Diploma H1 2026 Earnings Call Transcript

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Provided by Quartr
May 19, 2026

Key Takeaways

  • Positive Sentiment: H1 results were very strong, with organic growth of 15%, total revenue up 17%, operating margin expanding 300 bps to 24.5%, and EPS rising 36%. Return on capital also improved to 22.7%, underscoring continued compounding performance.
  • Positive Sentiment: The company raised full-year guidance again, now expecting 12% organic growth and 6% contribution from acquisitions, up from 9% and 3% previously. Management said it still expects operating margin to hold at 25% for the year.
  • Positive Sentiment: Controls was the standout division, delivering 26% organic growth, led by strong performances from Clarendon, IS-Group, Windy City Wire, and Peerless. Management said growth is broad-based and should remain strong, even if comparisons get tougher in H2.
  • Neutral Sentiment: Acquisition activity accelerated, with 15 deals completed over the last 12 months and GBP 310 million deployed in total. Management emphasized that deal flow remains strong, but some acquisitions may be slightly dilutive to group margins in the near term.
  • Neutral Sentiment: Seals and Life Sciences remain mixed: North American Seals performed well, while International Seals showed improvement late in Q2 but remains challenged; Life Sciences posted 4% organic growth and management expects broadly mid-single-digit growth for the full year.
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Earnings Conference Call
Diploma H1 2026
00:00 / 00:00

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Operator

Welcome to the Diploma PLC half year results for six months ending 31st of March 2026. I'd now like to hand over to Johnny Thomson, CEO. Johnny, please go ahead.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Morning, everyone. Thanks for joining. Great to have you with us today. I'm here, as usual, with our CFO Wilson Ng. I'm gonna start with an overview of performance. Wilson will take you through the numbers, and then I'll come back to talk about strategy and the businesses. Questions as usual at the end. Let's get started. It's been a great first half. We've delivered a very strong performance across all our key financial metrics, building on our long-term compounding track record. We balance ambitious earnings growth, 36% in the half, with disciplined returns, 23% in the half, and together key to sustainable compounding success. The quality and diversity of our portfolio gives us exposure to attractive end markets, which support structural long-term organic growth, 15% in the half and 10% on average over the last five years.

Johnny Thomson
Johnny Thomson
CEO at Diploma

It also gives us resilience in uncertain times. We accelerate organic growth with targeted acquisitions. We've done 15 deals in the last 12 months, including seven since we updated at Q1. The pipeline remains healthy with plenty of balance sheet capacity. We're upgrading guidance again today, adding a further 6%, meaning expecting expected operating profit growth of over 30%, and we're looking forward to another year of sustainable quality compounding. Diploma has been delivering compounded double-digit revenue and earnings growth for decades and at great returns on capital. We've developed the strategy, injected more ambition, improved our execution, the compounding has accelerated. What's really exciting is that we're just getting started. The group's future is very promising. We balance ambition with discipline. Our business model is robust. Our growth potential with structural support is massive.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We focus on cash, capital allocation, and returns, and we're intensely execution-orientated. I'm really excited about our future. Our people and our culture deliver this. They make it sustainable. I'd like to thank all of my brilliant colleagues. Their skill, energy, and passion drives our success. Our differentiated culture of commerciality, accountability, and continuous improvement is thriving across the businesses, and we complement that with a connectivity and performance ownership mindset across the group. We spent a great few days together in Nashville last month, and we asked some of our business leaders how they would describe our culture, and this is what they said.

Video Narrator

[Presentation]

Johnny Thomson
Johnny Thomson
CEO at Diploma

I'll now hand over to Wilson to take you through the numbers.

Wilson Ng
Wilson Ng
CFO at Diploma

Thank you, Johnny. Good morning, everyone. Turning to H1 2026, we've delivered another very strong performance across all of our key metrics. Organic growth is our priority, so I am really pleased with the 15% growth in H1. Total revenue was up 17%, including a 3% contribution from net acquisitions. We've delivered a 300 basis point increase in operating margin to 24.5%. In turn, driving strong EPS growth of 36%, continuing our long-term track record. Strong cash conversion of 76% ahead of our typical half year performance, significant balance sheet headroom with leverage at 0.8x at half year. Return on capital increased 360 basis points to 22.7%. In line with our policy, we have grown the dividend by 5%.

