Consistently delivering value

Diploma PLC Annual Review 2019 Consistent and sustainable shareholder value creation

Life Sciences See pages 12–15 Seals See pages 16–19 Controls See pages 20–23

Contents IFC Diploma Model 01 Financial Highlights 02 Group at a Glance 04 Chairman’s Statement 06 Chief Executive’s Review 08 Strategy 10 Strategic Priorities and KPIs 12 Sector Reviews 24 Finance Review 26 Board of Directors 28 Five Year Record 29 Financial Calendar, Shareholder Information and Advisors Our purpose is to Essential Products consistently deliver value, empowering our people to service our customers and reward our stakeholders every day Value-add distribution Diploma’s strong and successful model distribution business model is developed around the proposition of Essential Products, Essential Solutions and Essential Values. The Essential Products that are distributed are critical to customers’ needs. The Essential Core Competencies Solutions – deep technical support in Life Sciences, responsive customer lue-ad service in Seals and value-add servicing Va d in Controls – differentiate the Group from its competitors and drive customer loyalty. The Essential Values focus on empowering our employees, who are best placed to understand and Supply chain deliver to their customers’ needs Product management

The Group’s value-add distribution model is built on strong foundations and supported by its Core Competencies and Organisational Capability

The Group will grow by focusing on its core developed markets and products, both organically and by acquisition. This strategy will continue to deliver Organisational Capability strong and consistent financial returns for shareholders

Talent Essential Solutions Essential Values

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 End Markets lue-ad Va d

Supply chain Operational Route to Commercial management excellence market discipline

V alue-add

Technology Facility Diploma PLC Annual Review 2019 01

Financial Highlights Year ended 30 September 2019

Strong double-digit growth in revenues and earnings

Revenue Statutory operating profit Statutory profit before tax £544.7m £84.1m £83.5m 2018: £485.1m 2018: £73.2m 2018: £72.7m +12% +15% +15%

Adjusted operating profit1 Adjusted operating margin Adjusted profit before tax1,2 £97. 2m 17.8% £96.5m 2018: £84.9m 2018: 17.5% 2018: £84.8m +14% +30bps +14%

Free cash flow3 Acquisition spend ROATCE £56.5m £78.3m 22.9% 2018: £60.5m 2018: £20.4m 2018: 24.5%

2019 2018 pence pence Adjusted earnings per share1,2 64.3 +14% 56.4 Basic earnings per share 54.7 +15% 47.5 Total dividend per share 29.0 +14% 25.5 Free cash flow per share3 49.9 -7% 53.5

1 Before acquisition related charges and Chief Executive Officer transition costs in 2018. 2 Before fair value remeasurements. 3 Before cash payments on acquisitions and dividends.

Diploma PLC uses alternative performance measures as key financial indicators to assess the underlying performance of the Group. These include adjusted operating profit, adjusted profit before tax, adjusted earnings per share, free cash flow, trading capital employed and return on adjusted trading capital employed (“ROATCE”). All references in this Annual Review to “underlying” revenues or operating profits refer to reported results on a constant currency basis and before any contribution from acquired or disposed businesses. The narrative in the Annual Review is based on these alternative measures and an explanation is set out in notes 2 and 3 to the consolidated financial statements in the Annual Report & Accounts. Diploma PLC 02 Annual Review 2019

Group at a Glance We focus on supplying essential products and services across a range of specialised industry Well diversified Sectors by geography and business area

Life Sciences Seals

The Life Sciences Sector Group revenue Employees The Seals Sector businesses businesses supply a range of supply a range of seals, gaskets, consumables, instrumentation 437 filters, cylinders, components and related services to the and kits used in heavy mobile healthcare and environmental machinery and specialised industries. 27% industrial equipment. Healthcare (85% of revenue): clinical North American Seals (61% of revenue): diagnostic instrumentation, consumables Aftermarket: next-day delivery of seals, and services supplied to hospital pathology sealing products and cylinder components and life sciences laboratories for the testing Primary growth drivers for the repair of heavy mobile machinery. of blood tissue and other samples. Surgical • Public and private medical devices, consumables and services healthcare spending Industrial OEM: sealing products, supplied to hospital operating rooms, GI/ custom-moulded and machined parts Endoscopy suites and clinics. • Ageing population and supplied to manufacturers of specialised increasing life expectancy industrial equipment. Environmental (15% of revenue): • Health & Safety and environmental analysers, containment MRO: high-quality gaskets and fluid sealing enclosures and continuous emissions Environmental regulation products supplied to end users with critical monitoring systems. services in high-cost failure applications.

International Seals (39% of revenue): sealing products and filters supplied outside North America to Aftermarket and Industrial OEM customers as well as to Maintenance, Repair and Overhaul (“MRO”) operations. Diploma PLC Annual Review 2019 03

North American European Rest of World revenue revenue revenue (by destination) by Sector (by destination) by Sector (by destination) by Sector

Group revenue Group revenue Group revenue

40% 49% 11%

17%23% 25%24% UK US Rest of Canada Europe

Locations Locations Locations

Life Sciences Seals Controls

Controls

Group revenue Employees The Controls Sector businesses Group revenue Employees supply specialised wiring, cable, 1,007 connectors, fasteners and 601 control devices used in a range of technically demanding 40% applications. 33% Interconnect (63% of revenue): wiring, cable, harness components and cable accessories used in specialised technical Primary growth drivers applications in Aerospace, Defence, Primary growth drivers • General economic growth Motorsport, Energy, Medical, Rail and • General growth in the • Activity and spending levels Industrial. industrial economy in Heavy Construction and Specialty Fasteners (21% of revenue): • Activity and spending levels in Infrastructure specialty aerospace-quality fasteners Aerospace, Defence, Motorsport, • Growth in industrial supplied to Civil Aerospace, Motorsport, Energy, Medical and Rail Industrial and Defence markets. production • Equipment installation • Capital expansion projects at Fluid Controls (16% of revenue): and maintenance in Food & major customers temperature, pressure and fluid control Beverage and Catering products used in Food & Beverage and Catering industries. Diploma PLC 04 Annual Review 2019

Chairman’s Statement

which the Board has approved and which Adjusted operating profit increased by Our principal corporate has excellent potential to create further 14% to £97.2m (2018: £84.9m) reflecting objectives are to achieve shareholder value in the years ahead. the strong growth in revenues and an increase of 30bps in adjusted operating double-digit growth in Shortly after the year end Nigel Lingwood, margins to 17.8% (2018: 17.5%). Adjusted Group Finance Director, announced his profit before tax and adjusted EPS also adjusted EPS over the decision to retire from the Board at the close increased by 14% to £96.5m (2018: £84.8m) of the next financial year. Nigel joined the and 64.3p (2018: 56.4p), respectively. business cycle; generate Group in 2001 and has played a significant TSR growth in the upper role in pursuing the current strategy that On a statutory basis, the Group’s operating over the past 18 years has delivered double- profit was 15% ahead of last year at £84.1m quartile of the FTSE 250; digit growth in earnings and dividends. This (2018: £73.2m) after £13.1m (2018: £9.6m) has led to a growth in market capitalisation of acquisition related charges, largely and deliver progressive from £60m to over £1.9bn today. We look comprising amortisation of acquired forward to working with Nigel during his intangible assets. Last year’s statutory dividend growth final year with the Group, before wishing operating profit included one-off charges him a long and restful retirement. of £2.1m with respect to the previous targeting two times CEO transition process. Statutory profit dividend cover. Results before tax increased by 15% to £83.5m Group revenues increased in 2019 by 12% (2018: £72.7m) and statutory EPS was 15% to £544.7m (2018: £485.1m), benefiting up on last year at 54.7p (2018: 47.5p). Diploma has delivered another strong from both a strong 5% contribution from financial performance in 2019. The Group acquisitions and a currency tailwind of 2% The Group’s free cash flow remained robust again achieved double-digit growth in from translating the results of the overseas at £56.5m (2018: £60.5m); last year’s free adjusted earnings per share, generated businesses, caused by the sharp depreciation cash flow included £4.0m from the sale of strong free cash flow and maintained in UK sterling in the second half of the year. a small non-core US gasket business. The a robust balance sheet, despite having outflow of cash to support working capital invested a record amount in acquiring After adjusting for the contribution from increased this year to £9.4m (2018: £5.1m) new businesses this year. The results acquisitions completed both this year and was largely driven by the investment demonstrate the resilience of the Group’s and last year, net of a small disposal required in the US Industrial OEM business, businesses and the consistent delivery last year and for the currency effects on following implementation of a new ERP against the Group’s strategy that has translation, Group revenues increased system. Capital expenditure also increased allowed Diploma to build a long track by 5% on an underlying basis. The Life this year to £10.9m (2018: £6.6m) as the record of strong financial performance Sciences and Controls businesses both investment in the new distribution facility and growth in shareholder value. delivered strong underlying revenue in the US Seals Aftermarket began to ramp growth of 7% and 9% respectively, but up and further investment was made by The Board was pleased to appoint a new the generally weaker Industrial markets the Healthcare businesses in new field Chief Executive Officer (“CEO”) early in limited the more cyclical Seals businesses equipment in support of customer contracts. the financial year. Since joining Diploma to 1% growth in underlying revenues. in February this year, Johnny Thomson has demonstrated strong and effective leadership. Johnny has also completed a thorough review of the Group’s strategy

Consistent and sustainable shareholder value creation

John Nicholas Chairman Diploma PLC Annual Review 2019 05

The Group has delivered strong Adjusted EPS growth (pence) double-digit growth in revenues 1 and earnings” +16%p.a. 64.3 56.4 49.8 41.9 38.2 36.1 34.8 33.1 27.9 18.9

1110 12 13 14 15 16 17 18 19

As indicated in last year’s Annual Report, the Governance TSR growth (TSR index 2009 = 100) heightened uncertainty in global industrial The appointment of a new CEO this year markets has led to a healthier pipeline of has provided stability in the Executive acquisition opportunities as vendors of leadership of the Group. The focus this year good quality businesses decide to exit their will be on broadening the non-Executive 1 companies, having enjoyed the benefit resource to provide further support to the +29%p.a. of relatively favourable macroeconomic leadership team and to prepare for the conditions over the previous few years. additional corporate governance compliance requirements that come into effect for the Company in the new financial year.

