STRATEGIC REPORT SECTOR REVIEW

Life Sciences

The Life Sciences Sector Healthcare TPD focuses on specialised laboratory The Diploma Healthcare Group (“DHG”) diagnostics and specialty medical businesses supply a operates in three principal geographies device segments, again leveraging – Canada, Australasia and Europe. In a number of common suppliers. range of consumables, Canada, DHG supplies to the ca. 600 instrumentation and public across the country as Environmental well as to private clinics and pathology The a1-group is a supplier to related services to the laboratories. Somagen Diagnostics Environmental testing laboratories Healthcare and (“Somagen”) supplies a range of and to Health & Safety engineers. The consumables and instruments used in a1-envirosciences business, based in Environmental industries. the diagnostic testing of blood, tissue Germany, supplies a range of specialised and other samples. It is also a leading environmental analysers and a range supplier to the growing cancer screening of containment enclosures for potent and the assisted reproductive powder handling. The a1-CBISS business, (“ART”) markets. AMT surgical (“AMT”) based in the UK, supplies equipment and Principal segments supplies specialised electrosurgery services for the monitoring and control equipment and consumables for use of environmental emissions, as well in operating rooms and is as a range of gas detection devices. also a portfolio of specialised surgical instruments and devices used Market drivers in minimally invasive (“MI”) surgery. The DHG businesses in Canada supply Vantage Endoscopy (“Vantage”), now into areas of Healthcare which are managed as a separate division within predominantly public sector funded. AMT, supplies endoscopes and related Private sector funding, representing consumables, therapeutic devices ca. 30% of Healthcare expenditure in and services to GI Endoscopy suites in Canada, is largely focused on areas where hospitals and private clinics. Vantage DHG do not participate, specifically 84% Healthcare is also expanding its portfolio into the dental, cosmetic and eye surgery and 16% Environmental Urology and Gynaecology surgical pharmaceuticals. The principal demand segments with rigid and flexible scopes driver for DHG in Canada is therefore the and specialised instrument sets. sustainable level of Healthcare spending funded by the Canadian Government. In Australia and New Zealand, DHG Geography expanded its operations with the The Canadian Health Act (“the Act”) 52% Canada acquisition in April 2017 of Abacus ensures universal coverage for all 28% Europe ALS, a long established supplier of insured persons for all medically 20% Australasia instrumentation and consumables necessary services provided by hospitals, to the Pathology and Life Sciences physicians and other Healthcare sectors. Abacus ALS is in the process providers. A growing, ageing and well of being combined with Diagnostic educated population demands high Customers Solutions (“DS”) to form abacus dx, a standards of delivery, helping 84% Clinical larger, broader based clinical diagnostics to ensure ongoing growing demand. 9% Utilities business supplying to both public 4% Chemical & Pharmaceutical and private laboratories. Big Green The Provinces are responsible for the 2% Life Sciences Research Surgical (“BGS”) supplies a range of delivery of the Healthcare services, 1% Other Life Sciences products to the Surgical Products but the Federal Government partially sector and shares several common controls delivery through Federal suppliers with AMT in Canada. Provincial transfer payments, which Products represent the largest source of revenues 74% Consumables In Europe, DHG operates through for the Provinces. The relative stability 17% Instrumentation Technopath (“TPD”), an and consistency in funding by each of 9% Service established supplier of products to the the Provinces, guaranteed through the Biotechnology, Clinical Laboratory and Act, ensures that the market remains Medical Device markets in Ireland and the well funded through the economic UK. Similar to the other DHG businesses, cycle and current expenditure of

Principal operations Healthcare Somagen Diagnostics Edmonton, AB, Canada AMT Surgical Kitchener, ON, Canada Vantage Endoscopy Kitchener, ON, Canada abacus dx Brisbane, QLD & Melbourne, VIC, Australia Big Green Surgical Melbourne, VIC, Australia Technopath Distribution Ballina, Co. Tipperary, Ireland

Environmental a1-CBISS Tranmere, UK a1-envirosciences Düsseldorf, Germany

16 Diploma PLC Annual Report & Accounts 2017 10.3% of GDP (11.1% including capital Canadian Healthcare expenditure1 (C$bn) % growth expenditure) places Canada in the top 20% of OECD countries. 16 159.1 68.9 2.7% 15 155.6 66.5 2.9% Over many years, Healthcare expenditure 14 152.0 63.8 3.1% has grown steadily with annual variations 13 148.2 61.1 1.9% mostly dependent on the periodic 12 145.1 60.3 3.2% additional tranches of funding provided by individual Provinces. In periods Public Private when the economy has been slower, Source: Canadian Institute for Health Information. Healthcare funding has still shown 1 Includes capital expenditure. positive growth, albeit at reduced levels.

In 2016, public Healthcare spending 1 in Canada was ca. C$160bn, with Australian Healthcare expenditure (A$bn) % growth the largest category of expenditure 16 114.6 55.8 5.4% (C$65bn) being in the hospital sector. 15 108.1 53.5 4.5% 14 104.9 49.8 5.2% The Healthcare market in Australia shares with Canada many of the same 13 100.4 46.6 3.6% attractive characteristics for specialised 12 99.3 42.6 7.8% distribution. While privately funded Public Private Healthcare is more prevalent in areas such as surgery and laboratory testing, Source: Australian Institute of Health & Welfare. public sector Healthcare funding is 1 Includes capital expenditure. still large and supported by a stable, resource based economy. As with UK Healthcare expenditure1 (£bn) % growth Canada, Australia has a large geography to be covered, low population density 15 129.4 28.2 3.1% and purchasing processes that vary by 14 125.6 27.3 5.0% State. These characteristics necessarily 13 119.4 26.2 2.5% demand a significant investment by 12 116.3 25.7 3.1% manufacturers in technical and 11 113.7 24.0 2.9% service resource which makes the specialised local distribution model Public Private a very attractive mechanism for Source: UK Health Accounts (2016 data not yet available). manufacturers to serve the local markets. 1 Excluding capital expenditure.

