Record half year results
Halma made good progress during the first half of the year. Revenue increased by 16% to £442m (2015/16: £380m) including a positive currency translation impact of 8%. Organic revenue growth at constant currency was 2% and 6% on a weekly average basis when adjusted for 27 weeks in the prior period1.
Adjusted1 profit before taxation increased by 12% to £83.6m (2015/16: £74.7m) including a positive currency translation impact of 8%. Organic profit growth at constant currency was 2% and 6% on a weekly average basis1.
Return on Sales1 was 18.9% (2015/16: 19.7%). The slight reduction from the prior year was predominantly due to slower than expected progress from acquisitions made in 2015/16 coupled with increased investment across all sectors in innovation, international expansion, talent development and M&A resources. Excluding prior year acquisitions, Return on Sales was in line with the first half of last year.
Strong financial resources and increased interim dividend
Cash generation remained strong and in November 2016, we increased our Revolving Credit Facility from £360m to £550m for a further five-year term. This combination of good cash generation, a healthy balance sheet and increasing financial resources provides us with the capacity we need to invest in organic growth and acquisitions to meet our growth objectives as well as to sustain our progressive dividend policy.
The Board has declared an increase of 7% in the interim dividend to 5.33p per share (2015/16: 4.98p per share). The interim dividend will be paid on 8 February 2017 to shareholders on the register on 30 December 2016. For the past 37 years we have increased our full year dividend by 5% or more each year.
Revenue growth in all major regions
In varied market conditions, we achieved revenue growth in all major regions supported by organic growth, favourable currency translation and acquisitions. Revenue from Asia Pacific rose by 17% including 7% organic constant currency growth – the highest of all our major regions. The USA also grew revenue strongly, increasing by 29% to contribute 36% of total revenue. There were low single-digit organic constant currency growth rates in the UK, Mainland Europe and the USA.
Revenue from regions outside the UK, Mainland Europe and the USA increased by 14% with the strong growth in Asia Pacific, an improved performance in South America and weaker demand in the Near and Middle East. Revenue from China was up by 17% to £29.9m (2015/16: £25.6m) with organic constant currency growth of 8% and increases in all four sectors reflecting the opportunity for continued growth in this market.
The tables below summarise revenue growth by region and by sector, including the underlying rates of organic growth at constant currency. Organic constant currency rates exclude the effect of currency translation and acquisitions but do not include any weekly average adjusted figures.
Robust sector trading performances
Infrastructure Safety revenue grew strongly by 21% to £148.0m (2015/16: £122.4m) including 5% organic constant currency growth, a 6% positive impact from currency translation and a 10% contribution from acquisitions in the prior year. There was growth in all major market segments with good growth in Fire and Door Safety and steadier progress in Security and Elevator Safety. These trends contributed to higher organic constant currency growth in the UK and Mainland Europe and solid growth rates in Asia Pacific and the USA.
Profit2 increased by an impressive 30% to £32.0m (2015/16: £24.6m) including 17% organic constant currency growth, a 5% positive impact from currency translation and an 8% contribution from the prior year acquisitions. Return on Sales rose from 20.1% to 21.6% with organic improvement coming from a small increase in gross margins and good overhead cost control.
Firetrace, acquired in October 2015, performed below expectations after a delay in shipping a major contract, which is now expected to be released in the first half of 2017. However, we continued to invest in innovation, international expansion and talent management reflecting our confidence in its growth prospects.
The Medical sector’s revenue was up by 29% to £118.7m (2015/16: £92.3m) including 4% organic constant current growth, an 11% positive currency translation impact and a 14% contribution from prior year acquisitions. There was growth in all major market segments with the strongest performances from the Patient Care businesses involved in vital signs monitoring and ophthalmology. Regionally, there was excellent organic constant currency growth in Asia Pacific and more modest growth in the UK and the USA. There was a decline in Mainland Europe due to lower demand from a major global ophthalmology OEM customer.
