The Group has a proven and successful value-add distribution model. We hold strong positions in key niche markets with a clear route to market that provides organic growth potential and exciting acquisition opportunities in largely fragmented market environments.
Our consistent strategy will continue to evolve as the Group gets larger and more complex. However as we grow we will continue to maintain our strong foundations and to invest and develop in our Core Competencies and Organisational Capabilities.
It is a strategy based on continuity that builds on the foundations that underpin Diploma’s success.
The Group has been built on these strong foundations and our strategy will continue to build on this strong foundations.
Resilient value-add distribution model
We supply Essential Products to a range of end markets. Our Essential Solutions give sustainable high margins through added-value services and customer loyalty. Our empowered management teams embody our Essential Values.
Passionate, accountable, customer-centric people
We have a decentralised structure that encourages an entrepreneurial culture across our businesses and allows our managers the freedom to run their own businesses with the support of the Group.
Strong positions in attractive markets
We hold strong positions in key local markets with potential for greater penetration in the larger developed economies and across our product portfolio.
Successful M&A history
We carefully select value-enhancing acquisitions that accelerate the underlying growth and take us into related strategic markets and adjacent product opportunities.
Strong cash flow and robust balance sheet
We generate strong free cash flow and have a robust balance sheet that helps fund a disciplined acquisition strategy and provides healthy returns to shareholders.
Our Core Competencies help us to operationalise our proposition of Essential Products, Essential Solutions and Essential Values. As Diploma grows and becomes a broader and more complex business, we must continue to focus on and develop our Core Competencies. It is these competencies in our business model that differentiate us, protect us from disruption and deliver outstanding performance.
Supply chain management
We are a value-add distributor and our suppliers are integral to our success.Improving our demand planning and taking advantage of our increasing scale within and across our businesses will make us more competitive to our customers.
Our distribution operations will become larger and more complex and we will ensure that we have the correct processes and systems in our distribution facilities that will allow us to continue to be agile and responsive to our customers’ needs.
We will continue to provide excellent service and solutions by developing our talent, our processes and our information systems that help us deliver that service and those solutions.?
Route to market
We will use our scale to be more strategic in evaluating our addressable market and how we best take advantage of it. We will identify the more relevant markets, develop those markets through the right channels, invest where necessary and execute well-defined business to business sales.
Our businesses provide excellent customer service every day. Our financial model must fit our customers’ financial requirements and at the same time reward our businesses fairly. Pricing remains critical to ensuring that we are always competitive to our customers and sustain our margins. This is a win-win for Diploma and our customers.
We drive our Core Competencies by investing in and developing the Organisational Capability that provides the competitive advantage across our Sectors and facilitates the improvements in our business.
We have great people and as our Group grows, we need to give our colleagues the right support, development and opportunity to grow too.
We continue to invest well in technology that will support us in delivering our Core Competencies, which is key to unlocking the operational potential in our businesses.
We are strategic about our facilities in order to improve our efficiency, quality, agility and distribution footprint.
Diploma holds strong positions in key markets and products across each of our three Sectors. Structural market trends in our existing end markets help to sustain healthy levels of growth over the long term.
To complement this growth, encouragingly,the Group still has very low market share in its core markets and products. Those markets are also relatively fragmented. This means that we can grow by focusing on core developed markets and products,both organically and by acquisition, without being distracted elsewhere at higher risk.
The Group’s increasing scale can be used selectively to support long term growth without affecting the proximity and closeness of customer relationships and services.
Small to medium sized bolt-on acquisitions continue to play an important part in the development of our Group. In a fragmented market, there are many high-quality operators, and the Group has a healthy balance sheet to reinvest.This year has been a record year with four new businesses joining the Group. We will continue to pursue similar businesses that have the right strategic fit and meet our criteria.
Diploma has delivered excellent shareholder returns over many years and the Group’s businesses have significant potential to continue this track record.
The key performance indicators (“KPIs”) we use to measure the success of the business model relate to recurring income and stable underlying revenue growth, sustainable and attractive margins and organisational health. This year, underlying revenue growth, after adjusting for currency movements and acquisitions, has been a robust 5%, with the growth rate softening in the second half of the year. Reported growth has been 12% in the current year and on a five-year CAGR basis.
The agility and responsiveness of the organisation is more difficult to measure directly, but non-financial KPIs can give an indication of the organisational health. The number of working days lost to sickness has consistently been only ca.1.4% a year and over the last five years, the average length of service for all employees has been ca. 6.7 years (ca.10 years for the senior management cadre).
Acquisitions are not made just to add revenue and profit, but rather to bring into the Group successful businesses that add value to the Group from their growth potential, capable management and a good track record of profitable growth and cash generation. As part of our strategy to focus the business for strong growth, we invest in the businesses post-acquisition to build a firm foundation to allow them to move to a new level of growth and improve operating margins. These acquisitions form a critical part of our Sector growth strategies and are designed to generate a pre-tax return on investment of at least 20% and hence support our Group objectives for return on total investment.
Again we measure the success of the growth of the business with KPIs, the first of which is acquisition spend. As part of the Group’s objective of strong double-digit growth we have an acquisition capacity of up to two times net debt/EBITDA, though year-onyear spend will vary with the acquisition environment. This year, the Group invested ca. ￡78m in acquisitions, bringing the total over five years to ca. ￡190m. The acquisitions completed over the last five years have contributed ca. 25% of 2019 revenues.
The Group’s return on total investment measure is the pre-tax return on adjusted trading capital employed, excluding net cash, but including all goodwill and acquired intangible assets (“ROATCE”). This is used to measure the overall performance of the Group and very importantly, our success in creating value for shareholders through our acquisition programme. Over the last five years, ROATCE has exceeded the 20% target and this year was 23%.
As the Group continues to grow it will continue to pursue these metrics in its financial model.