Diploma PLC & Value-Added Distribution
Former Managing Director at Diploma PLC
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Former Managing Director at Diploma PLC
Interview Transcript
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Did you have a certain minimum margin or earnings for the last five years that you’d look for in a company?
The criteria we were looking for were margins that were upper teens digits, double digits. If they were much lower than that, there was a path to get them to what was 20% operating margins. Typically, that meant that we looked at businesses that had strong gross margins. If you've got strong gross margins, you could do something with the cost base even if the operating margins were lower. If your product margins and, therefore, your gross margins are low, you haven't much room to maneuver. We looked for strong gross margins businesses, which indicates a differentiated product and service in the market against the competition. We looked for companies with a good track record of profitable cash-generative growth.
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Were these mainly distribution businesses with 20% margins or were they mainly product niche companies, product companies?
Both; it's the same thing. They were value-added distributors of niche products and services for particular market applications. The overall philosophy in all my time at Diploma was around this value-added distribution model. I’ll explain what value add is in a moment. They were all essential products; everything that was sold was always needed. Whenever you get macro-economic fluctuations, the cyclical nature of economies, these products are always needed regardless. Different parts of the business were more susceptible to economic changes than others. Still, overall as a portfolio, it could ride out those peaks and troughs better because the products were always needed. That was the model. It was essential products and services. Then the value-add piece differentiates Diploma from just buying and selling product as a distributor. It will determine what value add means depending on which part of the business you're talking about.
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