Wilson Ng
Wilson Ng
CFO at Diploma

Summing all that up, I am very pleased to be reporting another very strong performance. We have built a high quality and diversified portfolio that enables us to consistently deliver strong revenue growth. In H1, we delivered 15% organic growth. Controls increased organically by 26%, driven by excellent execution in favorable market conditions. This included great performances from Clarendon, IS-Group, and Windy City Wire, and another outstanding performance from Peerless. Seals achieved organic growth of 2% despite conditions remaining challenging in International Seals market, particularly in the U.K. Life Sciences delivered a consistent performance, 4% organic growth in challenging healthcare markets. If we were to exclude Peerless, the rest of the portfolio grew organically at high single digits, well ahead of our financial model.

Wilson Ng
Wilson Ng
CFO at Diploma

Total revenue is up 17% overall after a 3% contribution from acquisitions, net of the disposals in H1 2025 and some FX headwinds. I will now move to operating profit. Following a strong performance in FY 2025, we have again improved operating margin up 300 basis points in H1 to 24.5%. As a result, operating profit grew 33% in the half to GBP 209 million. Our volume growth has, as usual, been a strong driver of margin expansion, driving significant operating leverage benefits. Our ability to pass on input cost increases and inflation through pricing is a key measure of our value add model and the solutions we bring to our customers. Over the last few years, our operating margins have expanded significantly.

Wilson Ng
Wilson Ng
CFO at Diploma

This has been driven by, A, operating leverage as our businesses grow, B, continuous performance improvement through strong discipline and execution, and C, structurally improving the portfolio through high quality acquisitions. Margins feel like they are towards the top end as we look to sustain growth by selectively reinvesting in OpEx and complementing our organic growth through acquisitions, which may not always be accretive to our high margin. Now on to EPS growth. Interest expense was a little higher year-over-year as acquisition momentum stepped up, reflecting the timing of acquisitions, including several after the period end. We expect this to step up slightly again in H2. Our all-in blended cost of debt remained consistent at 5.3%. Our effective tax rate was 25%, consistent with FY 2025.

Wilson Ng
Wilson Ng
CFO at Diploma

Earnings per share increased by 36% to GBP 1.092, continuing our long track record of strong double-digit growth. Let's turn to cash. Our capital light business model and disciplined execution allows us to drive strong and consistent cash conversion. We achieved 76% conversion, broadly consistent with last year and higher than our typical half year cash conversion, delivering free cash flow of GBP 110 million. We see inventory investment as an important tool to unlock growth when executed carefully and with discipline. In line with this, we have deployed almost GBP 60 million on selective net working capital investments, and we will continue to do more of this across the group. Acquisition outflow was GBP 92 million, reflecting the step up in deal momentum.

Wilson Ng
Wilson Ng
CFO at Diploma

Deals totaling a further GBP 170 million have taken place in the early part of H2. We paid GBP 60 million in dividends, continuing our long track record of progressive dividend growth. Taking all this together, net debt increased to GBP 344 million, with leverage maintained at 0.8x, well within policy of 2x. Reflecting deals we've done in the early part of H2, leverage would be slightly over 1x. Let me talk about those acquisitions. Acquisition momentum continued through the period. Over the last 12 months, we have done 15 deals across all three sectors. At our Q1 announcement, we mentioned eight of these acquisitions completed across two quarters with a combined investment of GBP 130 million. Since then, we have committed a further GBP 180 million on seven acquisitions.

Wilson Ng
Wilson Ng
CFO at Diploma

In total, therefore deploying GBP 310 million on the 15 acquisitions, contributing GBP 40 million of annualized operating profit, equating to an average EBIT multiple of 8x. These acquisitions support future organic growth. They expand our presence in attractive markets. CDM, FC Lane, and Synnis increase our defense exposure in the U.S., U.K., and Europe. CNC Packings brings expertise in water infrastructure. Acquisitions also extend our geographic footprint. Modal Nordic in Norway adds to our European life sciences footprint, following the recent acquisitions of ElectroMed in Ireland and Alpha Labs in the U.K. Abbey Seals marks R&G's entry into Ireland, and Selwyn supports IS-Group's interconnect solutions offering across broad markets in the U.K. Now on to returns. Delivering disciplined returns is critical to sustainable compounding results.