Since 2013, the Canadian and Australian Total current Healthcare expenditure1 as a percentage of GDP economies have come under significant pressure from the falling oil price and 2012 2013 2014 2015 2016 reduced demand for the countries’ natural resources. This tougher economic Canada 10.2% 10.1% 10.0% 10.3% 10.3% environment has resulted in greater Australia 8.7% 8.8% 9.1% 9.4% 9.6% pressure on budgets throughout the UK 8.5% 9.9% 9.8% 9.9% 9.7% Healthcare systems in both countries. In such periods, Healthcare funding is Source: OECD. tightly constrained through targeted 1 Excluding capital expenditure. controls imposed on the number of laboratory tests and operating procedures as well as more rigorous tendering and Group procurement processes for expenditure on capital equipment. Even with such pressures, however, Healthcare funding has shown expenditure saw reductions year-on-year positive growth in total Healthcare in 2010 and 2011, since when growth has expenditure of 2–3% and 4–5% resumed again at low single digit levels. respectively in Canada and Australia. The a1-group supplies to customers The principal market driver for the in the Environmental in TPD business is Healthcare funding the UK, Germany and France. The in the UK and Ireland, which totals market demand is largely driven by ca. £200bn, representing ca. 10% of Environmental and Health & Safety combined GDP. The UK accounts for regulations and growth in recent years ca. 90% of the total funding and ca. has been driven by the need to be 80% is provided by public funding and compliant with a range of EU regulations. 20% by private funding. Following the Since market demand is driven by 2009 recession, annual growth in UK regulation, this ensures reasonably Healthcare expenditure has slowed to steady demand for essential consumable low single-digit levels, compared with products and services, though customers average growth of 8% p.a. over the may defer capital expenditure during previous decade. In Ireland, Healthcare significant downturns in the economy.

Diploma PLC Annual Report & Accounts 2017 17 STRATEGIC REPORT SECTOR REVIEW

Life Sciences

Sector performance The Life Sciences businesses invested Highlights from the year £2.0m in new capital during the year Reported revenues of the Life Sciences •• Sector revenue growth of 15%; (2016: £1.9m) of which £1.6m (2016: businesses increased by 15% to £125.9m £0.9m) was spent on acquiring field underlying growth of 4% after (2016: £109.9m). The acquisition of equipment for both new placements in adjusting for currency, an Abacus ALS (“Abacus”), acquired in hospitals and laboratories and for loan acquisition and a disposal April 2017, added £7.6m or 7% to Sector equipment and demonstration models revenues, but this was offset by the to support existing placements. The •• In Canada, DHG underlying prior year disposal of the Medivators increase in spend on field equipment revenues increased by 6% with business. Currency movements, was largely driven by the launch of strong capital revenues as projects on translation of the results from a new series of flexible endoscopes, were reactivated; AMT and Vantage overseas businesses to UK sterling, together with the addition of a range contributed a further 11% to Sector of rigid endoscopes under a new combined into single Surgical revenues. After adjusting for currency, Products business supplier agreement. A further £0.3m the acquisition and the disposal, was invested, in part on the AMT/ •• In Australia, underlying revenues underlying revenues increased by 4%. Vantage facility consolidation and in increased by 4%; Abacus acquired part on the general IT infrastructure of Sector adjusted operating margins the Life Sciences businesses. Free cash in April 2017 and being integrated improved by 70bps benefiting from a flow reduced to £17.0m (2016: £19.0m), with DS to form a larger broader- combination of stronger gross margins reflecting the slightly higher working based business in Abacus and from reduced operating capital in the Healthcare businesses; costs following the consolidation of the although last year’s free cash flow •• TPD revenues broadly flat in Ireland AMT and Vantage business operations also included £2.2m received on the and the UK with new suppliers and into one facility at the beginning of the disposal of the Medivators business. products replacing suppliers moving year. Transactional currency pressures to direct supply model on the Healthcare businesses also eased Healthcare towards the end of the year, following The DHG group of Healthcare businesses, •• Environmental businesses increased a number of years when gross margins which account for 84% of Life Sciences underlying revenues by 3%, were significantly impacted by the revenues, increased underlying revenues finishing the year with strong progressive depreciation of the Canadian by 4% after adjusting for currency, and Australian dollars relative to the order the acquisition of Abacus and the US dollar and Euro. Operating margins disposal of the Medivators business. also strengthened in the Environmental businesses, with an increase in gross In Canada, underlying revenues increased margins and with improved leverage by 6% against the background of from the increased revenues. Sector continuing budget pressures throughout adjusted operating profits increased the Provincial healthcare systems, by 19% to £23.3m (2016: £19.6m). but with strong capital revenues as new technology was introduced and delayed projects were reactivated in the diagnostic laboratory sector. Revenue (£m) (compound growth over five years) Somagen’s core Clinical Diagnostics business in Canada delivered an increase of 10% in revenues, with steady growth in consumable and service revenues

%p.a. boosted by strong growth in capital +10 revenues. Demand for diagnostic 17 125.9 testing remained robust, particularly 16 109.9 with the growth of cancer screening tests and related diagnostics and capital 15 103.1 revenues increased strongly with new 14 91.4 technology introduced in the areas of 13 93.2 Allergy, Autoimmunity and Histology. 12 78.4 Capital revenues also benefited from some relaxation in the policy of regional consolidation of diagnostic laboratories Revenue in Quebec despite the continued drive for cost savings and efficiencies within £125.9m many public medical laboratories. AMT and Vantage were combined into 2017 2016 a single, more efficient Surgical and GI Revenue £125.9m £109.9m +15% specialty medical device business in Canada following the disposal of the Adjusted operating profit £23.3m £19.6m +19% Medivators business in September Adjusted operating margin 18.5% 17.8% +70bps last year. Warehousing, logistics and back office functions have been Free cash flow £17.0m £19.0m –11% integrated within AMT’s facility in ROATCE 19.7% 18.0% +170bps Kitchener, which has provided good opportunities for operational leverage