The Group invested a record £78.3m (2018: 1,263 £20.4m) in acquisitions this year which will The Nomination and Audit Committees provide a strong contribution to operating are now supporting the CEO in searching 1,054 for a new Group Finance Director. The 777 profits in future years. The acquisition 628 199 463 469

Remuneration Committee has updated 171

pipeline remains healthy and although 434 acquisition processes remain competitive, the Remuneration Policy in light of the 306 the Group will retain its disciplined change in leadership and this Policy will 1110 12 13 14 15 16 17 18 19 approach to bringing high-quality, value- be proposed for approval by shareholders enhancing businesses into the Group. at the AGM on 15 January 2020.

The Group’s balance sheet remains robust Employees with net debt at 30 September 2019 of The process undertaken over the past two Dividend growth (pence) £15.1m (2018: cash funds of £36.0m), after years in changing the leadership of the investing £78.3m in acquisitions and making Group has been a challenging period for distributions to shareholders of £29.8m (2018: our employees. I would like to record my £26.8m). The Group also has unutilised bank thanks to all our employees who, during this 1 facilities of ca. £54m and the Group’s strong period, have remained focused on delivering excellent service and value to our customers +14%p.a. balance sheet provides support to increase these facilities to finance further acquisition that is the driving force behind the Group’s opportunities in the next financial year. performance and the achievement of another year of strong financial results. 29.0

Dividends 25.5 The combination of strong results and free Outlook 23.0 20.0 18.2 cash flow supported by a robust balance Diploma has a strong and resilient business 17.0 15.7 model with a broad geographic spread 14.4 sheet has led the Board to recommend 12.0 an increase in the final dividend of 15% to of businesses supported by a robust 9.0 20.5p per share (2018: 17.8p). Subject to balance sheet and consistently strong 1110 12 13 14 15 16 17 18 19 shareholder approval at the Annual General free cash flow. This model has delivered Meeting (“AGM”), this dividend will be another strong financial performance paid on 22 January 2020 to shareholders in line with our expectations. on the register at 29 November 2019. 1 Ten-year compound. Despite the uncertain political and The total dividend per share for the year economic environment impacting will be 29.0p (2018: 25.5p), which represents Industrial markets, the Board remains a 14% increase on 2018, with the level of confident of further progress in the dividend cover remaining unchanged at current financial year as moderately 2.2 times on an adjusted EPS basis. lower underlying growth will be offset by a strong contribution from acquisitions. Diploma PLC 06 Annual Review 2019

Chief Executive’s Review

The acquisition of Sphere Surgical (“Sphere”) We continue to add new products into the 2019 has been in Australia has given us a good entry point Sector. Whilst market conditions in the another year of strong into the high-growth bariatrics segment and UK have created more uncertainty in our complements our current product portfolio Industrial end markets, we continue to be performance. The Group’s in BGS. In Life Sciences, underlying revenues very positive about the future prospects increased by 7%, after adjusting for currency for this Sector. In Controls, underlying reported revenues movements and the acquisition of Sphere. revenues increased by 9%, after adjusting for currency effects and acquisitions. increased by 12%, with In the Seals Sector, the NA Aftermarket currency movements businesses had another strong year as Acquisitions we grew market share through our high- Diploma has a strong history of disciplined adding 2% and quality service offering and scale of our acquisitions. We had a very positive year for operation. We are currently developing a acquisitions with VSP Technologies, Gremtek, acquisitions contributing new leasehold facility in Louisville, Kentucky, DMR Seals and Sphere all joining the Group which will further broaden our footprint with a total spend of ca. £78m. In the US, we a further 5% to the across North America. The US Industrial have been pleased with the transition of VSP OEM markets have been challenging this Technologies into the Group and are excited revenue growth. year. We experienced implementation issues by its growth potential. VSP Technologies is with the ERP system earlier in the year, a leading supplier of high-quality gasket and On an underlying basis, after adjusting however with new leadership in place we fluid sealing products, as well as customised for acquisitions and for currency effects are confident that these difficulties have solutions, to the industrial MRO market. on translation, Group revenues increased now been resolved. VSP Technologies has VSP Technologies is built on strong, long- by 5%. Encouragingly, there was good made an encouraging contribution since standing customer and supplier relationships growth in all three Sectors. Group adjusted joining the Group in July this year and supported by value-add servicing. The operating margins improved by an excellent extends our sealing products offering to the acquisition is consistent with our strategy 30bps to 17.8%. As a result, the Group’s gasket market, supported by a high-quality, and provides an exciting opportunity adjusted earnings grew by 14% in the year. well-established customer proposition and to extend our Seals activities in North Strong cash flow generation provided management team. In September, we America. In addition, three smaller bolt-on funds to allow us to report a record year completed the acquisition of DMR Seals in acquisitions were completed in the Seals, for acquisition spend, as well as a 15% the UK, which complements our existing Controls and Life Sciences Sectors during proposed increase in the final dividend. FPE Seals business. In Seals, underlying the year – DMR Seals in the UK, Gremtek in revenues increased by 1%, after adjusting France, and Sphere Surgical in Australia. We Sector performance for currency movements and acquisitions. are very positive about the prospects for all It has been a very strong year in Life four businesses and the strategic attributes Sciences. Somagen, in Canada, extended The Controls Sector has developed well this they bring to the Group. Bolt-on acquisitions its coverage in the Canadian Provinces year. The Clarendon Specialty Fasteners remain a key part of the Group’s strategy. with its diagnostic screening product, business had great success penetrating designed to provide early detection of further into the Civil Aerospace market. colorectal cancer. This product has been The Interconnect business has been very well received in its market and is a expanding successfully in Germany and great example of innovation in response has extended its business reach with to customer need. Market share gains the acquisition of Gremtek in France. in Vantage’s Endoscopy business in Canada have also boosted growth. Another year of strong performance

Johnny Thomson Chief Executive Officer Diploma PLC Annual Review 2019 07

Management resources We continue to develop the Executive Business Model – value-add Strong management in the businesses Management Committee (“EMC”) which distribution is key to the continued success of the comprises the Executive Directors and Stable and resilient revenue growth is Group. This year we have made some Executive senior managers responsible achieved through our focus on Essential important appointments to reflect our for the major business clusters and key Products and Services funded by customers’ growing organisation: David Goode joined Group functions. The EMC meets regularly, operating model rather than capital budgets in April 2019 to lead the Controls Sector, providing the opportunity for members to and supplied across a range of specialised allowing Gustav Rober to retain his focus broaden their perspective of the Group’s industry segments. By supplying Essential leading our Corporate Development. activities, reinforce the key elements of the Solutions, not just products, we build In September, following the acquisition Group’s culture and identify best practices strong, long term relationships with our of VSP Technologies in the US, which that are transferable across the Group. customers and suppliers, which support extended the scale and opportunity of the sustainable and attractive margins. Finally, Seals businesses, Alessandro Lala, who Strategy we encourage an entrepreneurial culture in has been with the Group since 2006, was We have a consistent strategy that is our businesses through our decentralised appointed to manage the International built on the strong foundations of our management structure. These Essential Seals businesses. Jill Tennant joined the value-add distribution model. Since Values ensure that decisions are made close Group as our first Group HR Director in joining this year I have, together with the to the customer and that the businesses May 2019. In recognition of the increasing Executive team, reviewed and refreshed are agile and responsive to changes in the importance of developing the Group’s talent. the Group’s strategy based on these market and the competitive environment. strong foundations. As the Group evolves, In order to manage our succession and we will continue to strengthen the Core business growth requirements most Competencies that support that model effectively, while retaining our winning and the Organisational Capability to culture, we are committed to making execute these Core Competencies at internal appointments where possible. In scale. We will also focus our growth on the 2019, over 50% of our senior appointments exciting opportunities in core developed were internal candidates. The right blend larger markets and products. This growth of stability, internal progression and will be organic and complemented as external skill is key to the strong results normal by acquisitions. This strategy will that will lead to our future success. continue to deliver strong and consistent Acquisition growth in 2019 has also allowed financial returns for shareholders. us to bring new talent into the Group.