Wilson Ng
Wilson Ng
CFO at Diploma

Following a strong performance in FY 2025, we've delivered another step up in returns, adding 360 basis points to ROACE to achieve 22.7%. Now this is a little ahead of our optimal high teens range, reflecting the strength of our performance and the quality of the acquisitions we've made over the last seven years, more than offsetting the investments in the year. I've already mentioned some planned investment to growth in OpEx and working capital. With our strong acquisition pipeline, we also hope to bring more businesses into the group. With these investments, we would expect returns to moderate back to our optimal high teens range. Now on to our updated guidance. We are upgrading our expectations for the full year. H1 performance has been very strong. H2 is off to a great start and despite macro uncertainty, we have confidence in our outlook.

Wilson Ng
Wilson Ng
CFO at Diploma

We expect organic growth of 12% up from the 9% previously guided. The shape of organic growth across the year remains consistent with our previous guidance with some mathematical moderation of growth rate in H2 due to strong comps. Acquisitions will now contribute 6% to growth in FY 2026, up from 3% previously guided. We are maintaining operating margin for the year at 25%. Summing up, another great year. I will now hand back to Johnny.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Great. Thanks, Wilson. Reminder of our strategy. It's about building high quality, scalable businesses for sustainable organic growth. We drive organic growth in what I call our three buckets, positioning behind structurally growing end markets, expanding further in core developed geographies, and extending our product range to grow addressable market. Small concentrated businesses stepping out of their niche, taking their specialized proposition to new places, they all have fantastic opportunities to grow. This strategy drives exciting, sustainable organic growth, scale, and increased resilience. This is complemented by selective high quality acquisitions that drive future organic growth at great returns. Our acquisitions add to the quality and diversification of the portfolio, which in turn have made the group's organic growth more structural. Our value add model and our powerful decentralized culture are our key differentiators.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We naturally have to do things a bit differently while always preserving these differentiators. Building effective scale is key to the strategy, developing our businesses and Group to become better, not just bigger, and as such to sustain long-term delivery. The financial outcome of this strategy is sustainable quality compounding, ambitious earnings growth combined with disciplined returns in the good times and the bad. Let's just spend a minute on growth. Our geographic and product white space potential is huge. Have a look at the slide in the appendix. Our products and services are relevant to so many attractive end markets, our first bucket. They give us growth tailwind and resilience. A few examples of recent progress. In Defense, we already have well-established positions, particularly in air Defense in U.K. and Europe. Over the last year, we've brought in specialist resource.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We've opened a new facility in Czech Republic to service air, land, and marine supply chains in Europe. We've acquired Spring Solutions to strengthen our U.K. position, and we've just signed the acquisition of CDM, our first step into the U.S. defense market. More on that shortly. We're accelerating our growth in data centers. Windy City has done incredibly well to build a material exposure with premium cabling solutions for the high-performance environment. We're also growing our cabling business into data centers in the U.K., and we're building out new MRO opportunities too, including seals, gaskets, and hoses for cooling systems. Nuclear is still early for us, but potentially very exciting too, given the power requirements to support AI. VSP, our U.S. gasket MRO business, specializes in solutions for high risk, high regulated environments and is making great strides in supporting nuclear development in the U.S.