18 Diploma PLC Annual Report & Accounts 2017 from the increased scale of the combined integrated to form abacus dx, a larger Potential for growth business. In its core electrosurgery broader-based Clinical Diagnostics, business, AMT continued to face Life Science and Patient Simulation pricing pressures from the tender business, supplying to both the public Increase share of specialised and evaluation processes introduced and private pathology laboratories, segments of Healthcare by shared service organisations and and to research and educational markets in Canada, national group purchasing organisations institutions across Australasia. (“GPOs”). These pricing pressures will Australia and UK/Ireland continue to be a factor as the GPOs The TPD business in Ireland and the UK continue to consolidate in Canada. reported revenues broadly flat in Euro However, AMT was able to maintain terms, with business transacted in UK Leverage product portfolio revenues by increasing sales of sterling (ca. 40% of revenues) impacted across existing businesses specialised surgical instruments and by the weaker currency. TPD continued devices used in laparoscopic and to achieve steady growth in supplying and extend into other other MI surgical procedures. clinical chemistry and serology products medical disciplines used to control quality in Clinical Vantage, operating now as a division Diagnostics laboratories. TPD also of AMT, increased revenues in its delivered revenue growth in specialty Pursue further acquisition core GI/endoscopy product lines and medical devices used in digestive health successfully launched a new series of and rapid microbial testing products opportunities in Europe flexible endoscopes with significantly used in industrial laboratories. However, and Asia-Pacific improved light imaging performance revenues reduced in the water testing and higher reliability. Vantage also and interventional cardiology segments secured the exclusive distribution as certain suppliers moved from Continue to develop product rights for a premium range of rigid specialised distribution to a direct supply and flexible endoscopes and surgical model. TPD is introducing a number of and geographic spread of instrument sets, which give entry into new suppliers and products to replace Environmental businesses the Urology and Gynaecology segments these revenues and it is broadening its and provide further opportunities for service capability beyond diagnostic growth in the Surgical products sector. instrumentation to extend into the blood services sector. TPD has also established In Australia, the Healthcare sector in a new Surgical Products division to bring recent years has experienced similar to market the electrosurgical and smoke healthcare budget pressures to Canada, evacuation products similarly supplied by plants playing an important role in but has the added capacity of private AMT and BGS in Canada and Australia. reducing waste. The gas detection Healthcare spending to offset some sector has started to see increased of the economic constraints. Against Environmental demand from Oil & Gas customers for this background, the BGS and DS The a1-group of Environmental single-use gas detection tubes after a businesses have increased revenues businesses in Europe, which account number of years of lower activity levels. by 4% in local currency terms. BGS for 16% of Life Sciences revenues, increased revenues by 8%, with smoke saw revenues increase by 9% in evacuation programmes in existing UK sterling terms and 3% growth and new accounts continuing to be in constant currency terms. the principal driver to growth. DS also delivered modest revenue growth, with The a1-envirosciences business based strong sales of Protein Electrophoresis in Germany increased revenues by 3% consumables following a number of in Euro terms against a strong prior year capital placements during the prior year. comparative, which had benefited from a large mercury detector order. Revenue In April 2017, DHG completed the from high-end trace and elemental acquisition of Abacus, a long established analysers used in the Environmental supplier of diagnostics instrumentation and industries delivered and consumables to the Pathology and good growth, with the second half Life Sciences sectors in Australia and of the year being particularly strong New Zealand. Abacus supplies to the in the UK and the Benelux region. large private laboratories that dominate Service revenue continued to grow the Clinical Diagnostic services industry with the larger installed base and in the region as well as supplying with increasing demand from the direct to certain hospitals and to the larger customers for faster response regional laboratory service groups that times. Demand for containment support hospital testing in the various enclosures for the safe weighing of States. Abacus has particular strengths hazardous materials remains robust. in Immunology and Biochemistry testing and also is developing a The a1-CBISS business based in the UK niche specialty Patient Simulation increased revenues by 2% with continued business in the Australian market. growth in the installation of continuous emissions monitoring systems (“CEMS”) Abacus has very complementary and increased service contract revenues clinical diagnostics products to the DS from CEMS projects delivered in the last business and these two businesses 18 months. The sector remains buoyant are now in the process of being with new Energy from Waste (“EFW”)

Diploma PLC Annual Report & Accounts 2017 19 STRATEGIC REPORT SECTOR REVIEW

Seals

The Seals Sector North America Market drivers – North America The Aftermarket businesses in North In the Aftermarket businesses in North businesses supply a range America supply sealing and associated America, the principal drivers are the products to support a broad range of general GDP growth and in particular, of seals, gaskets, filters, mobile machinery in applications which activity and spending levels in the cylinders, components and include Heavy , , Heavy Construction and Infrastructure , , Material Handling sectors. In 2017, the US economy is kits used in heavy mobile (lift trucks, fork lifts and dump trucks) forecast to show annual GDP growth machinery and specialised and Refuse Collection. The products of 2.2% (2016: 1.6%) driven primarily are generally supplied on a next day by strong consumer spending and industrial equipment. delivery basis and are used in the repair growth in business investments. and maintenance of equipment after it Total US Construction spend (including has completed its initial warranty period non-residential and infrastructure spend, or term, or has been sold on the as well as residential housing activity) pre-used market. The main customers has continued to rise through 2017. Principal segments are machinery and cylinder repair shops, and rebuilders and Unit sales in the US of Construction other parts distributors. Equipment (defined as heavy mobile equipment including excavators The Industrial OEM businesses in above 14 tonnes, crawler dozers and North America supply seals, gaskets, wheeled loaders) is important as a O-rings and custom moulded and medium term indicator for Hercules’ machined parts to a range of Industrial replacement hydraulic seals activities, OEM customers. The businesses as the new equipment will move out closely with customers to select the of the dealer warranty period in the most appropriate seal , material following years. It is also a good short and manufacturer for the application, term indicator for the HKX attachment 32% North America Aftermarket provide technical support and guidance kit business. During 2016 and the 29% North America Industrial OEM during the product development process first half of 2017, the demand for new and deliver the logistics capabilities to equipment declined as the general 39% International supply from inventory to support small mobile machinery population is relatively to medium sized production runs. new and contractors continue to opt for the rental model for their equipment Geography International needs; rental fleet utilisation rates have 57% North America The International Seals businesses increased by ca. 10% year over year. 33% Europe outside North America supply a range 10% Rest of World of seals, gaskets, filters, custom In Canada, 2017 GDP growth is forecast moulded and machined parts and to increase to 3% (2016: 1.5%) as a hydraulic cylinder components to stronger economy and stable oil prices both Aftermarket and Industrial OEM are expected to lead to expanding Customers customers. The businesses also supply exports and stable domestic demand. 45% Industrial OEMs products to end users operating process 32% Heavy Construction plants within the Mining, Oil & Gas, In general, the economic conditions 18% MRO & Other Industrial Pharmaceutical, Chemical, Food and in the South and Central American 3% Dump & Refuse Trucks Energy sectors, where products are economies served by the North 2% Logging and Agriculture required to support Maintenance, Repair American Aftermarket businesses and Overhaul (“MRO”) operations. continue to be challenging. Products 38% Seals & Seal Kits Principal operations 17% O-rings 17% Cylinder & Other North America (HFPG) 11% Filters Aftermarket 11% Gaskets Hercules US Clearwater, FL, US 6% Attachment Kits Hercules Canada Barrie, ON & Montreal, QC, Canada Bulldog Tampa, FL, US HKX Monroe, WA, US Industrial OEM J Royal Winston-Salem, NC & Tallassee, AL, US; Shanghai, China RT Dygert Minneapolis, MN, Chicago, IL & Seattle, WA, US All Seals Lake Forest, CA, Denver, CO & Houston, TX, US

