Diploma PLC

LSE:DPLM

Earnings Call Analysis

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the Diploma Q1 Trading Update. Today's conference will be recorded. I will now hand the call over to Johnny Thomson, CEO. Please go ahead.

[Jonathan Thomson, CEO & Director]

Thank you. Good morning, everyone. Happy New Year. Thank you for joining us this morning. I'm here with Barbara Gibbes, as usual, our CFO. I'll take you through our trading update for a few minutes and then hand over to questions. So to start with, just a reminder of our strategy, which is to build high-quality, scalable businesses for organic growth. We're excited about the significant growth runway that we see ahead. Firstly, positioning our businesses into structurally high-growth end markets; diversifying our businesses by penetrating further core geographies, U.S., Europe, U.K.; and indeed by extending our product ranges too. And of course, finally, growth -- organic growth driven by acquisitions in fragmented markets is an opportunity for us, too. So we're excited about our growth runway. And then secondly, it's important, of course, to make that growth sustainable. And we continue to develop our operational competencies, our structures, our capability to sustain customer service and our strong margins as we scale up. So quarter 1, in that context, has been a strong start to the year. Underlying growth was 16%, with demand continuing to be largely positive. Importantly, we've made more progress with our organic growth initiatives, reflecting our execution of the growth strategy I've just been talking about. So for example, in Controls, our business's diversification is paying off with very strong growth in quarter 1. In Controls, we're positioned well in high-growth segments like technology. And indeed, we're broadening into new ones like infrastructure. We're broadening geographically with good growth in Interconnect in Germany in the quarter and the contribution from our acquisition in fasteners in the U.S., AHW. And we're broadening in Controls through product range, too. We've made good progress with additional accessory products in our U.K. wire and cable businesses, and our acquisition last year of Techsil in Specialty Adhesives gives us a significant material new product range to develop in Controls, too. So we're very positive about the continued excellent growth in Controls. In Seals, we've seen an encouraging acceleration in Q1, reflecting investments we've made in growth recently. The prospects for Seals with infrastructure investment in the U.S. and indeed elsewhere will provide us in the long term with a structural tailwind. We're starting to see the market share gains in North American aftermarket from our Louisville transition that we've been talking about in recent times. Our international seals businesses continue to diversify their end markets driving resilient growth for international fields, both last year and into quarter 1. In Life Sciences, we're trading very well. As we previously flagged, short-term half 1 growth will be moderated by prior year COVID product sales; and secondly, by this year's continued lockdowns in Australia and Canada. For that short term, and we're very, very positive about the prospects for Life Sciences. In the medium term, there will be a market boost from the catch-up in surgical backlog, and indeed, as I said before, from increased investments into the diagnostics space. We're excited also about the development in Europe with recent acquisitions that we've made, and they are settling in well and contributing to Life Sciences growth. Overall, the group, therefore, reported revenue growth was 28%. As you remember, we did 10 acquisitions last year. They're settling in well and delivering. The pipeline is encouraging, but it's a hot market so we'll stay disciplined. Group operating margin was in line with what we expected, consistent with the trading at the end of last year. It is hard work. As I'm sure you know, supply chains are still tough. We're still seeing disruption from manufacturing constraints and freight issues. Labor markets, I would say, particularly the U.S. haven't yet eased. And so we do expect continued inflation as the year unfolds. But we're very well positioned to continue to manage that in our margin. So as we look forward to our outlook, we do expect growth to moderate as the year progresses. We'll probably see some of the stocking up unwinding as we go forward. We definitely see some impact from supply chain constraints. And of course, our competitors will get tougher. Having said that, we've made a great start to the year. We're more confident than ever in our guidance that we've given for the year, which as a reminder, is 10% revenue growth, half 1 weighted, with strong margins in the 18% to 19% range. And for us, that would represent a very strong performance in line with our financial model. And on that note, I'll hand over for questions.

