Good day and welcome to the Diploma Half Year Results webcast and conference call. I will now hand you over to Johnny Thomson, CEO. Please go ahead.
Thank you very much. Good morning, everyone. I hope you're all healthy and happy. Thanks for joining our half year update. It's great to have you with us today. I'm here, as usual, with our Finance Director, Barbara Gibbes. I'm gonna start with an overview. Barbara will then take you through the numbers, and then I'll come back for a review of the businesses, and there'll be questions as normal at the end. Let's get straight into it. I'm delighted with our performance and with our strategic progress in the last six months. We're executing our strategy of building high quality, scalable businesses for organic growth. Our organic growth and operating margins have, again, been strong in the half, and we're confident in our materially upgraded guidance for the full year communicated in April.
We've invested GBP 172 million in three strategically important acquisitions, one at each sector, which will build scale in key business lines and support future organic growth. Maintaining our portfolio discipline, we also disposed of two small non-core businesses. We continue to quietly evolve the structures, capability, and culture of the group. This will sustain our strategic execution and performance delivery for the long term. Finally, we're making good progress with delivering value responsibly, our ESG program, with all our businesses embedding activity into their core commercial strategy. For a summary, it's been a very positive first half. Our results for the first half were strong across all key metrics of our financial model. Organic growth of 16% reflects the success of our revenue diversification initiatives, the positive demand environment, and pricing.
Reported revenue growth of 23% includes the contribution from high-quality acquisitions completed over the last 12 months. We're pleased with our margin. Despite a challenging operating environment and inflationary pressures, margins was up 20 basis points on last year to 18.4%. This has been driven by the hard work on pricing, along with the benefits of our value add model. Adjusted EPS was up 22%, and we're increasing the interim dividend by 20%. Our success is due to our brilliant colleagues. We're acutely aware that they face a great many challenges right now, and so we're focused on supporting their personal well-being as well as their professional engagement and development. We've all been disturbed by events in Ukraine.
While Diploma has no direct business exposure to the region, we do have colleagues who are personally affected, and we've been fundraising for the Disasters Emergency Committee. I'd like to say a huge thank you to all of my brilliant Diploma colleagues. You continue to make the difference. Now over to Barbara to take you through the numbers.
Thank you, Johnny, and good morning, everyone. We have delivered a strong set of financial results for the first half of 2022. All of our metrics have outperformed our financial model, and we're driving really good returns for shareholders with an improvement in ROACE, which is 100 basis points higher than last year at 17.5%. I will tell you more about what has driven the financial results in the following slides, starting with revenues. Overall, our reported revenues have increased by 23% in the half to GBP 449 million. Underlying growth was 16%. Acquisitions and disposals contributed a net 7%. Johnny will cover the sectors in more detail, but to pull out a few highlights. Controls delivered very strong underlying growth of 28%, consisting of 17% at International Controls and an excellent 42% at Windy City Wire.
Seals is also growing well. Underlying growth was 15%, reflecting broad-based strength across the sector and in particular in North America. Underlying revenues declined 7% at Life Sciences. Excluding last year's COVID-related ventilator sales, underlying growth was 2%. Also moderated by lockdowns in Canada and Australia. Excluding these short-term impacts, the sector is trading well. We are confident in the outlook and expect the sector to return to growth during the second half. For the group as a whole, there are three key drivers of percent underlying growth. First, our organic revenue diversification initiatives. Second, positive demand environment, and third, a half of our underlying growth relates to volume. The rest to pricing, of which around five percentage points is from copper. Let's have a look at the operating margin next.
In such a challenging environment, with both supply chain pressures and inflation, I am delighted that we have been able to increase our operating margin by 20 basis points year-on-year to 18.4%. The bridge provides some insight into what has driven this margin expansion. Our businesses continue to work exceptionally hard to contain inflationary price pressures. Where that has not been possible, our value add gives us some pricing power. This means we can pass on cost inflation to customers and protect our margins. As I flagged on the last slide, around half our revenue growth related to pricing. What you see on the chart is the growth impact of pricing on our revenue line, including copper, and the gross inflationary increase in cost.