Business Model – value-add distribution

What we put in What we put in What we put in

Essential Essential Essential Products Solutions Values Most of the Group’s revenues Our businesses design their Within our businesses we are generated from consumable individual business models to have strong, self-standing products. Often, the products are provide solutions that closely management teams who are used in repair and maintenance meet the requirements committed to, and rewarded applications, and refurbishment of their customers. according to, the success of and upgrade programmes, their businesses. rather than supplied to original equipment manufacturers.

• Critical to • Responsive • Decentralised customers’ needs customer service model • Opex budgets • Deep technical • Customer orientated support • Range of • Accountable for end markets • Added value performance services execution

What we get out What we get out What we get out

Growth Sustainable high Empowered and resilience margins management teams Diploma PLC 08 Annual Review 2019

Strategy

Strategy Strong Foundations

The Group has a proven and The Group has been built on strong Strong positions in attractive successful value-add distribution foundations and our strategy will markets model. We hold strong positions in continue to build on this. We hold strong positions in key local markets key niche markets with a clear route with potential for greater penetration in the to market that provides organic Resilient value-add larger developed economies and across our growth potential and exciting distribution model product portfolio. acquisition opportunities in largely We supply Essential Products to a range of fragmented market environments. end markets. Our Essential Solutions give Successful M&A history sustainable high margins through added- We carefully select value-enhancing Our consistent strategy will continue value services and customer loyalty. Our acquisitions that accelerate the underlying to evolve as the Group gets larger empowered management teams embody growth and take us into related strategic and more complex. However as we our Essential Values. markets and adjacent product grow we will continue to maintain our opportunities. strong foundations and to invest in Passionate, accountable, customer- and develop our Core Competencies centric people Strong cash flow and robust and Organisational Capability. We have a decentralised structure that balance sheet encourages an entrepreneurial culture across We generate strong free cash flow and have It is a strategy based on continuity that our businesses and allows our managers the a robust balance sheet that helps fund a builds on the foundations that underpin freedom to run their own businesses with the disciplined acquisition strategy and provides Diploma’s success. support of the Group. healthy returns to shareholders.

Core Competencies End Markets lue-ad Va d

Supply chain Operational Route to Commercial Product management excellence market discipline

V alue-add

Organisational Capability

Talent Technology Facility Structure to Unlock operational Operational efficiency, encourage agility, potential through automation and performance infrastructure and management for and accountability development as improved quality, at scale. businesses scale. capability and distribution footprint. Diploma PLC Annual Review 2019 09

Core Competencies Organisational Our Core Competencies help us Value-add Capability to operationalise our proposition We will continue to provide excellent service of Essential Products, Essential and solutions by developing our talent, our We drive our Core Competencies Solutions and Essential Values. processes and our information systems that by investing in and developing the As Diploma grows and becomes a help us deliver that service and those Organisational Capability that broader and more complex business, solutions. provides the competitive advantage we must continue to focus on and across our Sectors and facilitates develop our Core Competencies. Route to market the improvements in our business. It is these competencies in our We will use our scale to be more strategic in business model that differentiate evaluating our addressable market and how Talent us, protect us from disruption and we best take advantage of it. We will identify We have great people and as our Group deliver outstanding performance. the more relevant markets, develop those grows, we need to give our colleagues the markets through the right channels, invest right support, development and opportunity Supply chain management where necessary and execute well-defined to grow too. We are a value-add distributor and our business to business sales. suppliers are integral to our success. Technology Improving our demand planning and taking Commercial discipline We continue to invest well in technology advantage of our increasing scale within and Our businesses provide excellent customer that will support us in delivering our Core across our businesses will make us more service every day. Our financial model must Competencies, which is key to unlocking competitive to our customers. fit our customers’ financial requirements the operational potential in our businesses. Operational excellence and at the same time reward our businesses fairly. Pricing remains critical to ensuring Facility Our distribution operations will become that we are always competitive to our We are strategic about our facilities in order larger and more complex and we will ensure customers and sustain our margins. This is to improve our efficiency, quality, agility and that we have the correct processes and a win-win for Diploma and our customers. distribution footprint. systems in our distribution facilities that will allow us to continue to be agile and responsive to our customers’ needs.

Focus the Business for Strong Growth Diploma holds strong positions in key markets and products across each Existing end of our three Sectors. Structural market trends in our existing end markets 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. Core 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. Product Small to medium sized bolt-on acquisitions Geographic continue to play an important part in category diversification the development of our Group. In a diversification 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 PLC 10 Annual Review 2019

Strategic Priorities and KPIs Consistent and sustainable shareholder value creation

The agility and responsiveness of the Again we measure the success of the growth Diploma has delivered organisation is more difficult to measure of the business with KPIs, the first of which excellent shareholder directly, but non-financial KPIs can is acquisition spend. As part of the Group’s give an indication of the organisational objective of strong double-digit growth we returns over many health. The number of working days lost have an acquisition capacity of up to two to sickness has consistently been only times net debt/EBITDA, though year-on- years and the Group’s ca. 1.4% a year and over the last five year spend will vary with the acquisition businesses have years, the average length of service for all environment. This year, the Group invested employees has been ca. 6.7 years (ca. 10 ca. £78m in acquisitions, bringing the total significant potential years for the senior management cadre). over five years to ca. £190m. The acquisitions completed over the last five years have to continue this track Acquisitions are not made just to add contributed ca. 25% of 2019 revenues. record. revenue and profit, but rather to bring into the Group successful businesses that The Group’s return on total investment The key performance indicators (“KPIs”) add value to the Group from their growth measure is the pre-tax return on adjusted we use to measure the success of the potential, capable management and a trading capital employed, excluding net business model relate to recurring income good track record of profitable growth and cash, but including all goodwill and acquired and stable underlying revenue growth, cash generation. As part of our strategy to intangible assets (“ROATCE”). This is used sustainable and attractive margins and focus the business for strong growth, we to measure the overall performance of organisational health. This year, underlying invest in the businesses post-acquisition to the Group and very importantly, our revenue growth, after adjusting for currency build a firm foundation to allow them to success in creating value for shareholders movements and acquisitions, has been a move to a new level of growth and improve through our acquisition programme. Over robust 5%, with the growth rate softening operating margins. These acquisitions the last five years, ROATCE has exceeded in the second half of the year. Reported form a critical part of our Sector growth the 20% target and this year was 23%. growth has been 12% in the current strategies and are designed to generate year and on a five-year CAGR basis. a pre-tax return on investment of at As the Group continues to grow it will least 20% and hence support our Group continue to pursue these metrics in its objectives for return on total investment. financial model.

Financial model

Revenue growth Adjusted operating Free cash flow conversion margin 10%+ 17%+ ca. 90%+

Net debt/EBITDA Dividend cover Return on adjusted trading capital employed <2x 2x adjusted EPS 20%+ Diploma PLC Annual Review 2019 11

Key Performance Indicators

Initiatives Key performance indicators

Revenue growth (£m) Underlying revenue GDP+ underlying +7 +7 growth (%) 544.7 485.1

revenue growth +5 451.9

We focus on essential products +12% 382.6 333.8 and services, funded by customers’ Five-year compound +5% +3 operating rather than capital Five-year average budgets, giving resilience +1 to revenues. 15 16 17 18 19 15 16 17 18 19

Attractive margins Adjusted operating Adjusted operating 18.1 17.8 17.5 17.3 margin (%) 17.2 margin (bps) +200– Our attractive operating margins Improvement in are sustained through the quality of customer service, the depth of adjusted operating 300bps 17.6% margin of acquired technical support and value-adding Five-year average activities. businesses three 15 16 17 18 19 years after acquisition.

Length of service (years) Average working 1.7 6.8 6.7 6.7 Agile and responsive 6.7 6.6

days lost to sickness 1.5

organisation 1.3 1.2 1.2 We encourage an entrepreneurial 6.7 years culture in our businesses through Five-year average 1.4% our decentralised organisation. Five-year average

15 16 17 18 19 15 16 17 18 19

Acquisition spend (£m) Revenue from Acquisitions to 20 78.3 acquisitions accelerate growth 16 (% of total) 14 12 Carefully selected, value enhancing £ 37.9m 12 acquisitions accelerate the Five-year average 37.8 underlying growth and take 32.7 15% 20.1 us into related strategic markets. 20.4 Five-year average 15 16 17 18 19 15 16 17 18 19

Strong cash flow Free cash flow (£m) Working capital 17.0 60.5 16.6 16.5 59.0 (% of revenue) 56.5 55.7 15.1 A robust balance sheet and 15.0 strong cash flow fund our growth £54.4m 40.3 strategy while providing healthy Five-year average 16% and growing dividends. Five-year average

15 16 17 18 19 15 16 17 18 19

Value creation ROATCE (%) 24.5 23.9 24.0 22.9 We aim to create value by 21.1 consistently exceeding 23% 20% ROATCE. Five-year average