International FPE Seals Darlington & Aberdeen, UK; Breda, The Netherlands Kentek Helsinki, Finland; St. Petersburg, Russia; Riga, Latvia M Seals Espergaerde, Denmark; Halmstad, Sweden; Beijing, China; Gateshead & Leicester, UK Kubo Effretikon, Switzerland; Linz, Austria WCIS Perth & Brisbane, Australia; Noumea, New Caledonia

20 Diploma PLC Annual Report & Accounts 2017 For the Industrial OEM Seals businesses US construction spend (US$bn) in North America, the principal market driver is the growth rate in the general 600 industrial economy. US industrial production reached a peak at the 500 end of calendar year 2014 and then declined through 2015 and 2016. In 400 2017, the industrial economy returned to steady growth as a general rise in was supported 300 by stabilised activity within the Mining and Oil & Gas segments. 200

Market drivers – International 100 The International Seals businesses 08 09 10 11 12 13 14 15 16 operate in a range of countries and Source: Cyclast Intercast. diverse market sectors and each has its own specific market drivers. The most relevant market drivers and US construction equipment units (’000) indicators are therefore the general 60 GDP growth and Industrial sector performance for the major geographies 50 in which the businesses operate.

In the UK, economic growth is forecast 40 to remain broadly flat in 2017 at ca. 1.7% (2016: 1.8%). The weakened 30 UK sterling is providing short term benefits to exporters, but this is offset by uncertainty over the terms of any 20 future EU trade deal, which has led to 10 investment decisions being postponed 08 09 10 11 12 13 14 15 16 or deferred. The UK Construction sector, which drives the Aftermarket business, Source: Cyclast Intercast. has been steadily growing since mid- 2012, driven mostly by new housing US industrial production index work, but began to show signs of a slow-down in the second half of FY2017. 120

In the Nordic region, all countries are forecast to show positive GDP growth 110 in 2017. Average growth across the region is forecast to be ca. 2.5% (2016: 2.0%) with Sweden forecast to show 100 the strongest growth and Finland showing good recovery in 2016 and 90 2017 after several years of weakness.

In Switzerland, the economy continued 80 to be affected by the strength of the 07 08 09 10 11 12 13 14 15 16 17 Swiss Franc following its decoupling Source: US Federal Reserve (seasonally adjusted). from the Euro in 2015, making exports of Swiss Industrial products less attractive. GDP growth in principal International Seals territories However, during 2017, the Swiss Franc has weakened against the Euro, resulting Real GDP growth 2012 2013 2014 2015 2016 in an increase in Industrial activity. UK +1.3% +1.9% +3.1% +2.2% +1.8% In Russia, the impact of low oil prices Nordic region +0.5% +0.8% +1.7% +2.2% +2.0% and EU and US sanctions continues to Switzerland +1.0% +1.9% +2.5% +1.2% +1.4% hinder economic growth. However, Russia +3.7% +1.8% +0.7% –2.8% –0.2% the economy is benefiting from a Australia +3.6% +2.1% +2.8% +2.4% +2.5% stabilisation of oil prices and foreign exchange rates and lower levels of Source: IMF and Nordic Cooperation. inflation and, after having contracted by 2.8% in 2015 and 0.2% in 2016, GDP is forecast to grow by 1.8% in 2017.

In Australia, industrial activity has been spending. GDP growth is forecast adversely affected by the downturn to slow to ca. 2.2% in 2017 (2016: in the Mining sector, but the broader 2.5%), but is forecast to increase in economy continues to be driven 2018 supported by the recovery in by increased public and consumer the Mining and Oil & Gas sectors.