The net effect of the two on profit is relatively modest. The main driver of profit growth and the higher margin is volume growth. The chart reflects the drop-through or positive operating leverage on higher volumes, and this is driving margin expansion. Acquisitions over the last 12 months have contributed positively. Finally, we have then carefully reinvested in operating expenditure and will continue to do so in order to sustain our business model as we scale. Now let's take a look at the rest of the P&L. Looking at the items further down the income statement that we haven't covered yet. Interest costs have increased due to increased leverage to fund acquisitions and higher interest rates. Expected tax rate is 25%. This is in line with what we saw for the full year and reflects the changing geographic profit mix with more U.S. weighting.
EPS grew very strongly, over 20% higher, and the proposed interim dividend of GBP 0.15 represents a 20% increase year-on-year. Let's have a look at net debt and cash flow. Cash conversion in the first half was 64%. A very good result, with free cash flow up 10% year-on-year at GBP 37.7 million. The GBP 20 million cash outflow for inventory includes incremental investment to ensure product availability and support market share gains. In line with seasonal patterns, we expect stronger cash generation in the second half, and we continue to expect full-year cash conversion to be in line with our financial model of around 90%.
Our net M&A spend of GBP 29 million principally relates to the acquisition of LJR Electronics, together with deferred consideration of previous acquisitions, partly offset by the proceeds from the non-core disposal of our Russian business, Kentek, back in November. Net debt at the end of March was GBP 209.5 million, or 1.2x EBITDA. Following the end of the half, we completed the acquisitions of R&G Fluid Power Group and Accuscience for a total of GBP 152 million. The non-core disposal of a1-envirosciences for GBP 11 million also occurred after the end of March. Including these transactions, we expect net debt of around 1.5x EBITDA by year-end. Strong cash generation in the second half will give us good headroom and a strong balance sheet. Moving on to acquisitions.
Our approach to acquisitions remains highly disciplined. Investments need to offer a strong strategic fit and meet our financial hurdle. We've had a great start to 2022, deploying capital across all three sectors with three strategically important acquisitions. We have done this while remaining financially disciplined, paying an average multiple of around 9x. Our disciplined portfolio approach also applies to our existing businesses, hence two disposals of Kentek in Q1 and a1-envirosciences after the end of the half. We are delighted with the improving returns to our shareholders, with ROACE up 100 basis points over the last year to 17.5%. Finally, I wanted to comment on current trading and our outlook. The wider macroeconomic environment is uncertain. We expect that the strong demand we are currently seeing may moderate and that inflation will continue.
Having said that, the second half has started well, and so we are confident in our full year guidance, which we materially upgraded in April. For 2022, we expect low double-digit underlying revenue growth. We have delivered 16% in the first half, and we expect growth to moderate in Q3 as the comparatives get tougher. The net impact of acquisitions and disposals made over the last 12 months mean that reported revenue growth will be a little over 20%. Just to remind you, since our April update, we have acquired Accuscience, which is expected to generate annualized revenues of around GBP 35 million and which you will need to include in your model. We expect our adjusted operating margin to be at the top end of the 18%-19% range.
We continue to expect free cash flow conversion to return to our financial model of around 90%. We currently expect cash generation in the second half to take net debt to around 1.5x EBITDA by year-end. We expect 2022 to be another strong year. Back to Johnny Thomson.
Okay. Thank you, Barbara. Now for a review of our businesses, and I'll start with a reminder of our strategy, which is to build high quality, scalable businesses for organic growth. Our businesses have fantastic organic growth opportunities. We diversify and scale them in three ways, positioning behind structurally growing end markets, penetrating further in core developed geographies, and extending our product range to expand addressable markets. By diversifying our revenues, we will grow organically, build scale, and increase resilience. As a group, we focus the portfolio around key scalable business lines. This means acquiring businesses which complement and accelerate this organic strategy. Occasionally, there may be the odd disposal as we tidy up the portfolio. Our value add distribution model underpins everything we do. It drives customer loyalty and therefore resilient growth, pricing power, and therefore attractive margins.
We continuously improve the core competencies of the model so that our businesses can deliver the value add proposition as they scale. We're evolving the structures, capability, and culture through which we manage the group too. Delivering Value Responsibly has become central to our commercial and operational strategy. It's a source of value creation for all of our stakeholders. In the next couple of slides, I'll take you through how we've been delivering against this strategy in the first half. Now let's start with organic growth. I've mentioned the three ways we diversify and grow our businesses, so a few words now on each. First, we seek to position our businesses behind structurally growing end markets. Some examples, increasing infrastructure investment in the U.S., and elsewhere will benefit Seals. Technology development, such as data centers and distributed antenna systems, benefit our Controls businesses, particularly Windy City Wire.