15 16 17 18 19 Diploma PLC 12 Annual Review 2019

Life Sciences Complementing our existing product range

Revenue £145.8m

Free cash flow £23.2m

ROATCE 22.0% Diploma PLC Annual Review 2019 13

Highlights 2019 2018 for the year Revenue £145.8m £134.7m +8% Adjusted operating profit £ 27.5 m £23.9m +15% • Sector revenue growth of 8%; underlying growth of 7% Adjusted operating margin 18.9% 17.7 % +120bps after adjusting for currency Free cash flow £23.2m £ 17. 3 m +34% effects and a small surgical ROATCE 22.0% 19.1% +290bps acquisition in Australia completed late in the year Sector performance The IT infrastructure across the Healthcare Reported revenues of the Life Sciences businesses was also upgraded. Free cash flow • In Canada, DHG underlying Sector businesses increased by 8% to increased strongly to £23.2m (2018: £17.3m), revenues increased by 10% £145.8m (2018: £134.7m) with strong largely reflecting strong operating cash flow, revenue growth from both the DHG and which also benefited from a cash inflow from with strong consumable a1-group. Revenues benefited from a reduced working capital. and capital revenues from currency tailwind of 1% on translation of the its market-leading new results from the overseas businesses to UK Healthcare sterling. After adjusting for currency effects The DHG businesses, which account for technology products, and the acquisition of Sphere Surgicals, 85% of Life Sciences revenues, increased extending its cancer underlying revenues increased by 7%. underlying revenues by 7% after adjusting diagnostics programme in for currency effects and the small acquisition. Adjusted operating margins grew by 120bps Somagen and endoscopy to 18.9% largely reflecting strong operating In Canada, underlying revenues increased product lines in Vantage cost leverage across both the DHG and by 10% driven by new technologies in all Environmental businesses. Gross margins businesses, despite the ongoing backdrop were slightly weaker reflecting the impact of of regional consolidation of GPOs. The GPOs • In Australia and New Zealand, transactional currency pressures on the continue to restructure and amalgamate, underlying revenues increased Healthcare margins, but favourable currency leading to harmonised contracting, by 8%. Abacus dx reported hedges helped offset some volatility of the and rationalised service provision in the Canadian and Australian dollars relative to laboratory sector in Quebec, in particular. strong growth across its the US dollar and Euro during the second In response the DHG businesses continue portfolio of products. Diploma half of the year. Adjusted operating profits to seek new suppliers that develop and acquired Sphere Surgical in increased by 15% to £27.5m (2018: £23.9m). provide innovative products to the market. September, adding bariatrics The Life Sciences businesses invested £3.3m Somagen’s core Clinical Diagnostics business to the product portfolio of the (2018: £3.5m) in new capital during the year delivered an underlying increase of 10% BGS surgical products of which £2.7m (2018: £2.3m) was spent on in revenues, with sustained growth in acquiring field equipment for both new consumable and service revenues. Capital business placements in hospitals and laboratories sales decreased reflecting the impact of and for loan equipment and demonstration laboratory centralisation, particularly in • TPD underlying revenues models to support existing placements. Quebec. Demand for diagnostic testing, The increased spend on field equipment both cancer screening and companion declined 7% in Ireland as the was largely driven by the launch this year diagnostics, remained robust. Somagen business rebuilds its product of a new series of flexible endoscopes, implemented two new large Provincial portfolio and restructures its and expansion and conversion of special contracts to provide colorectal cancer biochemistry technology in Australasia, screening products and services with the commercial divisions together with the replacement of smoke stability of long term contracts. Somagen evacuation products to extend contracted continued to pursue new supplier • The Environmental businesses business. The balance of £0.6m was split recruitment programmes, resulting between furnishings for the newly renovated in new targets entering the contracting reported 9% underlying AMT/Vantage facility and service equipment phase across the Specialty Diagnostics, revenue growth with strong improvements and upgrades. Microbiology and Molecular Diagnostics revenue growth in the a1- segments of the market. CBISS business, following a good recovery in the second half for CEMS installations and associated services Diploma PLC 14 Annual Review 2019

AMT/Vantage, the combined Surgical and In Australasia, Abacus dx delivered 11% The TPD business in Ireland and the UK Endoscopy businesses in Canada, delivered underlying growth in revenues driven by reported declining underlying revenues of strong underlying growth of 10% in expansion of product offerings in the 7% attributed to its Medical and Surgical revenues, particularly driven by Vantage’s immunology market and conversion of business in Ireland as it continues to manage continued success with the introduction of special biochemistry technology. However, the transition of a number of medical and a new series of gastric endoscopes. The revenues were also impacted by the surgical suppliers who have moved from new technology in these endoscopes has continuing consolidation of testing within specialised distribution to a direct supply successfully driven current customer the Australian Clinical Diagnostics market model. The Biotech business grew 13% on an contract extensions as well as new and broader based GPOs in the fragmented underlying basis, with the Clinical business contracted business. Continued diagnostics market. BGS, the Surgical remaining largely unchanged on prior year. diversification across both Vantage’s Products business in Australasia, stabilised The business has restructured into two endoscopy division and AMT’s surgical revenues with a modest 1% underlying commercial divisions, Medical Science and specialty division offers growth in new growth after the loss of a key surgical Clinical Science, with Medical Science segments of the market as well as supplier last year. The acquisition of Sphere aligning to the Medical and Surgical markets, off-setting some of the maturing, Surgical provided access to the Bariatric and Clinical Science aligning to the IVD and traditional electrosurgical market. AMT/ Surgery market, a new segment for BGS. Biotech markets. Both divisions have focused Vantage’s discipline around portfolio life BGS also made good progress in securing on portfolio development efforts resulting in cycle management, has yielded new new specialty surgical suppliers that will new suppliers that will provide new growth in suppliers that will drive future growth in drive further growth. the future. both the GI/Endoscopy and Specialty Surgical segments of the Canadian market.

Our Life Sciences Sector will continue to increase share of specialised segments in Healthcare and Environmental in its existing geographies. We will also pursue new market opportunities in Northern Europe. Diploma PLC Annual Review 2019 15

Environmental The a1-group of Environmental businesses Delivering our strategy in Europe, which account for 15% of Life Sciences revenues, saw underlying Analysis on Top 10 Device Areas in 2024, revenues increase by 9%, with both Market Share & Sales Growth (2017-2024) businesses performing strongly in the second half of the year. 18% In Vitro Diagnostics IVD The a1-envirosciences business, based in Germany, increased underlying revenues by 16% 4% driven by expanding demand across Europe for elemental analysers and the Cardiology associated service contracts. The increasing 14% environmental awareness and in particular, Diagnostic Imaging the anticipated regulations on toxic 12% polyfluorinated compounds, found in a range of manufactured products, is creating 10% continued demand for these analysers in Opthalmics R&D and Environmental control. Health & Safety regulations also continue to increase 8% demand for customised containment General & Size of market Drug Plastic Surgery enclosures for the safe weighing of 6% Delivery hazardous materials. The business has invested in additional service personnel and Orthopedics an IT based field service management 4% system to support the larger installed base Endoscopy and capitalise on the demand from 2% customers for faster response times. Dental Diabetic Care 0% The a1-CBISS business based in the UK delivered strong underlying growth of +3.0% +4.0% +5.0% +6.0% +7.0% +8.0% +9.0% 15% in revenues against a weak prior year % Sales Growth: CAGR 2017-24 comparator. Revenue growth reflected Note: Size of Bubble = WW Sales in 2024 Source: Evaluate, September 2018 a strong recovery in order placement for CEMS and associated service, as well as growth in the gas detection product • High growth budget segments segment. With strong CEMS capital – Diagnostics, preventative, speciality surgical sales, the associated service contracts – Niche, innovative, technology based solutions provide for future revenue growth. beyond mass market

• Focus on distributor model markets

• Complementary products in core markets

• Product life cycle management

• Scaling opportunity

Potential for growth – Increase share of specialised segments of Healthcare markets in Canada, Australia and UK/Ireland – Leverage DHG product portfolio across existing businesses and extend into other medical disciplines – Pursue further Healthcare acquisition opportunities in Northern Europe, particularly Nordics – Build scale through pursuing further Healthcare acquisition opportunities in Ireland/UK – Continue to develop product portfolio and geographic reach of Environmental businesses – Optimisation of IT infrastructure across Canada and Australasia businesses to improve operational efficiency Diploma PLC 16 Annual Review 2019

