first quarter was, was double digits. And, and we're, we're very pleased with the way that it continues, to, to, to trade.
Volume in a tougher market is still very good, and that's despite lapping some of the market share gains they made over the last year or two from a supply chain, more difficult supply chain. They're still lapping that now, but delivering good volume on the back of that. And we continue to be encouraged also by the diversification of the business and the higher margin growth in digital antenna and data center and other such premium markets. So, we're very, very happy with that. You know, in terms of how things are going with the management team, I mean, Rich has signed up for another three years, you know, at the end of the three years, first three-year cycle, if you like.
And, you know, he's signed up for the next three years, and so we feel very good also about the continuity of management. So, you know, overall, as I've said many, many times, Windy City, we expect to return to a good level of business growth as it has done over many, many years, and that's what we're seeing at the moment, and we're very happy with that.
Okay, thank you.
Thanks, James.
Thank you, and we're moving on now to Kean Madden from Jefferies. Please go ahead.
Thanks. Morning, all. Two quick ones from me. I appreciate they're not a direct competitor, Johnny, but, MSC Industrial in the States, we recently flagged a more optimistic outlook for U.S. trading momentum in 2024, driven by, you know, feedback from customers, lower interest rates, et cetera. I'm just wondering whether you share that positive outlook for your North American business in 2024 after some cyclical headwinds for the last 12 months? And then secondly, just wondering what your supply chain integrity challenges look like at the moment, given some well-documented freight issues around the world.
Yeah, I'll quickly take that one in a second, Keane. Thanks for the question. Just on the U.S., well, look, I mean, I'm not gonna pretend to be a soothsayer, am I? But I am generally an optimist on the U.S. for many reasons. In our kind of service-led organization, I think the homogenous nature, I guess the capitalist growth orientation of the market, I think is great. So I am an optimist on the U.S., and I hope that they are right, that things will pick up.
For the moment, I would say, as I said at the, you know, to one of the first questions, at the moment, I would say that what we see is kind of a level, a stable state at the moment. And that's allowing us to deliver, you know, decent performance. Windy City Wire, you know, a little bit more modest than Seals, so it's certainly not a disaster at the moment. It's pretty reasonable, I'd say. And I would hope that a more favorable environment would come, interest rates, as you say, et cetera. And so I'm optimistic, but I'm certainly not gonna make any predictions on it.
Keane, a couple of points, I think, on, you know, Red Sea and supply chain disruptions. Yeah, in a handful of our businesses, there will be a, you know, up to a kind of two to three week delay on shipments, and some cost increase. Freight is nearly 2% of our cost base, just to put that into context. It's not huge. The other point I think which is worth making about Diploma is looking back at the supply chain challenges post-COVID, where, you know, we were a bit of a beneficiary. In some of our markets where we've got closer in supply chains, e.g., Windy City, but also in our businesses where, you know, the, the level and breadth of inventory holding is part of the competitive advantage, those businesses fare well through disrupted supply chains.
Yeah. Good, good point. Thank you, Chris.
Thanks, Kean.
Thanks.
Thank you. And as a brief reminder, that is star one for your questions today. And up next, we have Sam Dindol from Stifel. Please go ahead.
Morning, guys. Congratulations on the good Q1. A couple questions from me, please. Firstly, on M&A, are you seeing any change to sort of vendor expectations, I guess, particularly in Seals, given the tougher macro there? And then secondly, appreciate the commentary on volume net growth. Could you give any commentary on where pricing is, and are you still confident that can offset your own cost inflation in the year? Many thanks.
I'll let Chris take that second one. On M&A, I think the general observation I would make for you is that we, we're not generally buying bad or broken businesses. And therefore, you know, if a vendor is coming to market with a business that we are interested in, they're expecting to command a sensible multiple for that business. Otherwise, what they will do is, rather than sell it on the cheap, they'll just wait and pull it and do it another time. So, I think what I would say is, you know, multiples are a lot more sensible and balanced than they were, say, 12 months ago, 18 months ago. But I wouldn't say that means that we can, you know, get anything on the cheap.
I would say we would pay a fair market price. I think, you know, if I can just expand on the question and say, from an M&A perspective, you know, we're pretty pleased with, you know, with where we're at on M&A. We've done 35 odd deals in the last four or five years, and spending just over GBP 1 billion, and our returns are very, very strong, so we feel good about that. We're gonna continue to do the smaller stuff. That's very, very important to us. We've done another three this quarter. I think we did 10 last year. They're great for organic growth for the small businesses. Great returns straight off the bat at a 4x or 5x multiple.
The competitive landscape, to your question, doesn't really change that much in that small business environment. We'd like to do more and more of that. But as we, as we also know, we'll occasionally do something bigger. We did TIE and DICSA last year. We've also got a good track record of delivering good returns on those slightly bigger deals, as, as well. We're well positioned. The markets are fragmented.
We are a buyer of choice against generally PE competition. We've really worked hard on developing our processes around M&A as well. So if, as they say, the market might, for M&A, might be, accelerating a little bit in 2024, then I think we're well positioned for that. But I would just underscore that by saying that we're in no rush, and we continue to be very, very disciplined. So I feel good. We've got a good pipeline. The market seems reasonably sensible, and we'll see how we go.
And Sam, on pricing, as you know, it's a key part of our margin formula to price to cover inflation. And I'm confident that we can continue to do that. We're not seeing a lot of inflation, either product inflation or, you know, our own cost base inflation. But in the quarter, you know, Yes, we've covered it. I would imagine for the full year, you know, you should expect, you should expect the same. It is a key measure, it's a key metric of our value add, the ability to do that. You know, no more, but the ability to cover that off. Done it in the quarter, and we'll expect to do it through the year.
Brilliant. Many thanks.
Thank you.
Thank you.
As there are currently no further questions in the queue, I'd like to hand the call back over to you, Johnny, for any additional or closing remarks.
Thank you. We feel like we've made a good start to the year, and we're on track for another strong year of great sustainable quality compounding delivery. I don't think there's much more for us to say than that at this stage. Thank you very much for everyone for joining, and we look forward to seeing you at the half year.
Thank you for joining today's call, ladies and gentlemen. You may now disconnect.