Renewables and sustainability investment can be a great growth driver for Seals and Controls. Finally, in Life Sciences, we're well-positioned to take advantage of significant acceleration in the clinical diagnostics space, especially after the pandemic experience. Secondly, we'll penetrate further into core developed economies where we are currently still relatively small. For example, we've made significant progress in the U.S. Our Louisville facility is driving market share gains in Seals, and the acquisition of LJR accesses the U.S interconnect market in Controls. Finally, we extend our product ranges to expand our addressable market. We do this incrementally within the businesses and at a portfolio level. The acquisition of R&G provides a step change for Seals in the U.K., broadening the fluid power product capability into industrial, hydraulic, and pneumatic systems.
All of our businesses have opportunities across all three of these dynamics, and that's really exciting for our future organic growth. We focus the activity in each business to ensure disciplined execution. That execution has contributed to the group's 16% organic growth in the first half. Focused development at the portfolio level is key to the sustainability of the organic growth strategy. This means being disciplined about acquisitions and disposals. We target businesses with strong value-add distribution characteristics and high growth margins, with organic growth potential and with great management teams. Once acquired, we add value by driving accelerated growth, whether it be through unlocking investments, providing management expertise, or even cross-selling products. In some cases, we also add value through scale benefits. Finally, we allocate our capital to those opportunities that best develop the portfolio, executing the organic growth priorities for our key businesses.
Far this year, we've invested GBP 172 million on three strategically important acquisitions. A few words on each. In April, we announced the acquisition of R&G Fluid Power Group in Seals in the U.K. for GBP 100 million. R&G had a great management team, a broad product offering, a strong customer proposition, and a platform with excellent reach across the U.K. Business has exciting prospects for continued organic growth and the opportunity to further consolidate small regional competitors. Strategically, it brings scale to our U.K. Seals business and expands our addressable markets through extending our products capability. We also acquired LJR Electronics in January for GBP 21 million, giving our Interconnect business improved access to the U.S. market. There's also scope for us to subject wider value-add processes to LJR. Last week, we acquired Accuscience for GBP 51 million.
Accuscience is a leading life sciences and med tech distributor in Ireland. The business has exciting prospects due to its positioning in the high-growth clinical diagnostics segment, very much consistent with our organic growth strategy. It also gives us scale in Ireland and continues to build out the European pillar for the life sciences sector. Finally, we are also tidying up the portfolio, as I said, two small non-core disposals. Kentek, our Russian business, in November last year, a1-envirosciences in life sciences sector a few weeks ago. Looking ahead, we remain highly disciplined on acquisitions, especially in uncertain economic times. However, the pipeline is encouraging. You've seen this slide before. For many years, we've talked about the importance of our value-add distribution model. It's the foundation of the group's success. The service component builds loyalty and therefore resilience, pricing power, and therefore margins.
There are five core competencies that underpin our value-add model, supply chain, operational excellence, value-add services, routes to market, and commercial discipline. Delivering these in big businesses is very different from in small businesses, so we must continuously improve the core competencies to execute at scale. The pandemic has been a test to the model, but also a catalyst for this continuous improvement. For example, in supply chain, we've been developing a structured and proactive approach, category management techniques to evaluate partners on a fuller set of criteria such as location, flexibility, environmental and employment practices, as well, of course, as quality and cost. This, together with the outstanding efforts of our colleagues, is making a difference. We're getting product to our customers, and in many cases, better product availability means we can differentiate and win market share. Another example is our management of a challenging inflation environment.
Our value-add products and services, together with commercial discipline or pricing, has helped us with inflation. Our products and services deliver real value to our customers. For example, Windy City Wire's RackPack save contractors 30% of their labor costs. In Aftermarket Seals, we're providing mobile machinery repair shops with access to a huge product range, technical support, and next-day delivery. Our Life Sciences commercial team bring years of technical knowledge and exclusive access to market-leading medical and diagnostics products. We deliver real value for our customers, and this value, together with our improving commercial discipline or our pricing processes, have helped us to manage higher inflation and therefore protect our margin. We will continuously improve our value add model to execute as we scale. Now let's review our sectors performances. Starting with Controls. Controls posted a very strong organic growth rate of 28%.
