TIDMDPLM
RNS Number : 2723T
Diploma PLC
16 March 2023
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16 March 2023
DIPLOMA PLC
ACQUISITION AND M&A PIPELINE UPDATE
Diploma PLC ("Diploma" or the "Company"), the international
group distributing specialised products and services, is pleased to
announce the acquisition of Tennessee Industrial Electronics, LLC
("TIE"), a market leading value-add distributor of aftermarket
parts and repair services into the fast-growing US industrial
automation end market, for ca. GBP 76 million (the
"Acquisition").
Diploma has a proven track record of accelerating organic growth
through acquisitions. In order to fund high quality acquisition
opportunities from an active near-term pipeline, while maintaining
our disciplined approach to leverage, we are today launching a
capital raise of approximately 7.5% of the current issued share
capital of the Company (the "Capital Raise"). The net proceeds of
the Capital Raise will be used to refinance the acquisition of TIE
as well as provide us with greater flexibility to execute on our
M&A pipeline to accelerate future organic growth. Full details
on the Capital Raise are set out in a separate announcement issued
by the Company today.
Strong trading performance
The Group has strong trading momentum. During the first quarter
of FY 2023 Diploma delivered very strong organic growth of 10% with
the Group's revenue diversification strategy driving continued
robust volume growth. Reported growth for Q1 was 30%, with a strong
contribution from high quality acquisitions, and operating margin
remained consistently strong at FY 2022 and FY 2021 levels. This
performance builds on very strong results for FY 2022, in which the
Group delivered organic growth of 15%, reported growth of 29%, and
adjusted operating margin of 18.9%.
The outlook for FY 2023 is positive and we have confidence in
delivering another year of strong growth for Diploma, consistent
with our full year guidance.
Strategy: building high quality, scalable businesses for
sustainable organic growth
Diploma's strategy has consistently delivered strong compounding
value creation over the long term. Over the last 15 years Diploma
has delivered double digit revenue growth, high margins, 15%
adjusted EPS CAGR and strong returns on capital. Since 2019, the
Group's refreshed strategy has accelerated strategic execution to
deliver a three-year adjusted EPS CAGR closer to 20% (2019-22).
The Group has a strong organic revenue growth track record. Our
strategy is to drive organic growth in three buckets: extending
into structurally high growth end segments; geographic penetration
of core developed markets; and extending product ranges to expand
addressable markets. All of Diploma's businesses have significant
opportunities to drive accelerated future organic growth with very
substantial growth runway in all of our three Sectors.
The Group can accelerate this organic growth by acquiring
high-quality, high-margin, value-add businesses that deliver
sustainably high returns. We are disciplined and selective in our
M&A strategy and will only consider opportunities that display
the following core characteristics:
-- differentiated value-add customer proposition generating sustainable high gross margins;
-- strong organic growth and scale potential;
-- capable management teams we can back.
In recent years, the Company has accelerated opportunities to
unlock value creative M&A whilst maintaining high returns. We
have invested GBP820 million over last four years on 27
acquisitions delivering an average annual growth of 15%(1) since
acquisition and FY 2023E average ROATCE(2) of 16% and growing.
The largest acquisition in this period was Windy City Wire,
acquired in October 2020. In two years under Diploma ownership the
business has doubled operating profit, significantly outperforming
its acquisition case with returns in-line with the Group ROATCE and
set to increase to more than 20% this year. We also drive on
average 20%+ year one ROATCE from a now consistent level of small
bolt-on acquisitions.
The Group is disciplined in our development of the portfolio,
through acquisitions and occasional disposals, with Group ROATCE of
17.3% at 30 September 2022, in-line with our high-teens target.
Strengthened acquisition pipeline
While maintaining our disciplined focus, in recent years we have
selectively invested in our corporate development capability to
develop a more strategic and structured approach to enlarging our
pipeline of opportunities. We take a rigorous approach to
identifying and developing potential acquisitions, aligned to our
organic growth strategy, and through this process we have mapped a
growing pipeline that so far comprises more than 2,000 identified
opportunities, of which around 700 are of interest today.
We are currently progressing a strong near-term active pipeline
of approximately 50 opportunities of which 36 are small and
mid-sized global opportunities across our three Sectors with a
combined enterprise value of ca. GBP800 million. Of this near-term
pipeline, those opportunities that proceed to a successful
transaction will be funded in part through the proceeds of the
Capital Raise (after the refinancing of TIE) alongside the
Company's existing debt facilities and cash resources. Our
acquisition approach is highly disciplined, and focused on ensuring
we bring high-quality, value-add businesses into the Group that
meet our strict financial and strategic criteria for
investment.