Johnny Thomson
Johnny Thomson
CEO at Diploma

There is much more ahead for us on that. Overall, we're making progress across all the markets on this slide and others too. We're investing behind them for the years ahead. We're looking forward to welcoming CDM to the group. Based in Philadelphia, CDM is a high-quality family-led interconnect business supplying custom connectors and cable assemblies into the U.S. defense market. We will pay $170 million once we've received regulatory approval to close the deal. The business has been growing at double-digit over many years and now has revenue of $80 million with high-teens margins. We're excited about supporting their continued success in the U.S. and their potential development in Europe too. The management team, Mark Deleo and Lori Sanchez, have done a tremendous job and will stay with us.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We're really pleased to be partnering with them, and we're excited about the future growth potential. It's a great example of our end market strategy, and it also demonstrates our progress this year with acquisitions. Acquisitions are important to the strategy. They accelerate our organic growth and together with selective disposals, they build the quality and the diversification of the portfolio. We've accelerated capital deployment with GBP 1.6 billion spent on 57 in the last seven years, significantly above our financial model. It can't be just any business at any price. Discipline is critical to sustaining our compounding represented by our 20% returns. Our discipline means that our progress with acquisitions won't always be linear, and that's fine. Over the long term, the fundamentals support a healthy deal flow. It's a fragmented market, and our pipeline is stronger than ever.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Our processes work, and we continue to be the buyer of choice. The short-term pipeline is encouraging, and I'm feeling optimistic. On to the sectors. Controls delivered another excellent performance with organic growth of 26%. Structural tailwinds across a number of attractive end markets were complemented by really good market share execution. More on this in a moment. Since the start of the year, we've welcomed six new businesses to the sector. CDM will make it seven. These deals give us great end market exposures, mainly in aerospace and defense, extending our existing capabilities and geographic footprints. Growth rates will of course moderate a touch as we lap tougher comparators, but we're confident of continued strong performance through this year and into next. Spotlighting our four largest Controls businesses for a minute, they're all doing fantastically well.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Clarendon Specialty Fasteners is growing double-digit with Aerospace and Defence tailwinds and positive new contract wins. They've recently welcomed Spring and Swift bolt-ons in these two markets as well. IS Group organic growth has been double-digit too, with exposure to Defence, Aerospace and energy markets in the U.K., Europe and increasingly the U.S. It's grown inorganically as well, with the additions of Selwyn, FC Lane and CDM. Peerless continues to deliver outstanding performance. The dynamics of the market and supply chain show no signs of changing, and we continue to win new business both in the U.S. and now focusing increasingly in Europe too. Windy City has been exceptional for many years and delivers long-term growth average of over 10%. Their business in data centers and digital antenna systems has been strong and positions them very well for the future. Overall, performance has been great.

Johnny Thomson
Johnny Thomson
CEO at Diploma

The market dynamics are favorable. With strong teams executing brilliantly, we're in great shape for the future. Seals organic growth was 2%. North America has benefited from new leadership, delivering growth of 7%. Our aftermarket business is doing well in U.S., as U.S. infrastructure investment continues. We welcomed a new business, CNC Packings, into OEM, adding water infrastructure experience. We're excited about our MRO business VSP's potential in data centers and nuclear. International Seals has been tougher, mainly in the U.K. We've been investing in management capability. The businesses are well set to make progress in the second half. We welcomed new businesses, HSA in Australia and Abbey Seals in Ireland. The short-term prospects for Seals are looking better, and I'm very positive about the long term too. We've many attractive end markets to go after.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We're expanding our fluid power product capability, and we've invested in capabilities to strengthen our execution. It's an exciting time ahead for Seals. Life Sciences delivered a consistent performance. IVD markets attract structural investment, and med tech surgical markets have returned to normal levels. The investments we've made in management capability and in our distribution footprint, together with the quality of our commercial teams, have helped drive market share gains. We've successfully onboarded the acquisitions of Alpha Laboratories and ElectroMed from late last year in the U.K. and Ireland, and we've welcomed Modal Nordic in Norway, continuing to build out our European platform. We've invested in management, in business development, and in our distribution footprint. There's lots to go for, and I'm very positive about the outlook for Life Sciences. Summarizing, it's been a great first half.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Earnings growth was 36% at a 23% return on capital, building on our long-term track record. The group's organic growth runway is massive, with promising end market structural support. We'll continue to acquire businesses that add to the quality and diversification of the group with a healthy pipeline and balance sheet capacity. We're feeling good about the year, increasing our guidance by a further 6%, expecting operating profit growth of over 30%. We're just getting started. Sustainable quality compounding. We'll take your questions.

Operator

Thank you very much.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Thank you very much.

Operator

If you'd like to ask a question, please do so by pressing star one on your keypad, or if you're on the webcast, please do so by typing it in on your, at the bottom of the webcast player. We're going to take our first question from Annelies Vermeulen from Morgan Stanley. Annelies, please go ahead.