Seals Extending our market sector reach

Revenue £220.6m

Free cash flow £17.7m

ROATCE 19.3% Diploma PLC Annual Review 2019 17

Highlights 2019 2018 for the year Revenue £220.6m £208.0m +6% Adjusted operating profit £38.1m £36.0m +6% • Sector revenue growth of 6%, reflecting contribution Adjusted operating margin 1 7. 3% 17. 3% – from acquisition of VSP Free cash flow £ 1 7.7m £25.9m (32%) Technologies; underlying ROATCE 19.3% 25.3 % (600bps) growth of 1% after adjusting for currency and acquisitions Sector performance The US Aftermarket businesses increased Reported revenues of the Seals Sector revenues by 2% on an underlying basis, driven • NA Aftermarket underlying businesses increased by 6% to £220.6m (2018: by improved trading in the second half of the £208.0) with the acquisitions in the second year in the Repair market, after a weak first revenues increased by 2%, half of the year of VSP Technologies and DMR half caused by an unusually high influx of driven by improved trading Seals contributing £9.3m to Sector revenues. new heavy mobile equipment in the past few conditions in the second half Underlying revenues increased by 1%, after years, which remained under the original adjusting for these acquisitions, net of a small manufacturer’s warranty. The Aftermarket of the year as large mobile disposal last year and for currency effects on business is now beginning to benefit as this machinery continued to move translation of results to UK sterling. new equipment moves out of warranty. HKX out of warranty period; HKX also experienced slightly softer markets from Adjusted operating margins remained a reduced supply of new mobile equipment revenues declined marginally unchanged at 17.3% with stronger gross in the dealer network and competition from reflecting a reduced supply margins, particularly in the NA Aftermarket excavator OEM manufacturers. of new equipment business following robust price increases and strong freight recoveries. However, these In the domestic Aftermarket, Hercules margins were largely offset by investment reported underlying revenues up 3% on the • US Industrial OEM revenues in the US Industrial OEM business necessary prior year with the Repair and Distributor significantly impacted this to resolve issues that arose on implementation segments continuing to provide growth of a new ERP system. The International Seals and opportunities. Smaller seal distributors year by combination of businesses reported adjusted operating continued to purchase from Hercules to softening US Industrial margins marginally below the prior year, avoid seal manufacturer lead times and markets and operational reflecting the impact of softer demand in minimum order quantities. Hercules also their key markets. added new products to its portfolio as well issues arising on as broadening both the scope of customers implementation of new The Sector invested £5.1m (2018: £2.0m) and equipment supported. After several ERP; underlying revenues in capital expenditure during the year years of product development, Hercules are reflecting the ramp up of investment of now making successful inroads to supply decreased by 6% on prior £3.2m in a second distribution facility seals into the heavy mobile equipment year. ERP issues now resolved for the NA Aftermarket business and a Rental sector, including namely Aerial Lifts, and new leadership team further £0.6m (2018: £0.8m) was invested Skidsteer Loaders and Front-end Loaders. in completing the implementation of New market opportunities include seal kitting appointed at end of year the new ERP system in the US Industrial services for industrial plants of OEMs and OEM business. The International Seals industrial MRO. E-commerce continued to • VSP Technologies acquired businesses invested £1.0m on beginning deliver strong year-on-year growth and an implementation project for new ERP now accounts for 34% of invoices processed in July has made solid systems in both Kubo and in FPE Seals and 28% of Hercules US revenues. A new contribution in line with and on new warehouse machinery. version of the e-commerce site has been expectations developed during the year and will be rolled Free cash flow was significantly impacted out in early 2020. This will provide greater by difficulties that arose from the ERP functionality, faster response and greatly • International Seals reported implementation this year in the US Industrial enhanced search engine optimisation. an increase in underlying OEM business and decreased by £8.2m to revenues of 4%; weaker £17.7m (2018: £25.9m). These difficulties The US$10m project to develop a second were exacerbated by the expansion of distribution facility made strong progress second half reflecting softer trade tariffs in the US during the year. during the year, with new logistic equipment European industrial markets Both issues contributed to a substantial being installed in a new 120,000 sq ft leased increase in inventories in this business facility in Louisville, Kentucky. During the necessary to help customers mitigate year ca. £0.2m of one-off costs were incurred the impact of tariffs, manage increased on this project; further one-off/dual running lead times from select suppliers and costs of ca. £2m will be incurred in the next increased on-hand stock requirements to financial year, prior to completion of the maintain service levels to customers. project in late 2020. When fully operational, this facility will comprise highly technical North American Seals warehouse automation that will allow The NA Seals businesses, which accounts for much greater access to expanded territories ca. 61% of Seals revenues, reported revenues in the US, as well as more competitive up 7% on the prior year which included a shipping logistics. strong contribution from VSP Technologies, acquired in July 2019. Underlying revenues decreased by 1%, after adjusting for this acquisition, net of a small non-core disposal last year and the weakening of UK sterling against both the US and Canadian dollar.

Diploma PLC 18 Annual Review 2019

In Canada, revenues increased by 6% The US Industrial OEM business was disrupted revenues from customers in the Automotive, in local currency terms. This outpaces significantly this year by the difficulties that Hydraulic and Aerospace sectors from dual a Canadian economy that has seen arose on implementation of the new ERP sourcing and some Industrial OEM customers some volatility over the past year, with system on 1 October 2018 and underlying were lost because of weaker service delivery market share being gained from both revenues were 6% below the prior year. caused by operational challenges that arose Repair and Industrial OEM customers. Revenues also suffered from a softening US following the ERP implementation. During the year, Canada also successfully industrial market in the second half of the leveraged the Hercules e-commerce year, caused by the disruption from increased In the second half of the year, the principal platform, which now accounts for 9% of trade tariffs and weaker global economies issues relating to the ERP implementation invoices and 5% of Canadian revenue. leading to a decline in US exports. With this were successfully resolved with a background, larger customers in particular corresponding and substantial improvement In markets outside of NA, Hercules faced continued to seek pricing concessions in in operational processes. In September, a headwinds because of the impact of exchange for both retaining and gaining new leadership team was appointed and the increased tariffs that led to a reduction additional business. In response, management business has now stabilised and is looking in cylinders manufactured in China and has also secured price reductions from its forward to resume growth by exploiting delivered to export markets. Despite this suppliers and has taken advantage of suppliers newly developed products and additional reduction in cylinders, moderate revenue who relocated production facilities outside of specialty compounds, as well as rebuilding growth of 2% was reported in Central and tariffed regions, to maintain competitiveness relationships with engineering departments South America. in the marketplace. at several large and mid-size customers.

HKX revenues declined by 3% as the business The business has a number of large key In MRO, the VSP Technologies business, faced significant equipment shortages which accounts across a range of specialised acquired in July 2019, reported a solid reduced HKX kitting opportunities as industrial applications in industries including contribution to revenues in its initial three excavator OEM manufacturers enhanced Water, Medical, Oil & Gas, Fluid Handling months as part of the Group with revenues both their capability and availability of and Food Equipment, as well as Consumer above last year on a like-for-like-basis and factory installed auxiliary hydraulics. The Products. Despite the operational difficulties, in line with our expectations. The business introduction of mandated Tier 4 mobile Water, Medical and Consumer Products continued to gain US market share growth equipment in Canada from 1 January 2019 continued to show positive gains as new in the transportation segment through its also contributed to weaker demand, after a projects and products were introduced. RideTight® programme. The demand for the strong finish for Tier 3 machines last year. However the business saw a decline in RideTight® programme and related products has also gained traction internationally. The Group has begun developing cross- selling opportunities with our existing Seals businesses and these will provide good opportunities for growth next year.

International Seals The International Seals businesses, which Our Seals Sector will develop account for ca. 39% of Seals revenues, reported the North American a 4% increase in reported and underlying revenues, with activity across European Aftermarket and Industrial Industrial OEM markets softening in the second half of the year, against a strong comparative activities by expanding into last year. During the year FPE Seals, Kubo and new regional markets and M Seals UK commenced work on implementing new ERP systems, all of which are expected to broadening product range. go live during 2020. These new systems will lead We will also build large and to substantial operating efficiencies, including cross selling and inventory management within broader businesses in key the International Seals businesses and provide a international markets. platform to extend their e-commerce activities. The FPE Seals and M Seals businesses, with their principal operations in the UK, Scandinavia and the Netherlands, together delivered underlying growth of 5% in revenues on a constant currency basis and after adjusting for the acquisition of DMR Seals in September this year.

The FPE Seals business delivered double-digit underlying growth, benefiting from the continuing improvement in the Oil & Gas market and strong growth in international sales which benefited from additional European sales resources added last year. Revenues also benefited from good growth in its core UK Aftermarket hydraulic seals and cylinder parts business, although a weaker UK construction market led to slower activity in the second half of the year.

In September 2019, FPE Seals acquired DMR Seals, a well established UK distributor of bespoke machined seals and gaskets based in Sheffield and supplying OEMs and MRO Diploma PLC Annual Review 2019 19

companies operating in a broad mix of industries. DMR Seals success has been built Delivering our strategy on deep technical knowledge, high levels of customer service and flexible machining Addressable market capabilities and complements well the products and services offered by FPE Seals.