Diploma PLC Annual Report & Accounts 2017 21 STRATEGIC REPORT SECTOR REVIEW

Seals

Sector performance contributions from the acquired Highlights from the year businesses and currency effects, Reported revenues of the Seals underlying revenues increased by 6%. •• Sector revenue growth of 17%; businesses increased by 17% to £195.3m underlying growth of 4% (2016: £166.6m), with the acquisitions The HFPG Aftermarket businesses after adjusting for currency of PSP and Edco completed during increased revenues by 5% on a and acquisitions the year contributing £2.1m or 1% to constant currency basis, driven by a Sector revenues. Currency movements, good performance in the core Hercules •• In North America, Aftermarket on translation of the results from Aftermarket Seals business in the US underlying revenues increased by overseas businesses to UK sterling, and Canada and a strong recovery in 5% with a good performance in the contributed a further 12% to Sector the HKX attachment kit business. core Hercules business and a strong revenues. After adjusting for the acquisitions and for currency effects, recovery in the HKX business In the domestic US market, Hercules underlying revenues increased by 4%. revenues increased by 5% as utilisation •• Industrial OEM underlying revenues of heavy mobile machinery increased in North America increased by 7% Adjusted operating margins for the substantially compared with the previous Sector reduced by 60bps to 16.3% with an improving trend through year and expenditure levels in the (2016: 16.9%). Across the businesses, Construction sector showed steady the year following the US election gross margins reduced with product growth. The additional investment last •• Senior leadership team established margins under pressure from supplier year in sales and resources cost increases, but also reflecting an to manage cluster of Industrial OEM also had a positive impact on revenues increase in other margin support costs, and specific growth initiatives continued businesses in the US such as freight, discounts and stock to gain traction, including the focus adjustments. This reduction in gross on national accounts and specialty •• International Seals businesses margins was significantly mitigated increased underlying revenues distributors. E-commerce continues by a combination of tight control over to deliver strong year on year growth by 1% with performances of the operating costs and improved operating of ca. 20% p.a. in terms of both businesses very dependent on leverage through increased revenues. revenues and invoices processed and local market conditions Adjusted operating profits increased now accounts for 23% of Hercules by 13% to £31.9m (2016: £28.2m). US revenues. Hercules continues to add new products and to expand the During the year, £1.1m (2016: £1.4m) breadth of equipment supported, with of capital expenditure was invested in the new focus on Bobcat cylinders and the Seals businesses which included Aerial Lifts gaining good momentum. £0.6m to fit out new and expanded facilities in J Royal, Hercules Canada In Canada, revenues increased by and Kentek. A further £0.2m was spent 5% in local currency terms, with the on new equipment in the strengthening Construction sector Industrial OEM businesses, both in the driving growth in the repair market and US and in Europe and £0.3m was spent in good growth in the Manufacturing sector, connection with a major upgrade to the particularly in Ontario and Quebec. Revenue (£m) IT facilities in the Hercules businesses. The modest recovery in the Oil & Gas (compound growth over five years) The free cash flow generated in this and Mining sectors has had a positive Sector was £24.9m, which remained impact and sales to hydraulic component unchanged from last year with the and attachment manufacturers have additional after tax operating cash % p.a. also seen good growth. In markets flow offsetting an increase in working outside of North America, Hercules +14 capital as trading strengthened and Bulldog revenues were broadly 17 195.3 in the second half of the year. flat with limited growth in Mexico and 16 166.6 the Middle East and reduced revenues North American Seals 15 139.6 in South and Central America. The North American Seals businesses, 14 119.8 which account for 61% of Seals revenues, The HKX attachment kit business 13 106.1 reported revenues up 21% on the prior returned to growth after two years of 12 99.9 year, benefiting from the weakening significant revenue reductions, which of UK sterling against the US and had reflected the severely depressed Canadian dollars and from the small market for new excavators. Revenues Revenue bolt-on acquisition of PSP. After excluding increased by 11% with growth particularly strong in sales to Canadian customers, m driven by recovery in the Oil & Gas sector, £195.3 increased pipeline construction and strong sales of excavators ahead of new 2017 2016 emissions regulations. New attachment Revenue £195.3m £166.6m +17% kits have been developed to drive further growth as well as quick coupler kits Adjusted operating profit £31.9m £28.2m +13% with added safety features. The HKX Adjusted operating margin 16.3% 16.9% –60bps product line has also been extended into higher tonnage equipment which Free cash flow £24.9m £24.9m – has seen good momentum supporting large scale projects. ROATCE 22.8% 20.1% +270bps

22 Diploma PLC Annual Report & Accounts 2017 The HFPG Industrial OEM businesses individual businesses very dependent Potential for growth in North America (J Royal, RT Dygert on local market conditions. and All Seals) increased revenues by 9% in US dollar terms, as the improving The FPE Seals and M Seals businesses, Continue to gain share trend in industrial activity seen in with their principal operations in the in Aftermarket Seals in the second quarter, following the US UK, Scandinavia and the Netherlands, election, strengthened further as the together delivered underlying growth North America through year progressed. All three businesses of 11% in revenues on a constant superior marketing, delivered double-digit revenue increases currency basis. FPE Seals experienced “Webstore” E-commerce in the second half of the year with good growth in its core UK market strong demand from key accounts for Aftermarket hydraulic seals and and new products across a range of specialised industrial metal cylinder parts and benefited applications in industries including from a recovery in demand from the Water, Medical, Oil & Gas, Appliances Oil & Gas sector for sealing products Build and expand the group and Food Equipment. The businesses used in Maintenance, Repair and of Industrial OEM Seals continue to provide high levels of Overhaul (“MRO”) operations. FPE customer service and technical support Seals also benefited from strong businesses in North America to service existing projects while looking growth in several export markets. for opportunities to deploy higher specification, regulatory-compliant M Seals delivered good growth in Explore opportunities compounds to target new projects revenues in its core markets, with more broadly in Industrial with higher levels of added-value. particularly strong growth in Sweden, building on its strong customer Distribution in North America In April 2017, J Royal relocated its relationships to develop a number of operations to a newly constructed, major new projects. M Seals has also purpose built facility in Winston-Salem, extended its activities into the Finnish Build larger, broader- North Carolina, which was then sold and market for seals, by investing in a sales based International Seals leased back to the business. At the same resource based in Kentek’s facility time, the Group acquired PSP, a small and making use of its operational business in the EMEA and bolt-on acquisition to All Seals based in infrastructure. As with FPE Seals, M Seals Asia-Pacific regions Denver, Colorado which supplies O-rings has also seen a recovery in demand and custom rubber moulded products from the Oil & Gas sector in the UK and has strong customer relationships and is targeting specialised Industrial in the semi-conductor and pneumatics OEMs in other sectors of the market. industries. PSP adds complementary new products and strengthens the position In June 2017, the Group completed in the second half of the year after a of the Industrial OEM Seals business the acquisition of Edco, a specialised 9% reduction in the first half. Kubo has in the Mountain Region of the US. distributor of O-rings, seals and gaskets been facing significant challenges in its based in Leicester and supplying to UK core industrial market in Switzerland, The Industrial OEM Seal businesses OEMs and MRO companies operating where the strong currency has made continue to pursue opportunities within the Oil & Gas and other process Swiss industrial manufacturers less to create synergies through joint industries. Edco’s success has been competitive. However, the strengthening purchasing and through leveraging built on deep technical knowledge, of the Euro through the year has the different product, material and high levels of customer service and contributed to an increase in industrial application skill-sets of the individual the ability to supply a wide range of activity in Switzerland. In Austria, businesses. In the second half of the products from stock. Edco is being Kubo’s improved sales focus has year, this was developed further by managed as part of the M Seals group introduced new customer revenues establishing a senior leadership team with good opportunities for cross-selling in Pharmaceutical and Industrial to manage this cluster of businesses in and improved purchasing power. OEMs to replace a large prior year order North America. While maintaining the which was not repeated this year. distinct identity of the businesses and The Kentek business, with principal close local contact with customers, operations in Finland and Russia, WCIS has core capabilities in gaskets key functions including Sales, Supply increased revenues by 4% in Euro terms. and mechanical seals used in MRO Chain, Technical and Finance will be The revenues generated in Russia, which operations in complex and arduous managed centrally by this team. The account for ca. 65% of Kentek revenues, conditions and has been significantly team has also initiated a project to slowed in the second half of the year after impacted by cutbacks in the Mining implement a new ERP system across strong revenue growth in Euro terms in sector in recent years. In New Caledonia, the Industrial OEM Seals businesses the first half. As selling prices for US and WCIS has come under substantial pricing in the US, to replace the disparate European sourced filters are linked to the pressure from cost reduction initiatives legacy IT systems in the businesses. Euro in this territory, the weakening of in the nickel mining and processing The new ERP system will be designed the Russian Rouble against the Euro as operations of its major customer and to increase operational efficiency, well as increasing competitive pressures in Australia, it has also experienced improve business intelligence and in this market contributed to the slow reduced revenues from its core Mining deliver broader marketing capabilities. down in revenue growth. However, customer base. WCIS has responded by Kentek significantly increased sales of its investing in additional sales resources to International Seals own-brand filters in Russia and the Baltics broaden coverage across a wider range The International Seals businesses, and achieved good growth in Finland, of market sectors and territories and which account for 39% of Seals benefiting from a recovery in both the this initiative is starting to gain some revenues, reported a 12% increase Aftermarket and Industrial OEM sectors. traction, though as yet the revenues in UK sterling terms. After adjusting are not sufficient to offset fully the for currency and the acquisition of Kubo and WCIS saw combined underlying reductions in the Mining customer base. Edco, underlying revenues increased revenues for the year reduce by 3%, by 1%, but with performances in the with a return to modest revenue growth Diploma PLC Annual Report & Accounts 2017 23 STRATEGIC REPORT SECTOR REVIEW