Profit2 increased by 17% to £28.9m (2015/16: £24.6m) including 2% organic constant currency growth, a 10% positive currency translation impact and a 5% contribution from prior year acquisitions. Return on Sales was 24.3% (2015/16: 26.6%) with the majority of the decline due to the lower than average returns from Visiometrics and CenTrak, acquired in 2015/16. CenTrak’s performance in the first half was adversely affected by a postponement in the roll-out of a major project in the USA due to third-party delays. We believe that shipments will recommence in the first half of 2017/18. CenTrak has continued to invest in new healthcare applications and geographic expansion and has a number of new pilot projects already underway, underlining its exciting growth potential.
The Environmental & Analysis sector revenue increased by 13% to £98.7m (2015/16: £87.2m) including 4% organic constant currency growth and a 9% positive impact from currency translation. There was strong organic constant currency growth in Asia Pacific and the USA, with a decline in both the UK and Mainland Europe.
Profit2 increased by 9% to £16.0m (2015/16: £14.8m) including a 2% organic constant currency reduction and an 11% positive impact from currency translation. Return on Sales of 16.2% (2015/16: 16.9%) reflected steady performances from the Environmental, Water and Food Safety businesses but reduced profit from the Life Science and Research business.
In September 2016, and following the geographic consolidation of our photonics coatings business (Pixelteq) in 2014/15, we decided to transfer certain technology and assets into Ocean Optics (also based near Tampa, Florida, USA) which will be completed in early 2017. The restructuring of the Pixelteq business is expected to benefit the sector’s full year adjusted profit by at least £0.5m in 2016/17 and £1.5m in 2017/18, also improving key returns metrics. This restructuring resulted in exceptional costs amounting to £2.1m, which are included within the adjustments2 to the Income Statement. No further restructuring costs are expected in the second half year.
Process Safety revenue reduced by 1% to £76.7m (2015/16: £77.8m) including an organic constant currency decline of 6% and a positive currency translation impact of 5%. Trading conditions in energy and resource markets, which contribute around 40% of sector revenue, remained challenging and there was organic constant currency revenue decline in all major regions. The year-on-year comparatives will become more favourable during the second half of the year and recent order intake trends support a return to year-on-year growth.
Profit2 was 9% lower at £17.4m (2015/16: £19.1m) including an organic constant currency decline of 13% and a 4% positive currency translation impact. Return on Sales was 22.7%, compared with 24.5% last year. We continue to balance the need to control costs with investment for growth in non-energy related markets and expect sector profitability to improve in the second half of the year as the benefits of our market diversification efforts continue to emerge.
Continued strategic investment for growth
Halma has achieved sustained success over a long period by building strong competitive positions in market niches with long-term growth drivers. Over many years, these fundamentals have been strengthened further by a relentless determination to increase strategic investment in innovation, international expansion and talent development both centrally and within each sector. Examples during the first half included:
- Our companies increased R&D expenditure by 16% to £23.0m (2015/16: £19.8m) representing 5.2% of Group revenue (2015/16: 5.2%) with higher rates of investment in the Infrastructure Safety and Environmental & Analysis sectors.
- All four sector boards recruited dedicated M&A resources.
- We successfully completed the first of our new flagship HPD Enterprise programmes which encourages our Sector Vice Presidents and MDs to think more entrepreneurially, particularly in the increasingly digital world.
Currency translation had a significant impact on the half year results and balance sheet. We report our results in Sterling with approximately 45% of Group revenue denominated in US Dollars and approximately 15% in Euros. Average exchange rates are used to translate results in the Income Statement. Sterling weakened in 2016/17, in particular following the result of the EU referendum in the UK, by an average 11% relative to the US Dollar and 12% against the Euro. This resulted in an 8% positive currency translation impact on Group revenue and profit. If exchange rates continue at current levels for the full year, we estimate that the currency translation impact will be approximately 10% positive year on year on both revenue and profit.
On an IAS19 basis the deficit on the Group’s defined benefit plans at the half year has increased to £94.0m (2 April 2016: £52.3m) before the related deferred tax asset. The value of plan assets increased in the half year but this was more than offset by the increase in liabilities caused by a reduction from 3.4% to 2.3% in the discount rate used to value liabilities following the result of the EU referendum. Earlier in 2016, increased contributions to the pension plans were agreed and these contributions will be reviewed at the next triennial plan valuations.