M Seals delivered modest growth in revenue in both the Scandinavian and UK markets, although trading activity softened in the second half of the year. In Scandinavia, solid revenue growth was achieved in Sweden driven by specific customer activity, but this was largely offset by flat revenues in the 15% Danish core markets. In the UK, similarly to FPE Seals, M Seals benefited from the improvement in the Oil & Gas market, with customers expanding activities but this 40% £20bn was partly offset by a weaker Industrial OEM market. Asia Kubo, which operates in Switzerland and Americas Austria, increased underlying revenues by 1% with performance very dependent on local 45% EMEA market conditions. In Switzerland, revenues reduced modestly against a strong comparative, as customers looked to reduce inventories to meet weaker industrial production in 2019 also reflecting the impact from the appreciation in the Swiss franc, relative to the Euro. A new distribution supply agreement for a major supplier expanded both the company’s customer base and Market Growth = GDP product range and helped mitigate the weakness in some of its existing markets. In Austria, Kubo reported robust revenue growth, benefiting from a new customer contract gained in the second half of last • Structural growth opportunities year. • Further North America penetration The Kentek business, with principal operations in Finland and Russia, saw – Louisville facility: broader US Aftermarket reach revenues reduce by 1% in Euro terms with – Aftermarket scale advantages competitive trading conditions continuing in both Finland and Russia, reflecting generally tougher end markets. Revenues generated in • Focus on core developed international economies Russia, which account for ca. 65% of Kentek revenues, reduced slightly in Euro terms as • Product adjacencies open new markets the ongoing impact from international sanctions increasingly hindered trading – Gaskets (VSP Technologies) activity and led to some projects being postponed. In response, Kentek continued • Scaling opportunities to focus on sales of its own-brand filter range and also invested in a new sales – US Industrial OEM branch in the far east of Russia to support the mining and logging sectors. In Finland, Kentek revenues reduced by 4% as sales to Aftermarket customers and other distributors suffered from strong Potential for growth competition in a market hampered by a lack of growth opportunities. – Successful go-live of second distribution facility for US Aftermarket will provide significant opportunities to grow business The TotalSeal business in Australia and by accessing expanded US territories New Caledonia has core capabilities in industrial gaskets and mechanical seals – Stabilise and rebuild the Industrial OEM business and broaden used in MRO operations in complex, high geography and products through acquisition specification and arduous conditions. The – Substantial opportunities to grow VSP Technologies through new business reported double-digit growth in both Australia and New Caledonia product development, expanded activities outside South-East US against a weak comparative and benefited and through bolt-on acquisitions from an improving mining sector. The – Broaden US Industrial OEM distribution activities using new business in New Caledonia was successful in renewing its supply contract with its business development resources to accelerate acquisitions major international mining customer. – Build larger and broader businesses in International Seals through acquisition and increased cross-selling in existing businesses Diploma PLC 20 Annual Review 2019

Controls Building a broader based business

Revenue £178.3m

Free cash flow £24.7m

ROATCE 31.0% Diploma PLC Annual Review 2019 21

Highlights 2019 2018 for the year Revenue £178.3m £142.4m +25% Adjusted operating profit £31.6m £25.0m +26% • Sector revenue growth of 25%; underlying growth of 9% after Adjusted operating margin 1 7.7 % 17.6% +10bps adjusting for currency and Free cash flow £24.7m £19.8m +25% acquisitions completed both ROATCE 31.0% 29.8% +120bps this year and last year Sector performance to protective strips and sleeving into an • Interconnect delivered Reported revenues of the Controls Sector aircraft manufacturer. There was modest underlying growth of 7% with businesses increased by 25% to £178.3m fall in the UK Defence sector reflecting the (2018: £142.4m). The acquisition of absence of a large one-off order delivered strong growth in the IS-Group Gremtek in October 2018 and FS Cables last year. The Industrial sector benefited businesses more than in August 2018, contributed £24.6m or from a positive first half as customers offsetting weaker revenues 14% to Sector revenues. After adjusting built inventories ahead of Brexit; however for negligible currency movements on the UK industrial market softened in the in the CCA Group (Cablecraft revenues from translation to UK sterling second half reflecting weaker economic and FS Cables) and for these acquisitions, underlying conditions. The Energy sector remained Sector revenues increased by 9%. strong with sales particularly buoyant into offshore and subsea applications and • The Gremtek acquisition Adjusted operating margins increased by activity levels remaining robust in the North completed in October 2018 10bps to 17.7% (2018: 17.6%) largely reflecting Sea Oil markets. In Motorsport, there was adds to the Interconnect operating leverage from strong revenue solid revenue growth from an expanding growth, which more than offset the impact presence in the Formula E race series, which business a range of own- from acquired businesses that joined the offset another quiet year for development branded protective sleeving Sector at lower initial operating margins. in Formula 1 and WRC. The IS-Cabletec and cable identification Gross margins improved marginally, largely business, a supplier of high performance reflecting mix effects across the Sector braided products, also delivered solid growth products and expands the businesses. Adjusted operating profits as it regained business with a key customer. business into France increased by 26% to £31.6m (2018: £25.0m). The IS-Sommer business in Germany Capital expenditure in Controls increased to delivered 9% growth in revenues with • Clarendon increased £2.5m (2018: £1.1m) in 2019, including £0.7m particularly strong performances in underlying revenues by 21%, invested in completing the expansion and the Defence and Energy markets. The with growth driven by strong refurbishment of the IS-Sommer facility in improvement in Energy revenues was Germany. Contracts to sale and leaseback driven by an expanded territorial access demand from both existing this facility are expected to be completed and, an improved service offering to a and new Civil Aerospace in early 2020. In September 2019, £1.3m was market with short lead times on inventory customers invested on a new stand-alone facility for availability. In the Defence market, Clarendon to provide additional capacity to revenue growth was achieved from new meet the substantial growth in this business. projects for the refurbishment of Leopard • Fluid Controls revenues After a short period of refurbishment, II tanks and Howitzer (PzH 2000) tanks increased by 1% with solid Clarendon will relocate to this facility in for supply into Hungary. The Industrial growth in the refrigeration December 2019 before completing a sale and market also grew supported by a large leaseback of the facility early in 2020. Free project win for insulation and protection market, held back by a cash flow increased by 25% to £24.7m (2018: of fuel-pipes into the automotive sector. challenging UK industrial £19.8m) reflecting stronger trading and the The Medical sector reported double- market benefit from reduced working capital, after digit revenue growth and continued to the unwinding of Brexit stock built up in the benefit from technical support provided to first half of the year. manufacturers in previous years to assist them managing new European Regulations Interconnect for medical devices. Motorsport revenues The Interconnect businesses account for recovered modestly following a decline in 63% of Controls revenues and reported an revenues in the prior year when Audi and increase in revenues of 34% in UK sterling Volkswagen withdrew from the German terms. After adjusting for the acquisitions DTM series. Aerospace revenues declined of Gremtek and FS Cables and for currency in the year against a strong comparative effects, underlying revenues increased by when a new distribution agreement was 7%. Strong underlying growth in the IS- concluded and led to large initial orders. Group and Filcon, more than offset weaker demand in the UK centric CCA Group. In October 2018, IS-Group expanded its European footprint through the acquisition The IS-Group’s UK businesses reported a of Gremtek based in Paris, France. Gremtek 10% increase in revenues reflecting further is a long established and leading supplier of success achieved in broadening its customer own branded protective sleeving and cable base across the EMEA region and good identification products. Now fully integrated growth from sales in the Asia-Pacific region. into the IS-Group, Gremtek offers a broader IS-Group has been successful in the EMEA product range, whilst at the same time region by directly targeting cable harness providing a platform to sell existing IS-Group houses and developing its network of products into the French market. Gremtek’s sub-distributors. In the Aerospace sector, revenues since acquisition were in line with a strong performance was driven by sales expectations. of assembly tags for fuel pipes, in addition Diploma PLC 22 Annual Review 2019

Filcon reported a 13% increase in revenues platform with enhanced functionality Europe and Asia. These customers, along against a weak comparative, with strong providing encouraging indications of revenue with their sub-contractors, are demand from its three core markets: Military growth in the second half of the year manufacturing aircraft seating and cabin Aerospace, Space and Motorsport. In Military from both existing and new customers. interiors and Clarendon supports many of Aerospace, public spending increased in these customers by supplying product Germany following pressure to meet NATO’s FS Cables, an established and leading through its automatic inventory defence spending targets. There was strong supplier of specialist cable products, was replenishment system (Clarendon AIR). The growth in the Space sector driven by a new acquired in August 2018. The revenues were number of customers using Clarendon AIR customer acquisition and geographic broadly flat on a like-for-like basis with solid saw significant growth reflecting the expansion and in Motorsport, demand export revenues (which account for ca. 20% high-quality service and responsiveness increased due to new project wins across the of total revenues), offset by weaker revenues provided by Clarendon. existing customer base and the addition of in its core UK commercial construction new applications within Formula E. market. In Clarendon’s other major market of Motorsport, underlying revenue grew, The CCA Group comprising Cablecraft The CCA Group has recently been created to despite the number of Formula 1 races and FS Cables (acquired in August 2018) take advantage of cross-selling opportunities remaining unchanged and there being no together reported a 3% decrease in across both Cablecraft and FS Cables and to significant changes to engine regulations. underlying revenues. Cablecraft revenue provide a strong platform for future growth Revenues also benefited from demand suffered from a reduction in demand from under a single leadership team. on “supercar” development projects with the rail sector when the new five-year major automotive OEMs and from the funding cycle (Control Period 6) opened in Specialty Fasteners supply of pre-assembled and captive April 2019. This led to a combination of a The Clarendon business now accounts for fasteners and bespoke engineered solutions change to the funding process and a delay in 21% of Controls revenues and reported an to the Defence and Industrial sectors. commencement of major projects, which are increase in underlying revenues of 21%, now anticipated to ramp up in early 2020. after adjusting for currency and a small Clarendon’s US business, acquired early last The wholesale and distribution sectors were acquisition in the prior year. In a buoyant year, delivered robust growth during the year also relatively flat as activity levels in the Civil Aerospace sector, revenue growth from gaining new customers within the US wider construction sector slowed sharply in continued to be driven by both increased aircraft seating and cabin interiors sector, as the second half of the year. During the year, demand from existing customers and further well as solid revenues generated in the space Cablecraft has launched a new e-commerce penetration into new customers across and urban air mobility (“UAM”) markets.