[Operator]

[Operator Instructions] We will now take our first question from David Brockton from Numis.

[David Thomas Brockton, Research Analyst]

I've got 2 questions, please, from a sort of divisional perspective. Just in respect of the market share gains that you're now taking in sales aftermarket, clearly, Louisville is working well. I'm just wondering whether that's sort of targeted regional expansion or whether that's sort of broader regional expansion that's occurring within that division, please? And then secondly, I know you touched on sort of the impact of lockdowns when you referenced Life Sciences, I was just wondering whether you've seen any broader impact across any parts of the business through lockdowns maybe through the tail end of the quarter into the early part of the next quarter?

[Jonathan Thomson, CEO & Director]

Just on North American aftermarket. I mean, it's very, very early days. So -- but it is encouraging that we're seeing market share gains in some of the regions of the U.S. where perhaps we've been a bit underweight in recent years. That would be the West Coast and the Midwest particularly. So we started to see some pickup there. We're only really now starting to, I guess, turn our attention properly to drive that, given that the operational challenges of a complex transition in a market with supply chain and labor pressures has commanded our full attention. So it's early days, it's early signs, but it looks very encouraging, as I said a bit earlier. You asked about Life Sciences and lockdowns. Yes, I mean, clearly, I would say that Canada and Australia in our geographies have probably been amongst the most, let's say, conservative in their approach to lockdowns, as I'm sure you're aware, and that's where the large chunk of our health care businesses reside. And therefore, that Life Sciences has just been moderated as a result of that. Outside of that, we haven't seen I don't think anything material at this stage in our other businesses and other geographies. Although I'll hold fire on that until we see a bit more data through January. But for the moment, I don't think we're seeing any material effect elsewhere in the group.

[Operator]

[Operator Instructions] We'll now take our next question from Jane Sparrow from Barclays.

[Jane Linsdey Sparrow, Director]

It's just one on the copper pass-through in Windy City, just whether there's any sort of lead lag impact that we need to bear in mind there that might have an impact on the margins through the year. I appreciate your reiterating margin guidance, but just thinking about sort of H1, H2 profile from that pass-through.

[Barbara Gibbes, CFO & Director]

So Windy City pass-through any copper price increases or indeed decreases, that's why we've called it out to 5% of the 16% related to that. If you recall, the rate of copper price moved last year, it started increased to the current level by the time of April. So it will likely stay stable and that impact would reduce as we go through the rest of the year and will be minimal in the second half of the year. They trade pretty quickly, turn their inventory relatively fast so there's not a huge amount of lag either way as the amounts go up or down.

[Operator]

[Operator Instructions] And we will now take the next question from Henry Carver from Peel Hunt.

[Henry Carver, Analyst]

Just another one on that, well, on the copper price, but more broadly sort of raw materials prices, is that the only one that sort of really moves the dial in terms of obviously when the amount of copper used there, and the only one that you treat in the same way in terms of pass-through to the customers? Is there -- are there any other sort of broader raw materials costs that we should keep an eye on?

[Jonathan Thomson, CEO & Director]

No. I think the diversity of the product range within the group means that there isn't much concentration elsewhere. I mean we do have some within Seals, some Teflon and some other raw material products which have an impact in Seals. But it tends to be a variety of different products. In that environment, we're able to pass on the raw material inflation across all the group as we're continuing to do. But I think we call out copper just because it is a material constituent of our raw material input costs.

[Operator]

As there are no further questions at this time. I'd like to turn the call back to your speaker for any additional or closing remarks.

[Jonathan Thomson, CEO & Director]

Okay. Thank you. Look, we feel very positive about the long-term prospects for the group, as I said at the beginning. We've got exciting potential for organic growth. We feel our value-add model can sustain very strong margins. In that context, quarter 1 is we had a very positive performance, very positive start to the year. There's clearly lots for us still to manage, but we're feeling confident about another great year for Diploma. Thank you very much, and thanks for joining.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.