Cash flow and balance sheet
Cash conversion (adjusted operating cash flow as a percentage of adjusted operating profit) was 84% (2015/16: 88%) just below our cash conversion target of 85%. As well as continued organic investment, dividend and tax payments increased this half year. Capital expenditure of £11.4m (2015/16: £9.0m) was up 27% as expected, with projects progressing across the Group and in particular in the Infrastructure Safety and Medical sectors.
Net debt at the end of the period was £237m (2 April 2016: £247m). The positive effect of cash generation was partially offset by a £12m increase in net debt due to the translation of debt denominated in US Dollar, Euro and Swiss Franc following the weakening of Sterling. Gearing (the ratio of net debt to EBITDA) at half year end was 1.17 times (2 April 2016: 1.27 times), comfortably within our typical operating range of up to 2 times gearing.
Risks and uncertainties
A number of potential risks and uncertainties exist which could have a material impact on the Group’s performance over the second half of the financial year and could cause actual results to differ materially from expected and historical results. The Group has processes in place for identifying, evaluating and managing key risks. These risks, together with a description of our approach to mitigating them, are set out on pages 30 to 33 of the Annual Report and Accounts 2016, which is available on the Group’s website at www.halma.com. The principal risks and uncertainties relate to operational, strategic, legal, financial, cyber, people and economic issues. See note 15 to the Condensed Financial Statements for further details.
The UK referendum decision in June 2016 to leave the European Union has added a new dimension to the uncertainties surrounding global economic growth. In the last financial year, approximately 10% of Group revenue came from direct sales between the UK and Mainland Europe. Our decentralised model with businesses in diverse markets and locations enables each Halma company to adapt quickly to changing trading conditions, such as weaker Sterling, offering competitive pricing opportunities for exports from the UK.
Halma has formed an executive working group that is tasked with assessing and monitoring the impacts on our business and to communicate updates and guidance as the Brexit process evolves. To date, the following principal risks have been identified as having an actual and/or potential impact on our business:
Economic conditions – increased overall uncertainty including the specific impacts on growth, inflation, interest and FX rates.
- Defined benefit pension liability – movements in bond yields affecting discount rates which may increase the liability.
- Laws and regulations – potential changes to UK and EU based law and regulation including product approvals, patents and import/export tariffs.
The Directors do not consider that the principal risks and uncertainties have changed since the publication of the Annual Report and Accounts 2016 and confirm that they remain relevant for the second half of the financial year. As part of their ongoing assessment of risk throughout the period the Directors have considered the above risks in the context of the Group’s delivery of its financial objectives. Movements in foreign exchange rates continue to remain a risk to financial performance.
After conducting a review of the Group’s financial resources the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Condensed Financial Statements.
At the AGM in July 2016, Jane Aikman retired from the Board as a non-executive Director. Jane joined the Board in 2007 and we thank her for her contribution to our success, particularly as Chairman of the Audit Committee. Carole Cran, who was appointed as a non-executive Director in January 2016, has now assumed this role.
In September 2016, Jennifer Ward, Halma’s Group Talent Director, was promoted to the Board as an executive Director. Since joining Halma in 2014, Jennifer has contributed significantly to the evolution of our growth strategy and talent development. Prior to Halma, she held senior positions with divisions of PayPal (an eBay company), Bank of America and Honeywell.
In October 2016, Jo Harlow joined the Board as a non-executive Director. Jo has global executive experience in consumer products encompassing strategy, innovation, product development and marketing including senior positions with Microsoft, Nokia, Reebok and Procter & Gamble.
Full biographies of both Jennifer and Jo can be found on the Management page.
Halma has continued to make good progress, delivering record revenue, profit and dividends for shareholders. The diversity of our business and the evolution of our organisational model through our four sectors is enabling us to sustain growth in varied market conditions. Since the period end, order intake has continued to be ahead of revenue and order intake last year and we are benefiting from the currency tailwind due to the weakening of Sterling since June. Halma remains on track to make progress in the second half of the year in line with the Board’s expectations.
22 November 2016
1 See Highlights.
2 See note 2 to the Condensed Financial Statements.