Our Controls Sector will focus on growing revenues in core markets across Europe, develop new product opportunities and seek to expand our footprint in North America. Diploma PLC Annual Review 2019 23

Fluid Controls The Hawco Group of Fluid Controls Delivering our strategy businesses accounts for 16% of Controls revenues and supplies temperature, pressure Addressable market and fluid control products, principally to the Food & Beverage industry. Revenues increased by 1% against the prior year with growth coming from the OEM refrigeration market as tighter environmental regulations drove demand; however overall revenue growth was held back by a challenging UK industrial market.

Hawco’s revenue growth in the OEM 40% Refrigeration equipment market came from OEMs exporting into the US, supplying into the Refrigerated Transport Home Delivery market and from the ongoing development of store formats in Convenience stores and 45% Petrol forecourts. Contractor revenues were marginally up on prior year with refrigeration spares sales improving, but installation of air conditioning units reduced because of a slowdown in construction projects. Revenues to OEMs for the supply of heating and temperature control products slowed in the financial year as demand weakened and Interconnect projects were deferred. Europe Market Abbeychart revenues declined slightly during Share the year, where strong revenues from the $1.3bn 7% Coffee, Soft Drinks and Water sectors were more than offset by a weaker Vending sector. In the Vending sector, OEMs reduced production of new machines to match softer Cabling demand and operators reduced spare parts held for the Aftermarket. Good progress was Europe Market made in North America, which delivered Share growth on the prior year. Additional sales $800m 4% resource was added in the second half of the year to support future growth plans. In May 2019, Abbeychart consolidated its inventory Speciality Fasteners with Hawco’s inventory held in Bolton and relocated its operations into a new leasehold Europe Market facility in Swindon. $650m Share 8%

• Underpenetrated European market – Foothold for Interconnect in France (Gremtek) – Developing Interconnect Germany (Sommer)

• Longer term: enter US market

• Significant product adjacencies

• Scaling opportunities – Four principle business units: ISG, Fasteners, CCA, Fluid Controls Potential for growth – Grow the Interconnect business geographically within Europe and broaden the product offer to include more own branded solutions – Accelerate cross-selling opportunities in CCA Group and maximise sales and marketing channels – Specialty Fasteners will build on strong positions in Civil Aerospace and Motorsport and focus expansion within Europe and the US – Target growth from new refrigeration product in Fluid Controls and drive export business into North America Diploma PLC 24 Annual Review 2019

Finance Review

Reported and underlying results transactional effects led to slightly weaker in 2019 gross margins, despite favourable currency Reported revenues increased by 12% to hedges partly mitigating the impact from £544.7m (2018: £485.1m) and adjusted weaker Australian dollar and Canadian The Group delivered operating profit increased by 14% to £97.2m dollar spot exchange rates relative to the US (2018: £84.9m). The results benefited from dollar and Euro. In Seals, adjusted operating another year of a strong contribution from acquisitions, margins remained unchanged as much a currency tailwind and an improvement stronger gross margins from robust price in adjusted operating margins. increases to customers and stronger freight strong double-digit recoveries, were offset by increased revenue The underlying results present the investments in the US Industrial OEM growth in revenues performance of the Group on a like-for-like business to resolve the difficulties with the basis by adjusting for the contribution from ERP implementation. In Controls, adjusted and adjusted businesses acquired during the year (and operating margins improved marginally from the incremental impact from those reflecting operating leverage from stronger acquired last year) and for the impact on revenues, a small positive mix effect on gross operating profit” the translation of the results of the overseas margins, partly offset by initial margin businesses from the weakening in the UK dilution from acquired businesses. sterling exchange rate in the second half of the year, primarily against the US and Adjusted profit before tax ROATCE Canadian dollars. After adjusting for the and adjusted EPS currency tailwind and for the incremental Adjusted profit before tax increased by contribution from acquisitions (net of a 14% to £96.5m (2018: £84.8m). The interest small disposal), underlying revenues and expense this year increased to £0.7m 22.9% underlying adjusted operating profits (2018: £0.1m), including £0.4m on increased increased by 5% and 7%, respectively. borrowings to finance acquisitions, a small arrangement fee to extend the expiry of Free cash flow Adjusted operating margin the revolver facility and an increase in the The Group’s adjusted operating margin notional interest expense on the Group’s improved by 30bps this year to 17.8% (2018: pension deficit. £56.5m 17.5%) largely reflecting stronger gross margins from a combination of robust price increases Adjusted earnings per share (“EPS”) implemented earlier in the financial year, increased by 14% to 64.3p, compared with Adjusted improved focus on other gross margin support 56.4p last year and statutory EPS increased operating margin costs and tight control of operating costs. by 15% to 54.7p (2018: 47.5p).

In Life Sciences, adjusted operating margins benefited from strong operational leverage. 17.8% However, headwinds from adverse currency

Maintaining financial discipline Nigel Lingwood Group Finance Director Diploma PLC Annual Review 2019 25

Free cash flow Free cash flow represents cash available Revenue bridge – FY2019 (£m) to invest in acquisitions or return to 600 shareholders. The Group generated strong free cash flow this year of £56.5m compared +£24.4m +£26.2m with £60.5m last year which benefited from £544.7m +£9.0m +5% £4.0m received on the sale of a small 500 +5% non-core US business. The reduction in free £485.1m +2% +5% cash flow conversion to 78% (2018: 95%) of adjusted earnings reflects a combination of a larger cash outflow into working capital 400 and increased capital investment this year.

The Group’s operating cash flow increased this year by 9% to £92.3m (2018: £84.3m), but was 300 partly offset by an increase in working capital FY2018 Translational FX Acquisitions, net Underlying FY2019 outflows of £9.4m (2018: £5.1m). There was a FY2018 and FY2019 strong inflow of cash from working capital in the second half of the year as the strategic build of inventories at 31 March 2019 to meet both Brexit uncertainty and specific customer/ GBP vs G10 currency basket product requirements was successfully 1,020 unwound by the end of the year. However, the initial difficulties that arose on implementation 970 of the new ERP system in the US Industrial OEM business led to a significant build-up in 920 inventories which was necessary to ensure service levels to customers were maintained. 870 The Group’s KPI metric of working capital to revenue at 30 September 2019 increased to 820 16.5% (2018: 15.1%), reflecting the increased inventories held in the US Industrial OEM 770 business at the year end.

Acquisitions completed during 720 the year 30 Sep 15 30 Sep 16 30 Sep 17 30 Sep 18 30 Sep 19 The Group invested £77.2m on acquiring new businesses this year and paid a further £1.1m of deferred consideration for Return on adjusted trading capital Impact of Brexit businesses acquired last year. As indicated employed and capital management At an operational level, the impact on the last year, the increasing uncertainty about A key metric used to measure the overall Group’s businesses from the current the future direction of global economies profitability of the Group and its success in uncertainty over the process and timing contributed to a greater number of sellers creating value for shareholders is the return of the UK’s exit from the European Union of private businesses to take advantage of on adjusted trading capital employed is not expected to be significant in terms several years of robust financial performance (“ROATCE”). At a Group level, this is a of the Group’s overall profitability. UK based and sell their businesses. pre-tax measure that is applied against revenues account for 28% of the Group’s the fixed and working capital of the Group, overall revenues and the UK businesses, as well With a more receptive M&A market for these together with all gross intangible assets as those based in Continental Europe, are businesses the Group completed a record spend and goodwill, including goodwill previously substantially “in country” industrial suppliers of on acquisitions this year. After a lengthy written off against retained earnings. At goods with limited cross border sales activity. structured sale process, the Group completed 30 September 2019, the Group ROATCE of the acquisition of VSP Technologies in July for 22.9% (2018: 24.5%) was weakened slightly The Group’s financial results this year have initial consideration of £57.2m, net of expenses by new acquisitions this year but remained been slightly impacted by macroeconomic and cash acquired in the business. VSP comfortably ahead of our 20% benchmark. instability caused by the delayed and Technologies is a leading supplier of high- uncertain timing of the intended exit from quality gaskets and fluid sealing products and The Group continues to maintain a robust the European Union. This uncertainty has the acquisition provides an exciting opportunity balance sheet with net debt of £15.1m at contributed to a weaker UK economy and to to extend our Seals activities in North America, 30 September 2019, compared with cash funds a substantial depreciation in UK sterling, consistent with the Group’s strategy. of £36.0m last year. With undrawn facilities of particularly in the second half of the year. ca. £54m available at 30 September 2019 and This has had a negative impact on the A further three bolt-on businesses were negligible debt leverage, the Group remains Group’s operating profits, although the also acquired in the year for aggregate confident of seeking additional facilities up overall Group results this year have benefited consideration of £20.0m net of acquisition to a maximum of ca. 2 times adjusted EBITDA on the translation of the results of the expenses, and cash acquired. In October last to fund further acquisitions in the new Group’s overseas businesses into UK sterling. year Gremtek, a small Interconnect business financial year. based in Paris, France was acquired for total A prolonged disruption at the UK’s borders consideration of £6.9m and in September this The Board has a progressive dividend policy that as a result of Brexit has the potential to year both DMR Seals, based in Sheffield, UK aims to increase the dividend each year broadly impact the supply chain of the Group’s UK and Sphere Surgical, based in Melbourne, in line with the growth in adjusted EPS. For 2019, businesses. In the first half of the year the Australia were acquired for initial consideration the Board has recommended a final dividend of Group’s UK businesses extended the depth of £7.3m and £6.6m, respectively. These three 20.5p per share (2018: 17.8p) making the of inventories by ca. £2m from building businesses are good examples of Diploma bolt- proposed full year dividend 29.0p (2018: 25.5p). inventory levels of their faster moving product on acquisitions which provide each of the This represents a 14% increase in the proposed lines which was successfully unwound by Sectors an opportunity to extend into new full year dividend with dividend cover remaining 30 September 2019. The Board will continue strategically related markets by broadening unchanged at 2.2 times adjusted EPS. to monitor closely developments in the Brexit the existing product offering leading to plans, but currently has no intention to increased value to shareholders. re-build inventory levels. Diploma PLC 26 Annual Review 2019