International Controls delivered 17%, reflecting revenue diversification initiatives to position our businesses for growth. For example, in the energy, medical, infrastructure end markets. Also, the return of the civil aerospace sector this half has also helped. As we expand our geographical reach too, we've seen good growth in our U.S., and continental European businesses. Finally, the acquisition of Techsil last year expanded our products capability into specialty adhesives, and it's growing very well. Windy City Wire continues to deliver. Organic revenue growth was 42% with nearly 20% volume growth. Their excellent customer proposition and better product availability is driving market share gains in high-growth technology end markets. The Controls operating margin increased 60 basis points to 21%. Positive operating leverage has more than offset the dilutive impact of passing on higher copper prices and some investment in growth.
Controls has had a fantastic first half and is well positioned for the future. Turning now to Seals. Seals was our most resilient sector through the pandemic, and so organic growth of 15% is really encouraging. North America led the way with growth of 19%. As I've already mentioned, our aftermarket facility in Louisville is delivering accelerated growth with market share gains, particularly in the Western U.S. states. International Seals also had a good first half, with organic growth of 8% against a strong 2021. Revenue diversification into new end markets such as food and beverage, medical, and renewable energies has benefited the sector's growth and resilience in the last 18 months or so. The Seals margin increased to 18.8%, up 210 basis points on last year.
This was largely due to last year's lower fuel and running costs dropping out. The benefits of selling our lower margin Russian business and leveraging our growth. It's been a great first half for Seals, and I feel very encouraged by the sector's prospects for the future. Finally, Life Sciences. Organic revenue was down 7%. This decline was driven by short-term circumstances. As you'll remember, Life Sciences experienced a V-shaped recovery last year after COVID, and this included ventilator sales, which were not expected to recur. Excluding these, organic revenue grew by actually 2%. Growth was also moderated by lockdowns and healthcare staff shortages in Canada and Australia in the first half. We're confident in the market outlook and the potential of our businesses, and the sector will be back to growth during the second half.
The Life Sciences operating margin was very strong at 22.5%, albeit down a little on an untypically high margin last year due to the expected return to post-pandemic variable costs. The mid to long-term prospects for Life Sciences are really exciting. We will benefit from the eventual catch up in surgical backlogs and increased investment in clinical diagnostics. We continue to expand geographically, building out our European footprint, as well as developing our product portfolio. We're making really positive progress with delivering value responsibly, our ESG program. It's been great to see how the businesses have embraced DVR, defining activities within our core focus areas. We embed these activities into commercial strategy to make a more meaningful impact.
Initiatives focused on positive impact revenue, by which I mean the sale of products, services, and solutions that benefit society or the environment, are now part of all of our businesses' growth plans. Our businesses are engaging with their supply chain on our supplier code, increasingly measuring successful partnership on employment practices and sustainability. Across the whole program, we're measuring performance against our metrics, building ownership, and working toward target setting for 2023. We're making good progress. Summarizing, it's been a great first half, very good results and plenty of strategic progress. However, we're not complacent. We recognize the prospect for a more challenging trading environment ahead. Our business model is resilient and our ongoing actions support that resilience. More diversified revenues, improving our value add model, which drives pricing power and margins, and retaining a strong balance sheet.
The second half has started really well, and we feel confident that we will deliver our upgraded guidance and that 2022 will be another strong year for the group. We will deliver attractive long-term organic growth at sustainably high margins. That's it. Thank you for listening, and we'll hand over to the moderator for questions.
Thank you. Ladies and gentlemen, to ask a question over the telephone, please press star one on your telephone keypad. Our first question today comes from James Rose of Barclays. Please go ahead.
Hi there. Good morning. I've got three, please. Firstly, if we think about a scenario of a moderate recession sort of looming on the horizon, what does Diploma Group look like, and do you still see opportunities to grow the group through a slowdown? The second question is on R&G. I think you've talked about it has its own M&A pipeline. You know, what kind of businesses are in the pipeline, and what sort of multiples are you paying for them? Then thirdly, on R&G as well, what new products does it bring to the group and how scalable are they across other sectors and indeed your other seals businesses? Thank you.