Acquisition of Tennessee Industrial Electronics LLC
The acquisition of TIE, which completed on 6 March 2023,
exemplifies the high-quality acquisition opportunities in our
pipeline. Based in Nashville, Tennessee, TIE is a market leading
value-add distributor of aftermarket parts and repair services into
the fast-growing US industrial automation end market, with a focus
on robotics and computer numerical control (CNC) machines. TIE
differentiates itself through its very strong aftermarket
capability; value-add proposition based on deep technical
expertise; speed to market and breadth of product offering which
result in high levels of repeat business from a large and loyal
customer base. TIE's strong and experienced management team will
remain with the business.
Industrial automation is a strategic new vertical for our
Controls Sector, with structural growth underpinned by semi-skilled
labour shortages and rising manufacturing wages, the onshoring of
US manufacturing and a growing and aging base of installed CNC
machines and robots. Industrial automation meets our key criteria
for future organic growth: an attractive, high growth end segment;
enabling further geographic penetration of our core US market; and
expanding our addressable market through product extension. We are
confident in the opportunity for TIE to accelerate growth ahead of
the market, winning market share with a differentiated proposition,
increasing its geographic penetration in the US beyond the current
customer base, and extending its end customer segments.
TIE has achieved long term organic revenue CAGR above
Diploma's(3) , with an accretive EBIT margin in 2022 of 24%(4) .
The purchase price of ca. GBP 76 million represents a multiple of
9.8x EBIT and the Acquisition is expected to deliver revenue of ca.
GBP31 million(5) . We see significant further opportunity to drive
continued growth, enhanced margins and high returns and the
business will be growth, margin and earnings enhancing in FY
2023.
Financing
The Capital Raise will enable the Group to execute the
opportunities that progress through our active acquisition pipeline
while retaining the financial discipline that underpins our growth:
maintaining a focus on a strong balance sheet with leverage levels
below 2x net debt / EBITDA. In prevailing market conditions we take
a more prudent approach to leverage and the Group's net debt /
EBITDA at the end of FY22 was 1.4x.
We are confident that the net proceeds of the Capital Raise can
be deployed against strongly value-enhancing opportunities whilst
maintaining rigorous discipline to capital allocation. Following
the acquisition of TIE, the Capital Raise is expected to be
earnings accretive in the first full year; this earnings accretion
will be further enhanced as the proceeds are deployed.
Johnny Thomson, Diploma's Chief Executive Officer commented:
"Diploma has a long track record for delivering strong revenue
growth at high margins, driving both compounding double-digit
adjusted EPS and attractive returns. Since we refreshed the
strategy in 2019 we have made excellent strategic progress,
accelerating our organic growth, bringing high quality businesses
into the Group, and building scale in our key business lines. Today
we are in a very strong position, with a differentiated customer
focused business model and significant long-term growth
opportunities.
"TIE is an excellent business in an exciting end market and has
a track record of delivering strong growth at high margins. We
welcome our new colleagues into the Group. TIE is a good example of
the quality of opportunities that we have in our pipeline.
Alongside our relentless focus on organic growth, we see
significant potential to strengthen the Group further with
disciplined acquisitions that accelerate future organic growth,
while maintaining our strong financial position.
"We are encouraged by the momentum across the Group, we are
excited about our growth potential and we are confident in
continuing to deliver on our compounding track record."
Presentation
An audio webcast for analysts and investors will be held at
17:30 (GMT) today and can be accessed via
https://brrmedia.news/diploma_plc_march . Participants wishing to
ask a question should join via the conference call facility,
details as follows:
Dial-in Number: +44 (0) 33 0551 0200 (UK / international) / +1
786 697 3501 (US)
Confirmation Code: Diploma
The audio webcast will be made available as a replay after the
event at:
https://www.diplomaplc.com/investors/financial-presentations/
For further information please contact:
Diploma +44 (0)20 7549 5700
Johnny Thomson
Chris Davies
Kellie McAvoy
Teneo +44 (0)20 7353 4200
Martin Robinson
Olivia Peters
The person responsible for releasing this announcement is John
Morrison, Company Secretary .
Diploma PLC LEI: 2138008OGI7VYG8FGR19
About Diploma
Diploma PLC is an international group supplying specialised
products and services to a wide range of end segments in our three
Sectors of Life Sciences, Seals and Controls.
Diploma's businesses are focused on supplying essential products
and services which are critical to customers' needs, providing
recurring income and stable revenue growth.