Controls

The Controls Sector Interconnect components. The customer offering The IS-Group, Filcon and Cablecraft is enhanced by value adding services businesses supply businesses supply high performance including kitting for production line electrical interconnect products used flow and the repair and refurbishment specialised wiring, in technically demanding applications of soft drinks dispensing equipment. connectors, fasteners in a range of industries including Aerospace & Defence, Motorsport, Market drivers and control devices used Energy, Medical, Rail and Industrial. A Industrial economic background in a range of technically high proportion of the products supplied The Controls businesses focus on are used in refurbishment, upgrade specialised, technical applications in a demanding applications. and maintenance programmes for range of industries, with over 90% of equipment in service. Products include Sector revenues generated in the UK and electrical wiring, protective sleeving, Continental Europe (principally Germany). connectors and harnessing products The background market drivers are and customised assemblies. A range therefore the growth of the industrial Principal segments of value adding activities enhances the economies in the UK and Germany. customer offering, including marking of protective sleeves, customised labelling A good indicator of the health of solutions, cut-to-length tubing, kitting, the UK industrial economy is the UK connector assembly and prototype Index of Production. Following the quantities of customised multi-core 2009 recession, gains in 2010 were cables. There is also a range of internally reversed in 2011 and 2012 and since manufactured products, including then there has been slow, steady flexible braided products for screening, growth. However, the index is still some earthing and lightning protection, power 8% below pre-recession levels and shunt connectors, multi-core cables, economic growth is now more driven cable markers, sleeving and trunking. by the Services and sectors. 59% Interconnect 18% Specialty Fasteners Specialty Fasteners In Germany, the Production Sector The Clarendon business supplies Output index tracks a strong period of 23% Fluid Controls specialty aerospace-quality fasteners to recovery through 2010 and 2011, since Civil Aerospace (focus on aircraft seating when it has slowly increased and is now and cabin interiors), Motorsport and ca. 5% above pre-recession levels. Geography Industrial & Defence markets. Clarendon 58% UK supports its key customers with its Specific industry drivers – 33% Continental Europe automated inventory replenishment Interconnect and Specialty Fasteners 9% Rest of World solution (“Clarendon AIR”) utilising Although influenced by the general bespoke dispensing racks located within industrial economic cycles, there the customers’ production cells. are also more specific drivers within the main market segments Customers Fluid Controls served by the Interconnect and 30% Aerospace & Defence The Hawco Group businesses supply Specialty Fasteners businesses. 29% Industrial a range of fluid control products used 15% Food & Beverage broadly in the Food & Beverage sectors, The Civil Aerospace market continues 14% Motorsport in applications including food retailing to grow steadily with growth in world 5% Energy & Utilities and transportation, catering equipment, passenger traffic averaging over 5% Medical & Scientific vending machines, coffee brewing, 6% p.a. over the last five years and 2% Rail pure water and water cooling systems. with continuing strong order books Products include fluid controllers, at Boeing and Airbus. The demand compressors, valves, temperature and for new aircraft is being driven by the Products pressure measurement devices and need to replace ageing fleets with 41% Wire & Cable specialised vending and liquid dispensing more fuel efficient aircraft and the 20% Fasteners 13% Connectors Principal operations 12% Equipment & Components 10% Control Devices Interconnect 4% Other Controls IS-Group IS-Rayfast Swindon, UK IS-Cabletec Weston-super-Mare, UK IS-Sommer Stuttgart, Germany IS-Connect Indianapolis, IN, US Filcon Munich, Germany & Le Mans, France Cablecraft Houghton Regis, Tewkesbury & Plymouth, UK