Annelies Vermeulen
Annelies Vermeulen
Analyst at Morgan Stanley

Hi. Good morning, Johnny. Good morning, Wilson. I have two questions, please. Firstly, just thinking back to those investments into the business you outlined at your full years in November, you've touched upon it today, but could you update on the progress you've made there and what the priorities are for the remainder of the year, whether it's by service line or division? Wilson, as part of that, you mentioned some investments into working capital, could you elaborate on those? Secondly, just on Seals, we've been speaking for a while about Seals starting to recover, but International Seals in particular looked a bit softer sequentially. Do you think that recovery has been pushed to the right, or are you seeing some green shoots and signs of recovery into the second half?

Annelies Vermeulen
Annelies Vermeulen
Analyst at Morgan Stanley

You mentioned some new management in the U.K. How confident are you on the outlook for that business? Thank you.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Thanks, Annelies. Wilson's gonna answer on Seals, and then I'll come back and do the investments one.

Wilson Ng
Wilson Ng
CFO at Diploma

Okay. Thanks, Annelies. I think yes, you know, let me just take Seals in totality. In North American Seals, we've continued to see very good momentum, you know, high single digits growth, continuing from what they did in H2 last year. We're very pleased with the performance there and expect that to continue into H2. For International Seals, obviously -1%, for H1. However, we have seen sort of positive growth and a better exit run rate as we finish Q2. You know, we are seeing green shoots in businesses like DICSA in particular, and working very hard in investing in businesses like R&G. You know, we're quietly confident with regards to its prospects going into H2.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Great. Just coming back to the investment question, Annelies. Look, I don't wanna overplay it in any way. It's just more of a kind of a reminder, if you like. You know, the investments we make will be very much incremental and within the context of the financial model. It's important that we continue to make investments because this kind of compounding doesn't come about. You know, you can't make it sustainable unless you're really thinking about the future as well. If you think about the context here, you saw my track record slide. We've got, you know, decades of compounding. The last five years have accelerated. It's really our job to make sure that continues. Yes, we'll be incrementally putting a bit more behind resource, particularly growth-enabled resource, end markets resource.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We talked about that. Inventory can be quite a big driver of growth for us as well, putting in selective or new inventory types to open up and unlock growth opportunities. We'll probably be doing a little bit more of that. We just wanna make the point about, you know, acquisitions. As Wilson said, we're probably above our normal returns rates at the moment, and if we do deploy over the next year or two a bit more capital, you'll see those settling back down. I think it's more than anything else, just a reminder for us and for everybody that, you know, we do need to continue to put a little bit of money back in. The year that you're seeing this year is a bit of an exceptional year.

Johnny Thomson
Johnny Thomson
CEO at Diploma

As we go forward, our objective is to continue to compound at the rates we've been compounding over decades on the back of this year, and that just requires selective incremental investment, and that's all we're signaling.

Annelies Vermeulen
Annelies Vermeulen
Analyst at Morgan Stanley

Very clear. Thank you both.

Operator

Thank you. We'll go to our next question, which is from David Brockton from Deutsche Numis. David, please go ahead.

David Brockton
Analyst at Deutsche Numis

Thank you. Good morning. Two questions from me as well, one on cross-sell and one on life sciences. Just focusing on the first one, cross-sell. I appreciate cross-sell is sort of cherry on top for this, for the business model, but I was intrigued that you said that VSP was looking at data centers, and I wonder whether that's an opportunity that Windy City Wire can help with. Also, is there a sort of any other natural cross-sell between CDM and your other interconnect businesses? That's the first question. Then the second question in respect of life sciences, it's clearly still a tough market, although the business is delivering. Could you just touch on whether that challenge spans across IVD and med tech?

David Brockton
Analyst at Deutsche Numis

What are you seeing in terms of sort of end market, the end market backdrop and whether there's any sign of improvement? Thanks.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Yeah, thanks for that, David. I'll take the question on cross-selling, and then Wilson can pick up on life sciences. I mean, you know, you kind of took the words out my mouth in terms of cherry on the cake. You know, each of our businesses have so many fantastic opportunities for themselves, and that's what we focus our sales execution upon. But of course, we encourage and foster cross-selling as well. As the group gets bigger and we expand the portfolio, then those cross-selling opportunities come thicker and faster. I mean, VSP, you mentioned, I mean, in some of these end markets, of course, we're putting in some end market specialism, which can help foster across businesses the right kind of business development opportunities.