Our businesses design their individual business models, with the
support of the Group, to closely meet the requirements of their
customers, offering a blend of high-quality customer service, deep
technical support and value adding activities. By supplying
essential solutions, not just products, we build strong long-term
relationships with our customers and suppliers, which support
attractive and sustainable margins. We encourage an entrepreneurial
culture in our businesses through our decentralised management
structure. We want our managers to have the freedom to run their
own businesses, while being able to draw on the support and
resources of a larger group. These essential values ensure that
decisions are made close to the customer and that the businesses
are agile and responsive to changes in the market and the
competitive environment. The Group employs ca. 3,000 employees and
its principal operating businesses are located in the UK, Northern
Europe, North America and Australia.
Over the last fifteen years, the Group has grown adjusted
earnings per share at an average of ca. 15% p.a. through a
combination of organic growth and acquisitions. Diploma is a member
of the FTSE 250 with a market capitalisation of ca. GBP3.2bn.
Further information on Diploma PLC can be found at
www.diplomaplc.com
IMPORTANT INFORMATION
This announcement is not intended to, and does not, constitute
or form part of any offer, invitation or the solicitation of an
offer to purchase, otherwise acquire, subscribe for, sell or
otherwise dispose of, any securities, or the solicitation of any
vote or approval in any jurisdiction, pursuant to this announcement
or otherwise. Any offer, if made, will be made solely by certain
offer documentation which will contain the full terms and
conditions of any offer, including details of how it may be
accepted.
The distribution of this announcement in jurisdictions other
than the United Kingdom and the availability of any offer to
shareholders of Diploma who are not resident in the United Kingdom
may be affected by the laws of relevant jurisdictions. Therefore,
any persons who are subject to the laws of any jurisdiction other
than the United Kingdom or shareholders of Diploma who are not
resident in the United Kingdom will need to inform themselves
about, and observe, any applicable requirements.
This announcement does not contain or constitute an offer for
sale or the solicitation of an offer to purchase securities in the
United States. The securities referred to in this announcement have
not been and will not be registered under the US Securities Act of
1933, as amended (the "Securities Act") or under any securities
laws of any state or other jurisdiction of the United States and
may not be offered, sold, pledged, taken up, exercised, resold,
renounced, transferred or delivered, directly or indirectly, in or
into the United States except pursuant to an applicable exemption
from, or in a transaction not subject to, the registration
requirements of the Securities Act and in compliance with any
applicable securities laws of any state or other jurisdiction of
the United States or other jurisdiction. There will be no public
offer of the securities referred to in this announcement in the
United States.
Certain statements contained in this announcement constitute
"forward-looking statements" with respect to the financial
condition, results of operations and businesses and plans of the
Company and its subsidiaries (the "Group"). Words such as
"believes", "anticipates", "estimates", "expects", "intends",
"plans", "aims", "potential", "will", "would", "could",
"considered", "likely", "estimate" and variations of these words
and similar future or conditional expressions, are intended to
identify forward-looking statements but are not the exclusive means
of identifying such statements. These statements and forecasts
involve risk and uncertainty because they relate to events and
depend upon future circumstances that have not occurred. There are
a number of factors that could cause actual results or developments
to differ materially from those expressed or implied by these
forward-looking statements and forecasts. As a result, the Group's
actual financial condition, results of operations and business and
plans may differ materially from the plans, goals and expectations
expressed or implied by these forward-looking statements. No
representation or warranty is made as to the achievement or
reasonableness of, and no reliance should be placed on, such
forward-looking statements. No statement in this announcement is
intended to be, nor may it be construed as, a profit forecast or be
relied upon as a guide to future performance. The forward-looking
statements contained in this announcement speak only as of the date
of this announcement. The Company, its directors, affiliates and
any person acting on its or their behalf each expressly disclaim
any obligation or undertaking to update or revise publicly any
forward-looking statements, whether as a result of new information,
future events or otherwise, unless required to do so by applicable
law or regulation, the Listing Rules, the UK version of Regulation
(EU) 2017/1129 as it forms part of UK law by virtue of the European
Union (Withdrawal) Act 2018, the Disclosure Guidance and
Transparency Rules, the rules of the London Stock Exchange or the
Financial Conduct Authority.
1. Average growth from acquisition to FY 2023E
2. Return on adjusted trading capital employed (ROATCE) is
defined as the pro forma adjusted operating profit, divided by
adjusted trading capital employed, where pro forma adjusted
operating profit is adjusted operating profit adjusted for the full
year effect of acquisitions and disposals.
3. Under its previous ownership, 2014-2022
4. TIE Adjusted Revenue and adjusted EBIT increased from $22.8
million and $4.5 million respectively for the year ended 31
December 2020 to $33.6 million and $8.2 million for the year ended
31 December 2022. Adjusted Revenue and adjusted earnings before
interest and tax ("EBIT") adjusted to reflect the underlying
trading performance of TIE.
5. Revenue and EBIT figures represent FY2023 estimate
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END
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