Specialty Fasteners Clarendon Leicester, Swindon & Totnes, UK

Fluid Controls Hawco Group Godalming, Bolton & Faringdon, UK

24 Diploma PLC Annual Report & Accounts 2017 demand from in the Asia-Pacific UK index of production (value) region. There is increased activity in the cabin interiors market where the 120 wide range of complex seating and systems is driving growth. 110 In the Defence sector, the UK remains committed to maintaining the NATO spend target of 2% of GDP through 100 to 2020. Despite this, the Ministry of Defence’s budget is under pressure from the weakness of sterling and 90 rising costs for ongoing new build projects. In Germany, the government 80 has committed to increased defence 07 08 09 10 11 12 13 14 15 16 17 spending in response to the emergence Source: UK Office for National Statistics. of new perceived threats and pressure Calendar and seasonally adjusted, reference year 2010 = 100. to meet NATO’s spending target. German production sector output (including construction) In Motorsport, the major drivers of 120 demand in Formula 1 are the number of races and teams (both of which reduced in the 2017 season) and the level of 110 development work related to technology and rule changes. These changes were significant in the 2017 season and related 100 principally to bodywork design; the 2018 rule changes are not expected to be as significant. The businesses do supply 90 to other motor racing series and the Formula E series in particular continues to gain momentum; however the spend 80 on Interconnect products is relatively low 08 09 10 11 12 13 14 15 16 17 in these series compared to Formula 1. Source: Deutsche Bundesbank. Calendar and seasonally adjusted, reference year 2010 = 100. In the UK, investment in Rail infrastructure continues with Revenue electrification projects, station passenger km upgrades, the Thameslink upgrade World passenger traffic (annual growth rate) growth rate and the final stages of the Crossrail project. In addition, the first stages of 16 6.3% the High Speed Two (“HS2”) project 15 7.1% 14 6.0% have received approval, with work 13 5.5% expected to run through to 2033. More 12 5.3% generally, UK infrastructure investment 11 6.6% is expected to continue with particular 10 8.0% focus on energy and utilities. In 09 –1.0% Germany, electricity generation and 08 2.0% distribution remains a positive sector 07 8.0% due to the fragmented nature of the Source: International Civil Aviation Organisation. local supply of electricity, where it is the responsibility of the towns and cities.

Specific industry drivers – Fluid Controls The Coffee market sector continues to The Fluid Controls businesses generate grow at above 10% p.a., with Abbeychart over 60% of their revenues from the Food supplying both the coffee machine & Beverage sector in the UK. In Food manufacturers and the Aftermarket Retailing, the trend away from major out- sector, predominately in the UK but of-town stores to convenience stores and also in Europe. The Vending market home delivery continues. There is also sector continues to see modest growth, a drive in the Retail industry to reduce driven by the sale of premium products, energy consumption and to introduce particularly in the hot drinks segment. low Global Warming Potential (“GWP”) refrigerants, in preparation for tighter EU regulations over the next five years. These trends are driving demand for smaller, more energy efficient components as supplied by Hawco.

Diploma PLC Annual Report & Accounts 2017 25 STRATEGIC REPORT SECTOR REVIEW

Controls

Sector performance Interconnect Highlights from the year The Interconnect businesses (IS- Reported revenues of the Controls •• Sector revenue increased by 23%; Group, Filcon and Cablecraft) account businesses increased by 23% to £130.7m for 59% of Controls revenues and underlying increase of 14% (2016: £106.1m). Full year contributions reported a revenue increase of 25% after adjusting for currency from Cablecraft and Ascome, acquired in UK sterling terms. After adjusting and acquisitions in the first half of last year, added £6.4m for the Cablecraft and Ascome or 6% to Sector revenues and currency acquisitions and for currency effects, •• The Interconnect businesses movements contributed a further 3% underlying revenues increased by 8%. benefited from increased project to Sector revenues on translation to UK work and delivered strong sterling. On an underlying basis, after The IS-Group continued to implement underlying growth of 8%; Cablecraft adjusting for these acquisitions and the business development programmes currency effects, revenues increased initiated last year, designed to position has expanded the range of products by 14%, with growth moderating in the supplied and markets served the business as the European supplier second half (though still double-digit) of choice for the full range of specialised •• Clarendon increased revenues by against stronger prior year comparatives. cable harnessing components. Field over 30%, with growth driven by sales resources have been realigned Adjusted operating margins increased to focus on sectors and customer increased customer demand in Civil by 70bps to 17.6% (2016: 16.9%). accounts with the highest growth Aerospace and Motorsport Gross margins were broadly stable potential and internal sales processes overall, with stronger margins in the •• Fluid Controls increased revenues have been refocused to more efficiently Cablecraft business broadly offsetting manage the baseline business. Further by 14% with upturn in refrigeration the impact of weaker UK sterling on investment has also been made in equipment sales and increased products purchased by the other broadening the product range and further export sales in Europe and the US Controls businesses. Operating costs developing E‑commerce capabilities. remained tightly controlled across the businesses and improved leverage from The IS-Group UK businesses saw the increased revenue more than offset revenues increase by 7% in UK sterling increased investment in sales resources. terms. In Defence and Aerospace, the Adjusted operating profits increased IS-Group reported a small increase in by 28% to £23.0m (2016: £17.9m). revenues, with the stronger growth seen in the first half of the year offset Capital expenditure in this Sector by slower trading in the second half. remained very modest at £0.2m (2016: The lower level of activity at UK £0.4m), with £0.1m invested in the electrical harness customers towards Clarendon business to upgrade its Totnes the end of the year is partly from a facility to improve operational efficiency. tightening in Defence spending and A further £0.1m was invested on general partly from certain key customers being IT infrastructure across the Controls in between projects. In Motorsport, businesses. Free cash flow increased IS-Group increased revenues strongly, Revenue (£m) strongly to £18.6m (2016: £16.4m) benefiting from regulation changes and (compound growth over five years) reflecting stronger trading, including the the increased level of competition in additional contribution from Cablecraft races this year in the Formula 1 (“F1”) and despite an increase in working series, development of new cars in the % p.a. capital to support the growth in trading. World Rally Championship (“WRC”) +10 Series and upgrades to the GT500 cars in Japan. The IS-Group also benefited 17 130.7 from good double-digit growth in 16 106.1 revenues from the Industrial sector in 15 91.1 the UK and more broadly in Europe, as 14 94.6 the business improved its competitive 13 86.2 position under new sales leadership, 12 81.9 following the appointment of a sales director focused on the EMEA region.