Johnny Thomson
Johnny Thomson
CEO at Diploma

VSP is definitely leaning on that resource expertise to help it in its data center, and it's also leaning on some of the expertise that we've got from Windy, who know data centers better than anyone else in the group. The answer to that is absolutely yes. CDM's another good example. I mean, of course, it's not even in the door yet, but as we look at it, excited, you know, it's done great double-digit growth. There's so much for us to go for developing the U.S. market, but we can also support other businesses, like Peerless, for example, in the defense space. And we can use our network in European defense to bring some of the CDM products across the Atlantic into the European market as well.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Yeah, there's lots of opportunities across the group for us to foster that cross-selling.

Wilson Ng
Wilson Ng
CFO at Diploma

Right, I'll take the life sciences question. Just to put it into context, you know, in the backdrop of very challenging healthcare markets, our life science business has managed to do 6% organic growth in the last three years and 4% in H1 this year. You know, it's about bringing good technology into the market and being, you know, having that first mover advantage. This is a very exciting year for the sector with some portfolio refreshes in the products in certain areas. We do see lots of opportunities and do expect the full year to still achieve sort of broadly mid-single digit organic growth with further margin improvements.

David Brockton
Analyst at Deutsche Numis

Thank you.

Operator

Thank you. We will take our next question from Daniel Cowan, who is from BNP Paribas. Daniel, please go ahead.

Daniel Cowan
Daniel Cowan
Analyst at BNP Paribas

Thank you. Morning, guys. Two questions, please. First one on the U.S. aerospace aftermarket. Can you give us some commentary, please, on how that's been panning out and any commentary on competition, et cetera, et cetera? Then the second question on CDM. Sounds very interesting. Can you give us an idea perhaps of when that might close in your view? Also any thoughts please on bringing margin there up into the 20s perhaps matching group average? Those are my questions, please.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Yeah, thanks, Dan. U.S. aerospace, I mean, nothing has really changed from our recent updates, if I'm honest with you. You know, I guess probably stating the blindingly obvious that the new build pipeline is still, you know, 10-15 years, whatever the number is today, significant. Of course, that then fosters, you know, a very healthy after-market repair business as well. That's hasn't really changed that much. From a competition perspective, we don't really see that having changed much either. The key to success in this environment, of course, is having the access to quality quality product to be able to service the growth within both the new build and the after-market business.

Johnny Thomson
Johnny Thomson
CEO at Diploma

And, you know, Peerless is obviously well-positioned for that, and Clarendon doing increasingly well in that too, as I said a minute ago, as well. There's not really any new news on that. The market still is, you know, vibrant. On the CDM question, yeah, look, we're delighted with it. It's, strategically, I mean, I suppose, first of all, just to make sure everyone understands what it is, it's in our kind of interconnect space, which we already know very, very well from our IS-Group businesses. CDM does a lot of servicing and cabling and harness, distribution solutions, so very much what we know. Strategically, though, very important for IS-Group as the first major platform into the U.S.

Johnny Thomson
Johnny Thomson
CEO at Diploma

We have some other business, this is the first major platform for them into the U.S. Of course, strategically, the defense sector play is very important. I would say on that, you know, from a defense perspective, historically, we've been mainly Europe, and historically, we've been predominantly air defense. CDM gives us U.S., and it also is more land than air, so it also balances us from that perspective too. We're very, very happy. We're happy with the team, fantastic team who've done a brilliant job, and they'll be staying with us. Just on the margins, yeah, I mean, I think we alluded to it earlier.

Johnny Thomson
Johnny Thomson
CEO at Diploma

When your margins are at 25%, if we were to say to you, we're only gonna buy businesses that are accretive to the group's margin, then we'd never do any deals. You know, you would expect margins in the acquisitions that we do will be slightly dilutive to the, to the group's margin, and that's okay, because we can still drive great shareholder value out of them. Of course, we'll be aiming, as we always do, to bring CDM's margins up, but the first priority for us will be great organic growth as it always is.