Board of Directors

01 02 03 John Nicholas1,3 Johnny Thomson Charles Packshaw1,2,3 Chairman Chief Executive Officer Senior Independent Non‑Executive Director Appointed: Joined the Board on 1 June 2013 Appointed: Joined the Board on 25 February and appointed Chairman on 21 January 2015. 2019 as Chief Executive Officer. Appointed: Joined the Board on 1 June 2013 and appointed Senior Independent Director Skills and experience: A Chartered Certified Skills and experience: Johnny worked with on 27 February 2015. Accountant with a Masters degree in Business Compass Group PLC for nine years to the end Administration from Kingston University, of 2018, with the last three years as Group Skills and experience: Charles has over 30 London. John has a wealth of business and Finance Director and a member of the Board years of City experience, including 15 years commercial experience and spent much of of Compass Group PLC. He has also been at HSBC where he was Head of UK Advisory his early career in technology-focused Regional Managing Director of both Latin and Managing Director in HSBC’s global international manufacturing and service America and CAMEA (Central Asia, Middle banking business. Prior to that, he was Head companies involved in analytical instruments, East & Africa). of Corporate Finance at Lazard in London. fire protection and food processing. Charles has been a non-Executive Director Johnny began his career at of two listed companies and he is also a He has been Group Finance Director of Kidde PricewaterhouseCoopers LLP after which Chartered Engineer. plc (on its demerger from Williams Holdings) he joined Hilton Hotels in a senior executive and of Tate & Lyle PLC. role. Johnny has lived and worked in Europe, External appointments: Charles is Senior North America, Asia and across Latin Independent non-Executive Director of BMT External appointments: John is non- America. Group Limited, non-Executive Director at Executive Chairman of Porvair plc. Fram Farmers Limited and Chair of Prostate External appointments: None. Cancer UK.

04 05 06 Nigel Lingwood Anne Thorburn1,2,3 Andy Smith1,2,3 Group Finance Director Non-Executive Director Non-Executive Director

Appointed: Joined the Company in June Appointed: Joined the Board on Appointed: Joined the Board and appointed 2001 and appointed Group Finance Director 7 September 2015 and appointed Chair of Chairman of the Remuneration Committee in July 2001. the Audit Committee on 17 November 2015. on 9 February 2015.

Will retire from the Board before Skills and experience: Anne was Chief Skills and Experience: Andy is Managing 30 September 2020. Financial Officer of Exova Group plc and Director, Severn Trent Business Services with has many years of experience at Board level responsibility for the company’s non- Skills and experience: Prior to joining the in listed international groups. Anne was regulated businesses. He has many years of Company, Nigel was the Group Financial previously Group Finance Director at British plc Board level experience having previously Controller at Unigate PLC where he gained Polythene Industries PLC. Anne is a member served on the Boards of The Boots Company experience of working in a large multinational of the Institute of Chartered Accountants PLC as Group HR Director and Severn Trent environment and on a number of large in Scotland. PLC as Water Services Director. Andy is a corporate transactions. Nigel qualified as Mechanical Engineering graduate and has a Chartered Accountant with Price External appointments: Anne is a significant operational and HR experience. Waterhouse, London. non-Executive Director of TT Electronics plc. He has worked in the UK and overseas previously with global businesses including External appointments: None. BP, Mars and Pepsi.

External Appointments: None.

Committee membership 1 Remuneration Committee 2 Audit Committee 3 Nomination Committee Diploma PLC Annual Review 2019 27

01 02

03 04

05

06 Diploma PLC 28 Annual Review 2019

Five Year Record

2019 2018 2017 2016 2015 Year ended 30 September £m £m £m £m £m Revenue 544.7 485.1 451.9 382.6 333.8 Adjusted operating profit 97.2 84.9 78.2 65.7 60.3 Adjusted profit before tax 96.5 84.8 7 7.5 64.9 59.6

Fixed assets 29.4 24.8 23.3 24.7 24.0 Working capital 96.6 75.2 68.4 63.4 59.9 Goodwill and intangible assets 251.1 182.1 176.8 169.8 129.5 Investment – 0.7 0.7 0.7 0.7 Reported trading capital employed 37 7. 1 282.8 269.2 258.6 214.1 Net (debt)/cash funds (15.1) 36.0 22.3 10.6 3.0 Other liabilities ( 37.4) (24.5) (24.7) (31.4) (22.3) Net assets 324.6 294.3 266.8 2 37.8 194.8

Cash flow from operating activities 92.3 84.3 79.3 76.6 62.1 Free cash flow 56.5 60.5 55.7 59.0 40.3 Acquisition expenditure (78.3) (20.4) (20.1) (32.7) ( 37.8)

Pence Pence Pence Pence Pence Adjusted earnings per share 64.3 56.4 49.8 41.9 38.2 Dividends per share 29.0 25.5 23.0 20.0 18.2 Net assets per share 286.7 259.9 235.6 210.0 172.0

% % % % % Adjusted operating margin 1 7.8 17.5 17. 3 17. 2 18.1 Working capital as percentage of revenue 16.5 15.1 15.0 16.6 17.0 Return on adjusted trading capital employed (“ROATCE”) 22.9 24.5 24.0 21.1 23.9

The information above has been extracted from the audited Annual Report & Accounts of Diploma PLC and does not constitute statutory information. Diploma PLC uses alternative performance measures as key performance indicators to assess the underlying performance of the Group. These include adjusted operating profit, adjusted profit before tax, adjusted earnings per share, free cash flow, trading capital employed and ROATCE, as explained in note 2 and 3 to the consolidated financial statements in the Annual Report & Accounts. Diploma PLC Annual Review 2019 29

Financial Calendar and Shareholder Information

Announcements (provisional dates) Shareholders’ enquiries If you have any enquiry about the Company’s business or about First Quarter Statement released 15 January 2020 something affecting you as a shareholder (other than questions Annual General Meeting (2019) 15 January 2020 dealt with by Computershare Investor Services PLC) you are invited Second Quarter Statement released 25 March 2020 to contact the Group Company Secretary at the address shown Half Year Results announced 11 May 2020 below. Third Quarter Statement released 27 August 2020 Preliminary Results announced 16 November 2020 Group Company Secretary and Registered Office AJ Gallagher FCIS Annual Report posted to shareholders 4 December 2020 Solicitor Annual General Meeting (2020) 20 January 2021 12 Charterhouse Square London EC1M 6AX Dividends (provisional dates) Telephone: 020 7549 5700 Interim announced 11 May 2020 Registered in England and Wales, number 3899848. Paid 10 June 2020 Final announced 16 November 2020 Website Paid (if approved) 27 January 2021 Diploma’s website is www.diplomaplc.com Annual Report & Accounts Copies can be obtained from the Group Company Secretary at the address shown across.

Share Registrar – Computershare Investor Services PLC The Company’s Registrar is: Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Telephone: 0370 7020010

Its website for shareholder enquiries is: www.computershare.co.uk

Advisors

Investment Bankers Independent Auditor Lazard PricewaterhouseCoopers LLP 50 Stratton Street 1 Embankment Place London W1J 8LL London WC2N 6RH

Corporate Stockbrokers Solicitors Numis Securities Simmons & Simmons LLP 10 Paternoster Square CityPoint London EC4M 7LT One Ropemaker Street London EC2Y 9SS Barclays Bank PLC 1 Churchill Place Bankers London E14 5HP Barclays Bank PLC 1 Churchill Place London E14 5HP

HSBC Bank plc City Corporate Banking Centre 60 Queen Victoria Street London EC4N 4TR 12 Charterhouse Square London EC1M 6AX

T +44 (0)20 7549 5700 www.diplomaplc.com