Great, James. Thank you very much for joining and for your questions. Your first question was basically about recession and prospects. Look, I mean, I guess like many, we expect that growth will moderate somewhat over the coming months. Our comps will get harder. It may be that demand softens a fraction, inflation will continue, et cetera. You know, we're not complacent, and we manage for a harder environment ahead. Having said that, the second half has started really well, as I said a minute ago. Run rates within our businesses still look good. The order books still look strong. One of the benefits of our decentralized model is that our management teams are very agile and proactive.
I feel good about how we're trading right now and our ability to manage into a harder environment in the months ahead. I think the really important thing to know also is from a long-term perspective the resilience of our value add business model. You know, first of all, our products and services tend to be critical to our customers' needs. We tend to serve into OpEx rather than CapEx budgets, which makes any trough shallower. Importantly, as I was talking about from a strategic perspective, we're increasingly diversifying our revenues. That revenue diversification could mean, for example, being exposed to structurally growing end markets. It means penetrating in core economies, so we don't run off to crazy countries. We're in core markets, more predictable markets, let's say.
The revenue stream being diversified helps our resilience. I think also, as I also said, the value add model itself, you know, we have pricing power and margins. We have loyalty from our customers and resilience, and that helps us, of course, to sustain our growth, and it helps us to manage inflation. As Barbara talked about, we have pretty good cash conversion and balance sheet strength as well. Look, overall, we feel we're in a good position. We're still trading pretty well. We're pretty active about managing ahead. The business model is in good shape. The strategy is only enhancing our resilience. Therefore, if there are some punches to come, I feel we're probably better placed than most to weather them. That's your first question.
Your second one was on R&G, M&A, and products, I think the second and third question. Yeah, I mean, the R&G story is really exciting. I mean, they've done a great job organically, b ut to answer your question specifically, they've also swept up a lot of really small regional U.K. distributors, and that's given them really good reach across the country. They've got a very active pipeline, and we expect them therefore to continue to do that. These are small businesses. They're generally somewhere between GBP 2 million and I think GBP 10 or 15 million at the biggest. You know, the multiples are pretty favorable, as you can imagine, somewhere in the four, five, six, seven bracket.
There's huge amounts of value, both from an organic perspective to come, but also from an inorganic perspective too. I think your last question was on their product capability. I mean, as well as giving scale in the U.K., this is the thing for me that is most meaningful from a strategic perspective because, you know, we have been expanding product ranges, as you know, across all of our sectors. Seals has probably been the one that just requires a bit of catching up from a product expansion perspective, and R&G provides that platform for us to do that. They have industrial, hydraulic, and pneumatic products, much broader than our traditional seals and gaskets offering.
You know, as well as giving us greater access into the U.K., therefore, in time, I hope that we can take that capability into our international Seals businesses too.
That's very helpful. Thanks very much.
Our next question today comes from David Brockton of Numis. Please go ahead.
Good morning. I was just hoping to ask a few questions around Accuscience, if I can. Can you just sort of set out how the business will be managed? You know, are the current management team staying? Where the acquisition has sort of come from in terms of how long you've been tracking it, to start with. Then just wondered if you can just sort of touch on, you know, to what extent the demand backdrop is changing for diagnostics or do you expect it to change following the COVID pandemic and how that sort of positions the broader Life Sciences business as well. Thank you.
Yeah. Okay. Accuscience, we've been tracking for a few years. It's. You know, as you know, we've been trying to One of the key strategies in Life Sciences has been to build out a European platform. Last year we acquired a few businesses in the Nordics. This business obviously gives us, A, scale in Ireland, but also gives us further scale, and therefore a healthier overall Life Sciences geographical portfolio. That's the first thing. The second thing is we've been back to our what I was saying before on organic strategy. We've been very keen to get our Life Sciences businesses behind some high growth end markets like diagnostics. That's one of the reasons why we were tracking this business too, because a decent size of their product portfolio is in molecular diagnostics, a high growth area.
That's very exciting. How will it be managed? It'll therefore be managed within Life Sciences within our European portfolio of businesses. The management team, very strong, will stay with the business indefinitely, which is fantastic. They're young, they're dynamic, they're commercial. They've built a great reputation across Ireland with presence in most hospitals and labs across the island. We're very excited about working with them on the next phase of that journey. Then you asked about diagnostics more generally. Yeah. I mean, it's really exciting. I mean, before the pandemic came along, if healthcare budgets globally were growing at, I don't know, 3%-4%, a much greater proportion of healthcare budgets has been allocated to diagnostics.