Daniel Cowan
Daniel Cowan
Analyst at BNP Paribas

Fantastic. Thanks.

Operator

Thank you. Our next question is from William Blunt from Rothschild & Co Redburn. William, please go ahead when you're ready.

William Blunt
William Blunt
Analyst at Rothschild & Co Redburn

Good morning, Johnny. Good morning, Wilson. Thank you for taking my questions. Could you first please maybe go into a bit more detail on the component performances within the Controls division? You saw double-digit growth from four of the businesses there, would you call out any in particular that have seen further acceleration since the March update and that has led to the upgraded guidance today? My second question is on the margin performance of Peerless Aerospace. You mentioned previously the success you are having in transitioning Peerless Aerospace's customers from the spot market onto contracts at higher margins. Have you seen the strength continue? Could you give your thoughts on whether you think this has lifted the structural floor for group margins going forward? Thanks.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Can you just repeat the first question? I wasn't sure I understood exactly what you were looking at.

William Blunt
William Blunt
Analyst at Rothschild & Co Redburn

Sure. The, obviously, the guidance has been upgraded this morning, mostly, I think, derived from better performance in the Controls division. I just wanted a bit more detail onto sort of where you've seen the most acceleration in that versus the update we had in March.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Well, the first thing I'd say is that our upgrade isn't necessarily just because of one division. Our upgrade is group-wide. You know, as Wilson alluded to, I just answered a little bit earlier in my script, we're feeling good about the forward momentum in Seals as well. It's not just about Controls. That would be the first thing. The second thing is that, you know, as I went through a bit earlier in my slides, you know, there's broad-based performance within the Controls sector. I'll come onto Peerless in a second, Windy City is doing terrifically. IS-Group have been growing organically at double-digit as well as bringing on new acquisitions, Clarendon, as well. It's been fairly broad-based across all of the businesses within Controls.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Of course, we're feeling good about it, as I said in the presentation because we've got great end market support, and we've got great teams executing on market share as well. We expect great growth levels to continue. For them, it might not stay at 26%. I mean, the laws of mathematics and lapping last year mean it might come off a little bit. But regardless of that, we're expecting great growth for them through the second half of this year and into next. You asked about margin performance in Peerless. Yeah, I won't talk about the market dynamics because I did that a second ago. If you translate what I said into the margin, we're still seeing great margins.

Johnny Thomson
Johnny Thomson
CEO at Diploma

I suppose the way to think about it is, over time, we're driving the spot MRO repair volumes. By managing down a little bit the spot prices. We'll probably see the spot side of the business margins come down a little bit, but growing our volume in that business. At the same time, we're winning new contract business at slightly higher margins. There's a bit of a balance there. I'd say that, you know, we bought Peerless on a margin of around about 35-ish%. It's obviously been a lot higher than that, 50% plus. I suppose over the long term, and don't get too excited about this in the short term, but over the long term, you kind of expect the current margin to moderate a little bit.

Johnny Thomson
Johnny Thomson
CEO at Diploma

I'm still expecting it to settle at structurally a higher level than it was when we bought it. The answer over the long term is probably somewhere in between.

William Blunt
William Blunt
Analyst at Rothschild & Co Redburn

Great. Thank you very much.

Operator

Thank you. Just as a reminder, if you'd like to ask a question, please press star one on your keypad, or if you'd like to ask a question on the webcast, please do so by typing it in the toolbar at the bottom of your screen. Our next question is from Virginia Montorsi from Bank of America. Virginia, please go ahead.

Virginia Montorsi
Virginia Montorsi
Analyst at Bank of America

Good morning. Thank you for taking my question. I just had two quick questions on A&D. The first one on defense. Have you seen any change in demand coming from the Middle East conflict? I'm thinking one of the big takeaways since the start of the conflict has been a rise in demand and a bigger focus on air defense, which is obviously quite big for you, as you mentioned. Anything that we should keep in mind as a consequence of the Middle East? On aerospace, can you help us understand a little bit more? I know you've touched on this before, but what's the balance in terms of demand strength between OE and aftermarket? Thank you very much.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Okay. On the defense side, I mean, suppose my answer to that would be, I don't think we necessarily see a Middle East conflict start or a conflict of any description start, and then a month or two later, direct demand consequences for defense. It doesn't really correlate quite as quickly as that. You know, a lot of the defense work is on kind of longer term contract basis. What I would say, however, is over a number of years, of course, you know, with the changing geopolitical framework, and I guess increased conflict around different locations, then of course, yes, you start to see defense spend as a % of GDP increasing. That, of course, then does pass through over time into defense spend.