In Germany, IS-Sommer and Filcon Revenue reported a 14% increase in revenues in Euro terms, with modest growth in m IS-Sommer boosted by major project activity in Filcon. In the Aerospace sector, £130.7 IS-Sommer delivered good growth with 2017 2016 a particularly strong performance in the Space market, supplying connectors Revenue £130.7m £106.1m +23% and backshells to the Meteosat Third Adjusted operating profit £23.0m £17.9m +28% Generation (“MTG”) and Sentinel satellites. Solid growth in the Industrial Adjusted operating margin 17.6% 16.9% +70bps market was driven by the stronger global Free cash flow £18.6m £16.4m +13% economy, which benefited German exporters. Revenues were held back ROATCE 32.2% 27.0% +520bps in the important Energy market where lower utility company budgets delayed repair and maintenance of the electricity

26 Diploma PLC Annual Report & Accounts 2017 network and Motorsport revenues also had success in increasing sales Potential for growth were impacted by the withdrawal to a range of other aircraft seating of VW from the WRC Rally Series and cabin interiors manufacturers and and Audi from the World Endurance their subcontractors across Europe In Interconnect, create a Championship (“WEC”) Series, which and introduced Clarendon AIR to a broader-based European includes the Le Mans race. Revenues in number of new customer locations. the Medical sector performed strongly cable harnessing business with key medical device manufacturers Good growth was also achieved in and extend product range managing a solid pipeline of projects Clarendon’s other major market of with own-branded products on the back of new regulations. Motorsport, where Clarendon supplies aerospace-quality fasteners to the Filcon delivered a very strong F1 race teams, engine builders and performance, increasing revenues by subcontractors and also supplies In Specialty Fasteners, ca. 30% in Euro terms. There was a full the Aerocatch own-brand range of build on strong positions year contribution from the small Ascome aerodynamic bonnet latches for high in Civil Aerospace and acquisition, but the primary driver of performance sports cars and offshore growth came from major orders secured powerboat racing. More modest growth Motorsport and expand in in the final quarter of the prior year has been achieved in the supply of pre- niche industrial markets from key Military Aerospace and Space assembled and captive fasteners and customers. These sectors have generally bespoke engineered solutions to the seen increased activity, with projects Defence and general Industrial sectors. Continue to reposition Fluid delivered for the Tornado aircraft, the RAM missile programme and the Orion After the year end, in October 2017, Controls business towards Mars capsule. In the Motorsport sector, Clarendon completed the acquisition growth segments of the the increased activity levels and demand of Coast Fabrication Inc. (“Coast”), a Food & Beverage industry in the F1 series has offset the reduced small US specialty fastener distributor demand from the withdrawal by Audi based in Huntington Beach, California. from Le Mans. The Industrial market Coast has a strong reputation in the for connectors remains competitive US Motorsport industry and also Explore opportunities and generally more challenging. provides a base in the US for supporting outside the UK and Northern Clarendon’s current Aerospace Continental Europe Cablecraft is a leading supplier of customers as well as expanding its cable accessory products used to aircraft interiors business in this large identify, connect, secure and protect market. A US presence is also a strategic electrical cables and has made a strong purchasing priority for Clarendon, giving contribution to the Group since its access to major fastener suppliers acquisition in March 2016. Cablecraft that principally sell to US entities. has extended the markets served by the Interconnect businesses and has Fluid Controls added attractive ranges of own branded The Hawco Group of Fluid Controls Abbeychart has continued to strengthen and manufactured products. During the businesses (comprising Hawco and its relationship with the large vending year the business continued to focus Abbeychart) accounts for 23% of machine operators in Europe and on its areas of specialism, including Controls revenues and increased during the year supplied products to the development of new own branded revenues by 14% against the prior a large project to refresh a range of identification products, the promotion year, in a market that remains highly vending machines for a major customer of its upgraded Identification Solutions competitive and price sensitive. in Switzerland. Abbeychart revenues offering and the specialist sales resources also benefited from a full year of sales added to support sales growth. Revenues Hawco reported a good upturn in activity activity for a range of spare parts for have increased by 7% on a like-for-like in the UK Refrigeration Equipment Wurlitzer vending machines and from basis, with good growth generated market, as store refurbishment activity the introduction of a catalogue of from the continued focus on end user in the UK increased and as the cabinet essential spare parts for the specialist customers, especially electrical panel display manufacturers targeted coffee market, which has offset builders and contractors upgrading the opportunities outside the UK. Hawco reduced revenues from one of its larger UK rail network. Cablecraft continues benefited in particular from supplying coffee OEM customers. Abbeychart to benefit from the move by customers scroll compressors into a significant has continued to take market share towards E-commerce, with online project with a major US retailer and in the soft drinks market by targeting sales growing by ca. 30% in the year. demand in the commercial Catering both the major and the independent and Home Delivery market remained suppliers, with its bar gun Specialty Fasteners robust. In the Contractor market, strong and pump refurbishment offering. The Clarendon Specialty Fasteners growth was achieved, as Hawco targeted business accounts for 18% of Controls the independent trade counters and revenues and increased revenues by over medium sized contractors who value 30% compared with the prior year, with Hawco’s stock holding, next-day delivery growth driven principally by increased and exclusive supplier relationships. demand from customers in the Civil Revenues from the Industrial OEM market Aerospace sector. Revenues increased reduced in the second half of the year, strongly with the ramp up of the major as demand from UK manufacturers business class seating programme softened, but this was partly offset at a key aircraft seating customer by an increase in export revenues. which Clarendon supplies through its automatic inventory replenishment system (“Clarendon AIR”). Clarendon

Diploma PLC Annual Report & Accounts 2017 27