Of course, keeping people out of bed is economically and clinically the best thing for the future of healthcare, and therefore healthcare systems have been allocating more money into preventive medicine, research, testing, and development, and therefore budgets in that area have been growing at, I don't know, 5%, 6%, 7%. That's been a great source of growth for us even before the pandemic. The pandemic itself only accelerates that. We've seen further investment starting to flow into that. I would also expect that, you know, the consumer sentiments will drive a different kind of behavior in diagnostics too. We're all just a little bit more sensitized to laboratories, to testing after what we've been through in the last couple of years. The consumer aspect of it as well. I feel very, very excited about that end market.
We've got great positioning in diagnostics in our existing Australian and Canadian markets. This business provides us with that access in Europe too, which is fantastic. By the way, to get it at the multiple we've got, I think is a fantastic outcome too.
Thank you very much.
We will now take a question from Henry Carver, Peel Hunt. Please go ahead.
Thanks. Good morning, guys. Just a couple from me. First of all, Life Sciences, just wondering what the kind of level of pent-up demand is. You know, there's clearly still a backlog to work through. Just wonder sort of how much, how long that would take to work through. A quick one just on a1-envirosciences. What was the rationale there for the disposal? I mean, just wondered if there's any more detail around that and perhaps what multiple you got for it, a nd then lastly, just one around CapEx and how we should be sort of thinking that moving forward, you know, talking about supporting the business model as a larger group, you know, is slightly different.
I just wondered if we should be thinking about CapEx perhaps getting a bit closer to depreciation or not, or how to think about that going forward. Thanks.
I'll let Barbara answer the question on CapEx in a sec. First, your first two questions. Firstly, on the backlog. Yeah. I mean, look, I've seen various people, heard various people, guesstimate the size of the backlog and how long it will take before the medical profession can catch up. I've heard everything between 18 months and five years, depending on the market and the circumstances. You know, I guess I look at it as being a two, three, four -year growth tailwind for our surgical businesses, which is great. The short term challenge is what has been lockdown, but the challenge now has been, I guess, healthcare staff across, you know, core healthcare markets, ours and others.
There is a distinct shortage of healthcare professionals right now, which of course has meant that it's difficult for them to keep up with current demand, never mind to unwind the backlog. There's obviously lots of activity within the healthcare systems to work on that, as you would expect, because they can't sustain such a big backlog forever. Otherwise, health statistics will start to suffer pretty dramatically. I'm confident, and I can already see them starting to make some improvements. We haven't, as I said in the presentation, we haven't seen any benefits of the catch up in the backlog. I expect quietly as time goes on, we will start to see it.
Along with the diagnostics point I was making a little bit earlier, this is the second reason to be encouraged about end market tailwinds for Life Sciences, which make the long-term prospects very good, a1, I mean, it's a small disposal. If you remember last year, we disposed of our other environmental business, CBISS. Why do we dispose of businesses? We dispose of them because they either don't have the value-add distribution business model that we believe is consistent with our group, or we are not the right group to scale it. In this sense, this business is not so much of a distributor and therefore wasn't quite at the center of our business model.
Secondly, there are others who do have that kind of business at their core, and therefore are more natural at scaling it. Therefore, in that circumstance, we've got to be disciplined. The other aspect is, as we're growing the group organically and inorganically, we've got to be disciplined to make sure that we tidy the portfolio behind the key business lines to make sure that our growth is scalable and sustainable. That means a bit of discipline here and there. Because if we have management spending too much time, messing around on stuff which is non-core, it's distracting as we get bigger and organically and inorganically. Very important that we do these kind of things. Barbara, do you want to talk about CapEx?
Yes. On CapEx, our model hasn't changed. I mean, all our businesses are fundamentally distributive, and we continue to be asset light. The group being larger doesn't change that particular aspect. I guess the CapEx is a little bit higher in the current year than it was last year. I mean, last year was still a little bit curtailed by COVID and so on. A lot of current year CapEx is actually going into Life Sciences, where we place capital equipment in hospitals, and then that has long-term revenue streams in terms of consumables attached, so very happy with those investments. Going forward, I mean, if we identify opportunities to invest organically, like we did in Louisville, in order to drive the scaling of the business, we'll be likely to do so. Overall, the model hasn't changed.
Brilliant. Thanks, guys. Very clear.
Thanks, Henry.
We will now take a question from Daniel Cowan of HSBC. Please go ahead.