Johnny Thomson
Johnny Thomson
CEO at Diploma

I'd say it's more of a long-term burn than a short-term reaction. Of course, you know, all of that being said, the defense business has definitely been picking up over the last year or two, that's for sure. On the aerospace, you know, as I said a minute ago, nothing has really changed from our point of view on the aerospace demand. You know, the long-term dynamics of a pipeline of new contract builds has remained pretty consistent. You know, Airbus particularly, and Boeing and others continue to deliver on that long-term pipeline. At the same time, as I said, it delivers an MRO repair market as well.

Johnny Thomson
Johnny Thomson
CEO at Diploma

I can't really say that there's been any change in that since we last updated. It remains just as buoyant as it was. As I said a second ago, the key thing is, are you in the right place, doing the right things? If you have, as we do, great products, great teams with long-term relationships, then of course, being in that supply chain, and being the quality, reliable, trustworthy partner in that supply chain is the key important factor.

Virginia Montorsi
Virginia Montorsi
Analyst at Bank of America

Thank you very much.

Operator

Thank you. We'll now move to questions from the webcast. First question is, despite your accelerating volume growth in controls leading to increased inventory levels, your cash conversion remains very strong. How should we think about cash conversion going forward?

Wilson Ng
Wilson Ng
CFO at Diploma

Thank you. I'll take this one. We have a model that states that our cash conversion is 90%, and we hold true to that. You know, we remain very disciplined with the way we manage the group and manage our growth. In line with, you know, what we've talked about previously about capital recycling, and ensuring that, you know, we're disciplined with regards to how we execute and very, very carefully add inventory, we believe that, you know, we can maintain that 90% cash conversion over the long term.

Johnny Thomson
Johnny Thomson
CEO at Diploma

If you look at the last five years, just to add to Wilson's answer, if you look at the last five years, our free cash conversion has been closer to 100%. I think what we're signaling is that just a reminder of the model at 90%, because we'd like to just put a little, probably a fraction more inventory in than we have done to support the organic growth ambitions for the future.

Operator

Thank you. We have our next question, which is from Henry Carver from Singer Capital Markets. You picked out nuclear as a growing stroke exciting space at the moment. Are you able to give any more color?

Johnny Thomson
Johnny Thomson
CEO at Diploma

Yeah. I mean, look, not a lot more than what I said in my presentation, you know, it's clearly gonna be an exciting market to have to power the technology boom, predominantly in the U.S., actually probably elsewhere as well. We have great products and services that are highly applicable into that space. While it's not necessarily our only business, VSP has such a fantastic product and solution for highly regulated, high risk environments, which they already provide in chemical and petroleum environments. They're very, very well suited for these kind of environments. We started to make some penetration into that space.

Johnny Thomson
Johnny Thomson
CEO at Diploma

It's only a handful of millions at the moment, so it's nothing to get necessarily massively excited about, but we are putting a lot more capability behind it, and I'd expect it to become a bigger part of VSP's portfolio and eventually to lead to other business opportunities for other products as well over time. It's clearly going to be a market that has some investment behind it to sustain the power requirements for technology's future, and we'll be a big part of that.

Operator

Thank you. We have no further questions at the moment. Johnny, if I can hand back to you for any closing remarks.

Johnny Thomson
Johnny Thomson
CEO at Diploma

Yeah, thanks. Look, we're in great shape. The numbers are good. There's lots for us to go for. We've got a long runway ahead of us. The mood in the camp is, you know, positive and energized, and we're very focused on delivering more sustainable quality compounding. Thank you for joining us today, and look forward to seeing you soon.

Executives
    • Johnny Thomson
      Johnny Thomson
      CEO
    • Wilson Ng
      Wilson Ng
      CFO
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