Morning, everyone. Thanks for taking the question. I've got three, please. Johnny, you were talking about supply chains and I guess within that sort of context, you know, your better availability being a competitive advantage. I was just wondering if you could talk a little bit about supply chains and the structural changes you're seeing there and how that's affecting you. I've got a question also on operating leverage, how you're driving that. The last one is more of a housekeeping on revenues and operating profit associated with Kentek and a1-envirosciences last year, please.
Okay. I'll ask Barbara to answer questions two and three, and I'll talk a little bit about the supply chain. I mean, in general, you won't be surprised to hear me say that supply chains are still pretty tough. Every now and again, I feel like things are getting easier, but then a fire will go off somewhere else. You know, we're still kind of managing the day-to-day of that. I guess in the short term, we've been managing it pretty well. I feel good about how we've managed it. Firstly, because our management teams are pretty agile, pretty pragmatic, pretty proactive, and therefore have been able to deal with day-to-day issues.
More recently, we don't have any exposure or very much exposure in our supply chain to China, which of course has helped too. The important thing, though, is the long term. You know, we have long-standing service-led relationships with our customers, and that tends to mean that we have good visibility of what they need. It tends to mean that we can plan with them and that they give us a bit more flexibility. We mirror those relationships with our suppliers as well. Those suppliers with long-term partnerships means that we tend to get prioritized in the eyes of our manufacturing supply chain, and that's just helpful in terms of first dibs on products, isn't it? You know, that value-add model really sets us up well to manage the challenges of supply chain as well as we can do.
Therefore, to be able to generally deliver for our customers, and therefore, as you point out, in some instances, to win some market share against those who are struggling a little more. One thing I would just point out, and I guess, I think this is a broader point in terms of something that I see. Over the last year to 18 months, everybody's been managing day-to-day the supply chain. They've been sleeves rolled up in the detail, trying to make things work, trying to get product from A to B, blah, blah. Very, very reactive, very, very pragmatic and tactical. What I think we are seeing now is a switch from the tactical into the more strategic. What does that mean?
It means people are taking a step back from the tactical and saying, "Well, hang on. We've seen this for the last 12 or 18 months. What does this mean for the way I want to manage my supply chain in the long term?" Starting to think about making more structural changes to the way they do things. That might be customers, that might be suppliers, manufacturers. Therefore, I think the whole market will transition from tactical to strategic. For us, that represents great opportunity. When you're reliable, when you have strong supply chains, when you have the servicing components, I think that plays into our strength in the long term.
Barbara.
Thank you. Dealing with the disposal first, the profit, the annualized profit for Kentek and a1 are probably around GBP 3.5 million per annum. On the operating leverage, it's the volume growth that really drives that, and around half of our 16% underlying revenue growth in the first half was driven by volume. We're seeing a good margin environment. As I said, the margin went from 18.2%- 18.4%. We'll continue to see that through the second half, which is why we're confident around delivering towards the top end of the 18%-19% range.
What's important to bear in mind is that we need to continue to reinvest in the operating margin to make sure that we've got the structures in place to support the scaling of the business, so we can continue to drive long-term underlying revenue growth at sustainably high margins.
Thanks. Thank you. Thank you both. Just a quick follow-up on the operating leverage. You've talked about sort of scaling in some markets. Is there anything you're doing, I guess, behind the scenes on the cost side? Were you able to sort of find efficiencies as you're getting bigger and larger in these segments?
Yeah. I mean, I think naturally over time, as we scale in key locations, key geographies, then we have the opportunity to do a little more of that. You know, a good example of that is the one we talked about in the presentation, our Louisville facility, which is a massive upgrade in our distribution capability and our servicing component, which is a result of having the scale to be able to invest and execute at that level. We're obviously looking at different opportunities to do similar things in different geographies, and that might be about, you know, bigger facilities, sharing facilities, more technology, you know, management across more businesses, et cetera, et cetera. There's a number of different things that we can do, as we grow and scale.
It's very, very important to remember that, you know, we are a customer-centric organization, and therefore, we won't do anything that in any way affects our business' ownership and accountability for their people and their customer set, because that agility serves us well in tough times and in good times, and we have to preserve that service level, customer-oriented, entrepreneurial spirit within our businesses, and we'll do nothing to damage that.
Understood. Thank you. I appreciate the answers. Thanks.
Ladies and gentlemen, as a reminder, to ask a question, please press star one on your telephone keypad. Our next question comes from Oscar Val Mas of JP Morgan. Please go ahead.
Yes. Good morning, Johnny and Barbara. I have three questions. The first one is around supply chain shortages in your Chinese exposure. Could you quantify that Chinese exposure and if you're seeing any changes in strategic suppliers? The second question is on M&A spend. You spent GBP 150 million in H1. You talked about the pipeline being healthy. How high in terms of leverage would you be willing to go? The third question is a bit more detail on the Life Sciences division. You talked about returning to growth in the second half. Could we think about the full year also being positive growth in Life Sciences? Just help to quantify the improvement in Life Sciences over the next six months as you see it today. Thank you.
Okay. I'll answer the first question on China and Life Sciences. Barbara Gibbes, then pick up on the GBP 170 million of M&A spend. I kind of touched on China a little earlier, Oscar Val Mas. We don't have much. We have some, but it's not a material component of our supply chain. So are we in some way affected by the kind of lockdowns and scenarios in China? Yes. It's modest. Secondly, what I'd also say is, as I said in the presentation, we've been working hard at the supply chain core competency and therefore to build optionality and flexibility into our supply chains, and that's helped protect any exposures we've had to China and indeed to other areas that have been challenging over the last 12 months. You asked about Life Sciences.
I've kind of talked about it a little bit, but we do expect to come back into growth during the course of this year. It can be a bit tricky to forecast because it very much depends on healthcare staff availability more than anything else. In our surgical businesses, our diagnostics businesses are doing brilliantly. In our surgical businesses, it will depend just how quickly healthcare systems can get back up to speed. If we're at underlying growth for the full year of flat, that might be a fraction optimistic, but we'll certainly be back into growth during the year. Barbara, M&A.
M&A. As you say, we spent GBP 170 million, so GBP 20 million of that was in the first half, GBP 150 million is coming April.
Yeah.
We previously said, we're comfortable to go to up to 2x leverage, but it's important to bear in mind with the strong cash generation, we expect the leverage to be at 1.5x EBITDA, at the end of the financial year. We have a very strong balance sheet, plenty of flexibility and good headroom.
Great. Thank you very much, both.
We are coming to the final few questions of our Q&A. If you would like to ask a question, please press star one on your telephone keypad now. We will now take our next question from Thomas Truckle of Jefferies. Please go ahead.
Yes. Hello all. Thomas Truckle here of Jefferies. I just have a couple, if I may, regarding inventory. First of which is that the inventory balance of GBP 165 million, just approximately how much of that is copper at any one time based on Windy City Wire? Secondly, I appreciate those are GBP 20 million investment in inventory in H1. Are there any remarks around how we should think about H2? Would it be fair to assume that the inventory levels may reduce if the strong growth does abate somewhat? Or are we expecting continued investment there? Thank you.
I'll ask Barbara to talk about copper. I mean, yeah, look, the inventory levels we clearly keep an eye on. It's been the right thing for us to do to build inventory because, you know, customer service and part of our customer proposition is to ensure product availability. So it's been very important to do so. We're clearly at a point now where we have to think about what the next six months look like and, you know, when is the tipping point to start to actively manage that down. That will be different in different businesses and different environments, but we're obviously in a place now where we're starting to get a bit more, just starting to manage that down a fraction. With good growth rates, I would expect that to come down.
Will it be down to a more normalized level by the end of the year? Probably not quite by that stage, but we'll certainly be on that journey.
Just to comment on copper, I mean, we hold about two months worth of copper stocks on-hand at the moment, so that gets traded out pretty quickly. I'd estimate that that's probably be around $15 million at the moment.
Thank you.
This will conclude today's question and answer session. I would now like to turn the call back over to Johnny Thomson, CEO, for any additional closing remarks.
Thank you. Thank you everyone for joining. As I said, we think we've made some great strategic progress. We're diversifying our business' revenues for exciting organic growth, for scale, and for resilience. We're developing our value add business model for loyalty, resilience, pricing power margins. We're man-managing our portfolio sensibly to build our business lines and for future organic growth with three exciting acquisitions in the last month. We feel great about our strategic progress. The results themselves are very strong, and we're confident in another very good year ahead. We feel well positioned for long-term organic growth and sustainably high margins. Thank you all for joining, and look forward to speaking to you soon.